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