Prosperity: The Laws and Charters Instrument

Paul Collier lists four instruments for addressing poverty in The Bottom Billion. We have looked at aid and military intervention. We turn now to the third instrument, laws and charters.

Collier writes that far too often “…the rich countries have been a safe haven for the criminals of the bottom billion.” (136) The idea of a Swiss bank account comes to mind as one example, where thugs are able to find a harbor for their plunder. There are other less obvious arrangements. For instance, Collier notes that until recently, French corporations were permitted to deduct from their taxes bribes made in emerging nations, which is the equivalent of subsidizing bribery. Over the past decade international agreements have been made that attempt to address these issues. Collier believes that there are five types of charters and laws that need attention.

Charter for Natural Resources

Charters are needed that regulate contract letting, contract negotiating, transparency of payments, transparency in public expenditures, and smoothing of public spending in the face of revenue shocks for nations that are heavily involved in natural resource exports. Emerging nations are overmatched by international corporations and developed nations in their legal expertise at negotiating and writing contracts. Lack of transparency in the bidding process creates fertile ground for bribes and corruption. Emerging nations have governments that are simply too weak or too corrupt to consistently ensure legitimate free market transactions.

Transparency in financial transactions is a major theme for Collier. He wants complete transparency concerning government and corporate transactions, as well as complete transparency in how the funds received for natural resources are expended for public goods. Additionally, Collier points out that most natural resource contracts, as they are written today, place all the risk of price fluctuation on the emerging nation, which can lead to catastrophic consequences in times of sudden downward price movement. Some price averaging mechanisms would help to lessen the shocks and share the risk that emerging nations bear.

All said, the goal should be a steady improvement in the prosperity and sustainability of the emerging nation so that it can become a legitimate player in the global market economy. Collier argues against emerging nations developing large reserve funds from natural resource revenue. It provides too much temptation for corruption and the present needs are too pressing. Instead of parking funds in the U.S. stock market, emerging nations need to learn to invest in, and develop, local markets.

Finally, Collier is critical of developed nations too heavily projecting their environmental and labor agendas. The emphasis needs to be less about these regulations and more on polices that will improve governance. As prosperity rises and governance improves, citizens of emerging nations will begin to effectively make their demands felt for more reforms.

Charter for Democracy

Probably the most notable feature of democracy is popular elections. Fair elections have been the inordinate focus of developed nations and international activists with regard to poor nations. However, as Collier writes, “Elections determine who is in power, but they do not determine how power is used.” (147) Democracy is also about protection for minority views and it is about checks and balances that keep any one person or branch of government from being able to dominate the rest of government and society.

Collier believes the first place to start is freedom of the press. With freedom of the press citizens have a means by which to hold government accountable and organize for reform. Without a free press, accountability and peaceful reform are exceedingly difficult. This explains why one of the first things nearly every new government in an emerging nation does is take over media outlets.

Charter for Budget Transparency

Collier tells a story from Chad where a Minister of Finance did research and determined that only 20% of funds intended for primary schools actually reached their destination. With the next round of funding, Minister Ritva Reinikka decided to announce the amount of funds that were intended for specific school to the local media and provided each school with a poster that advertised to the public how much money was allocated. Suddenly, 90% of the funds (up from 20%) found their way to the appropriate destination. Protocols and strategies are needed that keep government accountable to the people.

Charter for Postconflict Situations

Poor nations emerging from conflict are in need of long-term security help and investment (on the order of a decade). Too often, international organizations and developing nations commit for too short a time, believing that once elections are held that an emerging nation should be able to handle things on their own. Yet the first year or two after an election are often the most delicate because the losing side has a tendency to revert to destructive tactics. Long-term commitments are needed.

Charter for Investment

Collier’s last charter deals with need for both foreign and domestic investors to be able to trust that there investments will not be arbitrarily confiscated by governments without due process. Some corporations from developed nations have insurance policies that protect them against such actions but domestic investors of poor nations have no such guarantees. Thus, charters are needed that will create standards across nations.

In the late 1990s the OECD proposed a Multilateral Agreement of Investment that nearly saw the light of day until anti-corporation anti-globalization activists managed to block it. Collier writes:

“The development NGOs lobbied against the Multilateral Agreement on Investment in much the same way that, as you are about to see, the British charity Christian Aid has more recently lobbied against African trade liberalization. This was because the NGOs misread what the charter was about. They saw it as rich countries ganging up on poor countries to protect their capital investments, and did not acknowledge the reality that in the bottom billion there was no capital to protect because the risks had frightened investors off. An investment charter, and indeed the World Trade Organization (WTO), can provide the governments of the bottom billion with a means of locking themselves into the commitments that they choose to make. In the language of economics the general concept is termed “commitment technologies.” For the bottom billion these technologies are chronically lacking, and the resulting credibility problem is debilitating for private investment. Without radically higher private investment the reforming countries will not be able to reach middle-income state but will linger in limbo and risk falling back into one of the traps. By posing the problem as that of a grasping rich world imposing its rules on a weaker poor world, the NGOs conjured up a satisfyingly simple moral struggle in which they could campaign. But it was a fantasy world that, sad to say, did a disservice to the very people the NGOs are passionately trying to help. It was the headless heart in action.” (155-156)

Hernando De Soto points out that upwards of ten trillion dollars of capital are invisible and unproductive in poor nations because most citizens actively avoid participation in formal economic structures. An investment charter has the potential to bring trillions of dollars of capital owned by the poor into productive existence.

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