What links the top 0.1 percent and the bottom billion? Rent

Jun 3, 2014 /


Paul Collier studies the poorest people on earth — the 1 in 9 humans living in dysfunctional countries with broken economies, places whose income gaps are so wide it’s hard for westerners to wrap their minds around it. In 2007, his book The Bottom Billion broke down the problems facing this group of people, stuck in failed and failing states that keep them from progressing. Part treatise, part analysis, it was written, he hoped, for laypeople to read on the beach.

His work offers a fresh lens on the global conversation about inequality — because he looks at the mechanisms that create globe-sized income gaps. The former director of the World Bank’s research development department, Collier now teaches at Oxford. We caught up with him on the phone; a lightly edited version of our conversation follows.

Inequality is a buzzword now, from Stephen Colbert’s “r > g” T-shirt meme to your fellow economist Thomas Piketty getting a boatload of press for his book Capital in the 21st Century. It almost seems like you and Piketty have the same theory — that divergence is accelerating. It’s just he focused on the top 0.1 percent and you focused on the bottom billion.

Well, the obvious difference is that Piketty is working on income inequality within rich countries. What I would say is that we’re seeing the rise of the rent-seeking sector in rich countries. By that, I mean a sector that is not actually socially productive but is still capable of generating very high private incomes. That has got much bigger in the last 20-30 years, and that’s bad news — it drives inequality within rich countries and it makes things harder for the poorest countries.

How so?

Along with the new rent-seeking sector, there’s a growth of corporate tax avoidance, the internationalization of business and a shift of profits to low-tax environments. Poor countries need international companies with skill and money, particularly for resource extraction. The value of natural resources has to be captured via governance, and the way to do that is through a tax system. If that doesn’t work, then that’s very bad news for the poorest countries.

So do you find the public’s newfound interest in inequality useful or meaningful?

It’s not yet sufficiently nuanced to influence policy. The step I want to see happening is the distinction between the productive activities in an economy, and socially unproductive rent-seeking. There’ll never be consensus on how heavily to tax socially productive activities, but we should be able to build a consensus for heavy taxation on rent-seeking activities. Although they masquerade as being good for private business, they’re actually parasitic. If we go for that rent-seeking sector, the business interests and the interests of the poor can coincide. So that’s where I want to see the inequality debate move to. At the moment, there’s tension between incentives for producing and redistribution; the tax that achieves quality discourages production. If we focus on bringing rent-seeking sectors back down to size, there’s no tension and we can improve equity without creating a disincentive for production by reducing parasitic sectors and actually making it easier for producers.

What are our chances of being able to do this? The rent-seekers you describe are already pretty big and powerful, no?

They’re already too big. But we don’t have data well organized to measure them. One of Piketty’s great achievements is his data on wealth inequality. We need the same sort of thing on rent-seeking. If we can build that and get convergence, that’s where a policy agenda can really strike home, because it doesn’t pit one interest against another.

You’ve spent your career focused on working to end global poverty. How are we doing?

It’s relatively good news. Many of the poorest countries are starting to catch up. The main driver of that has been natural resource revenues. The last decade was basically a decade of discovery; the next one will be a decade of extraction. Now, that’s directly good news, but it’s also a very difficult opportunity to harness. We know from history that natural resources make policy choices much more important. Just look at the contrast between Botswana and Sierra Leone, for instance. They had the same resource, diamonds, yet Botswana went on to have the highest per-capita income in Africa, while Sierra Leone went down to the bottom of the world’s Human Development Index.

What’s the key driver influencing whether a country will head one way or the other?

Developments based on natural resource extraction are more sensitive to public policy choices than any other development path. That means governance really matters — both national governance and global governance. Things have started to improve there; global governance on natural resources has improved quite a lot in the last decade, but there’s still quite a long way to go. In one sense, resource extraction companies are like banks. They are the custodians of other people’s assets; they might take stuff out of ground but the value belongs to the citizens of countries.

Do any of them actually acknowledge that?

The best ones do. There’s a very wide dispersion between the good resource extraction companies and the bad ones. And we’ve learned the hard way with banks that custodians of other people’s assets have to be subject to tougher regulation and scrutiny than other companies. It’s taken us 50 years to build global governance structure for banks, and it’s very obviously still unfinished business. For the resources companies, we’ve only been doing this for 10 years or so.

Are there any lessons we can apply from the banking sector to speed up that process for natural resources companies?

That you can only get so far with volunteerism. You have to set global standards. You can’t do this nation by nation; the big nations have to agree.

But we don’t have a world government, and we’re not likely to get one any time soon. So who can actually fix these issues?

I had the privilege of advising the last G8 meeting, and I brought national resource issues to the fore. And we made a lot of progress. Five G8 countries signed up to the Extractive Industries Transparency Initiative. And Europe, Canada and America moved beyond volunteering for the EITI towards the compulsion of all resource companies registered in their territories. So we’re moving. Now we have to move to the G20 and move beyond transparency to other issues.

Like what?

Another thing I pushed at the G8 was to level the playing field for taxation. It’s very easy for resource extraction companies to legally avoid taxation. So you start with transparency and work down a long list. That’s why I have worked with other people to build the Natural Resource Charter, hoping to build understanding around the decision chain.

Another opportunity is new for the bottom billion, just in its very infancy, and that is: Now that wages in China have risen so much, there’s at last a chance for low-income countries to break into manufacturing. We’re seeing that across low-income Asia, and just seeing the very first steps in low-income Africa, for instance in Ethiopia with the  manufacturing of footwear. That has the potential to generate a lot of jobs. Labor-intensive manufacturing is a great thing because it’s pretty equalizing. Natural resource development isn’t equalizing unless you work at it. Even Haiti has started to do this, breaking into garment manufacturing in the last year or so.

How is this an opportunity for the poorer countries? Doesn’t it just mean a race to the bottom as everyone vies to offer cheaper prices to international companies?

On the contrary, it’s a race to the top. We’re now dealing with the last block of poor countries on earth. The garment sector shifts to the poorest countries and lifts them up. When there are no more poor countries to lift up, that’s great. The price of the garments rise, and so will the incomes of garment producers, and so we drive up incomes in the poorest countries. That’s been on hold for the last 30 years because China was hyper-competitive; it still had cheap labor and efficient clusters. But at last, the wages have got too high to keep them competitive, so manufacturing has to move out of there. That’s great.

One of your regular themes is that we all need to get involved in raising up the bottom billion. How can we do that, practically?

It’s absolutely critical that we develop a broad understanding of the important issues, to create what I like to call a critical mass of informed citizens. The only reason we got more action at the 2013 G8 on serious issues of natural resource governance and taxation than in the previous 20, was that the politicians there recognized this was not a suicidal agenda. And it wasn’t suicidal because a bunch of people understood why it mattered, so it gave them the political space to do something instead of wasting another G8 on gestures. The thousands of people who took trouble to get up to speed on the issues really did make a difference. We made a start. It’s unfinished business, obviously, but we’ve made a lot of progress. Now we just need to keep going.

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