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  • Student: Okay, so today Professor Rae is not

  • going to be here and so we're going to watch two videos

  • instead, one of him and second one is of

  • Paul Collier talking a little bit about his book,

  • but also about recent research that he's done,

  • especially on governments and commodities.

  • We're going to start with the first video and then go straight

  • into the Paul Collier video; so enjoy.

  • Prof: Hi there.

  • As you know I'm in Washington today,

  • and Jim Alexander has been kind enough to preside over the

  • Monday class, and I want to get in twenty

  • minutes or so of background thoughts taking us from the

  • SELCO case, where the question was how to

  • organize the distribution of distributed electrical

  • generating to bottom billion areas of India.

  • From that very specific set of questions to the much larger

  • question about understanding the plight of the world's bottom

  • billion, and the available strategies

  • for trying to be helpful to them.

  • The main text for this class and the next is Paul Collier's

  • Bottom Billion, which is, while not a page

  • turning thriller like White Tiger,

  • is a very solid, serious, and substantial piece

  • of scholarship by somebody who has been engaged both with the

  • best of growth economics as a scholar,

  • and with the practical work of the World Bank,

  • where he was head of research for a good long time.

  • The default assumption in thinking about the bottom

  • billion is to begin with the world demographic transition and

  • the thought that most of these people are the products of stage

  • two and stage three demographies;

  • where birthrates were vastly higher than death rates,

  • and so you had a huge surge in population and you found--

  • and many people in those societies found themselves in

  • the same predicament as the protagonist in White

  • Tiger, as being one of way too many candidates for every

  • job and having little or no market power,

  • and consequently, little or no income.

  • Collier's take is to say, "Well let's just grow

  • incomes."

  • It's not a bad approach, and he's perfectly aware of the

  • objections I'm going to make to it in the next few minutes,

  • but let's just catalog what it means.

  • The gross domestic product is at once too broad and too

  • narrow, as a measure of value generated by the economy.

  • For example, if a housekeeper and her

  • employer, or his, marry one another and

  • he or she continues to keep the house but now on the basis of a

  • spousal relationship the cash goes away and the value is

  • deducted from the GDP, while in fact,

  • nothing has much changed.

  • Or suppose a crime wave hits a society and enormous damage is

  • done to property by crime, it requires repair;

  • those repairs get recorded in GDP and can easily be mistaken

  • for an improvement in the condition of people living

  • there.

  • Further, people buy better locks, video cameras,

  • perhaps even weapons, and those too are recorded as

  • improvements, when in fact they really aren't

  • improvements.

  • Or take disease.

  • A--one society is relatively healthy and has relatively lower

  • medical expenses than the other, yet the second,

  • the one with the high medical expenses,

  • would be accounted as better off.

  • Finally, to get just how mechanical this measure is,

  • if for any reason we were prepared,

  • the government say, was prepared to pay people to

  • dig holes and then fill them back up with the same dirt and

  • pay them a salary for that, we would have increased GDP.

  • Those are ways in which the measure is too inclusive.

  • There are others ways in which it is not inclusive enough.

  • It doesn't include--the saying "The best things in life

  • are free," well that may not be entirely

  • true, but some of the good things in

  • life are free, and those need to be measured

  • in an accounting of how well off a society is.

  • The leading substitute measured these days for GDP per capita is

  • the human development index as put forward by the World Bank

  • and parallel institutions, which gives--which takes GDP

  • per capita as one part of the story,

  • adds to it longevity, and then supplements that by

  • adding a measure of education so you get a somewhat broader

  • measure that captures the surge we see in Hans Rosling's

  • wonderful data animation as lives become longer and

  • prosperity greater.

  • So one thing to do is just tinker with the measure.

  • There's a second set of issues that have to do with the value

  • of income.

  • I've got some childlike drawings here to share with you.

  • If we represent the dollar income of Mr. A on the

  • horizontal axis and of Ms.

  • B on the vertical axis, then GDP for these two people

  • is calculated just by adding the one to the other with no

  • attention to the distribution between them,

  • so that all the points on this indifference curve would

  • correspond to the same GDP as one another,

  • and all the points on this indifference curve would

  • likewise so correspond.

  • Well that's okay, there's nothing wrong with

  • that, except if you want to infer from it the value shared

  • by A and B in the use of that income.

  • A generally accepted hypothesis is that the value of income,

  • and economists would use a term utility,

  • let me just stick with value--the value of income first

  • increases and then decreases at the margin,

  • so that you get an S shaped curve like this.

  • On the horizontal axis we have how much income people get,

  • and on the vertical axis how much value they derive from it.

  • Now imagine down here around point A where people have

  • precious little income, so little that they cannot feed

  • and clothe, and lodge themselves.

  • Well think of a setting like an American city and imagine

  • doubling your income, annual income,

  • from $25 to $50.

  • Well that would move you a little ways along the horizontal

  • axis but it wouldn't lift you up the vertical axis because it's

  • not going to make a difference until you get to some threshold

  • where you actually begin to get increasing returns from rising

  • incomes, as in the zone I've labeled B

  • here.

  • Then eventually incomes like Richard Medley,

  • whom we met a month ago or Paolo Zanonni,

  • who we'll meet in a couple of weeks,

  • at their incomes the--so wide a range of material needs are

  • already satisfied that the marginal dollar gets less and

  • less valuable.

  • The implication of this for the relationship between GDP per

  • capita on the one side and a judgment of how well a society

  • is doing on the other is that there's--

  • we should probably have some egalitarian bias in the way we

  • interpret the numbers.

  • Where most people get to the level that I'm pointing at here,

  • where the diminution of marginal value really sets in,

  • where most people get to that, that's kind of where you want

  • to be, and Collier's emphasis on the

  • bottom billion responds to that.

  • The SELCO project, for example,

  • which we saw a moment-- saw--well actually I'm speaking

  • just an hour after class, which we saw in Wednesday's

  • class, is aimed at trying to bring people up that steep part

  • of the curve, maybe not very far but a little

  • ways, by judiciously providing the

  • opportunity to purchase electric light or electric power for such

  • other purposes as running a sewing machine or preparing

  • goods of some kind for sale.

  • The common sense response to this S curve is to pay special

  • attention to people who are near its bottom and try to find ways

  • to help them push themselves up the curve.

  • Now as a sidebar let me just mention John Rawls,

  • who published in 1971 a classic book,

  • a book that will be read hundreds of years from now,

  • I imagine, called A Theory Of Justice,

  • and Rawls asked people to imagine that they were behind

  • what he called a veil of ignorance,

  • and the idea of the veil of ignorance is roughly that you

  • have no idea who you are.

  • It's a little like Adam Smith's device in Theory Of Mortal

  • Sentiments.

  • But the question is, if you had no idea who you were

  • before we set up the basic institutions for a country,

  • or for the world if we think of it on a global scale,

  • what would be your way of structuring alternative

  • arrangements so that you could find one that you thought was

  • best from-- for you from behind this veil

  • of ignorance and on which you could agree with everyone else

  • behind the same veil?

  • His idea, stated way too simply, is that you should

  • maximize the welfare of the least advantaged group in

  • society.

  • The intuition is that that group would be unskilled labor;

  • and that doesn't mean that you should knock down inequalities

  • necessarily.

  • Indeed, if allowing bankers, engineers,

  • and entrepreneurs to reap substantial and very unequal

  • benefits from their work will ultimately read down to the

  • benefit of this unskilled labor stratum,

  • then that's great.

  • A Rawlsian picture of the indifference curves which before

  • utilitarianism just run at minus 45º here,

  • Rawls' are L shaped, and so if we're here,

  • so that this person is way better off than this person,

  • we try to move to a higher indifference curve from the

  • point of view of the less advantaged person;

  • and symmetrically here we try to move in this direction,

  • so that the L shaped indifference curves,

  • if there were just two people in the society would drive us to

  • seek the highest one, and it would have a powerful

  • middle-of-the-road bias to it, but it wouldn't have so

  • powerful an egalitarian kick that it would knock down

  • equality to an extent which hurt even the less skilled parts of

  • the workforce.

  • Societies--and we know societies that have reached that

  • level, in my judgment Castro's Cuba is just such a case and I

  • know it fairly well; North Korea,

  • which I know much less well, appears to be such a case.

  • Okay so that's all by way of background,

  • and now I just want to talk rather briefly about the

  • introductory series of traps in Collier's book,

  • and the traps are his way of summarizing things that can go

  • very wrong for a country and put it way behind the rest of the

  • world in economic growth.

  • Now as background, Collier is really thinking

  • about what we would call "emerging market

  • countries."

  • He's not thinking about Germany, Japan,

  • Canada, or the states.

  • He's thinking about India, Bangladesh,

  • Kenya, Zimbabwe, Bolivia, and Mexico,

  • countries which are just finishing the world demographic

  • transition, and are relatively late

  • entrants as full players in capitalist development.

  • The majority of them--and Collier gives very little stress

  • to this, and he probably should give

  • more--the majority of these countries were colonial sites

  • for European powers, and India is just such a case,

  • for example-- and the British Empire was

  • enormous.

  • Other countries were subject to the Dutch,

  • the French, and other--and the Spanish,

  • and the Spanish actually are quite important,

  • European powers which treated them as subordinate economies

  • and structured their governments to the advantage of the

  • metropolitan country.

  • Trap one may be, be a colonial site,

  • and be set back by it.

  • The other side to that story is that the colonial powers

  • sometimes left something good behind.

  • The extraordinary quality of technical education in India,

  • for example, is in part an outgrowth of

  • British education and the systematic inculcation of

  • British educational values.

  • Wouldn't want to go too far stressing that,

  • but it's there somewhere.

  • Okay so the Collier traps; the first one is what he calls

  • a conflict trap, and according to him 73% of the

  • bottom billion live in countries which are now in civil wars or

  • have recently been in civil wars.

  • That's a stunning number, and the world which occupies

  • the front page of every major newspaper--

  • Somalia, Iraq, the incredible mess in

  • Afghanistan, many other less dramatic cases,

  • these are all countries where civil strife has defined life to

  • a considerable degree in let's say the last twenty-five years.

  • Well the--Collier spends some time asking the causes of that.

  • He rejects the common sense popular explanation is ethnic

  • conflict.

  • He says that ethnic conflict is actually quite a lot less

  • important than simple poverty.

  • That countries with very low GDP per capita are greatly--

  • at much greater risk of civil war than countries