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Enterprise Solutions to Poverty

Today’s poor need all the connections they can get...Often the poor are better off moving from rural isolation to dense urban networks where they’re connected both with economic opportunities and with support systems.
- Paul Collier


In his book, The Bottom Billion, Oxford economist Paul Collier notes that approximately one billion people— one-sixth of the world's population—live in extreme poverty in regions of the world with little or no prospects for economic growth, unlike the rest of the world, which is either already rich or rapidly developing. He describes this bottom billion as trapped in poverty. “There is a black hole,” he writes. “Many countries are indisputably heading into it, rather than being drawn toward success.”

Collier goes on to argue that while specific cases vary widely, one or more of four poverty traps are involved, factors impeding development: (1) armed conflict, (2) dependence on natural resources, (3) being landlocked with bad neighbors, and (4) bad governance in small countries.

Poverty Trap 1: Armed Conflict

Collier notes that as a country becomes poorer, its tendency toward armed conflict increases. Unfortunately, civil war impedes development, and so these countries become trapped in a vicious cycle of conflict, unable to grow or establish peace. It is not poverty itself, Collier notes, but slow economic growth which makes a country prone to civil war, as the temptation rises to seize the government’s wealth now rather than wait for a stagnant economy. Outside observers – who fall into the class Collier describes as “the headless heart”—are tempted to romanticize rebel leaders as fighters for freedom and justice, but these are not usually the real roots of civil war. Instead, Collier points out the main factors behind most rebellions: the value of the country’s natural resources, which both incite and finance coups, and a large number of uneducated youth, the recruits for rebel armies, who “come pretty cheap in an environment of hopeless poverty.... Joining a rebel army gives these young men a small chance of riches.”

Poverty Trap 2: The Natural Resource Trap

Not only does the value of an impoverished country's natural resources contribute to the conflict trap, but the natural resources also form a trap in themselves even when the country is at peace: “The heart of the resource curse is that resource rents make democracy malfunction,” Collier writes. Because this form of revenue reduces the need to tax, it also reduces the government's accountability as to how the money is spent, and thus reduces its restraints. As Collier points out, “In the transition to democracy there are strong incentives for different groups to compete for election, but there are no corresponding incentives for them to build restraints. For a resource-rich democracy to succeed, there must be checks and balances. However, restraints are a public good that it is in nobody’s particular interest to supply.”

Poverty Trap 3: Landlocked with Bad Neighbors

A landlocked country’s trade is especially dependent on its neighbors. Resource-rich countries can at least support themselves internally, but a resource-scarce country, which must depend on manufacturing, is necessarily dependent on trading with its neighbors. Such countries face a major economic handicap if their neighbors are themselves poor, corrupt, or locked into their own poverty trap, such as civil war.

Poverty Trap 4: Bad Governance

In small countries, political corruption and incompetence can “destroy an economy with alarming speed.” Bad governance can entail such problems as corruption or graft, the mismanagement of resources, and unfair taxation policies, which discourage investment and waste wealth. This can mire a country in poverty, especially since corrupt governments are prone to capture foreign aid money, preventing it from reaching those in need.

Poverty Traps and Misguided Charity

Christian charity can play a role in helping people and countries escape these poverty traps. Unfortunately, effective charity in such situations is far from simple, and development charity often makes the problem worse. Collier gives the example of Christian Aid, a charity organization in the United Kingdom that focuses on ending poverty through practical assistance. The organization began publicly supporting a protectionist trade policy by running advertisements that showed a pig dressed in a suit sitting on top of a traditionally- dressed African woman, with the text “Free trade: Some people love it.” The ad continued, “Our government claims Free Trade is the solution to the world's problems. But that's exactly what you'd expect them to say. Why? Because it allows the world’s richest countries and their fat cat companies to profit.”

Further investigation revealed that Christian Aid’s position was based on an unpublished paper written by an “expert” who had never published an article on trade. Christian Aid, therefore, “was the largest charity campaign in the United Kingdom spending many thousands of pounds donated by Christians around the country who had given their money to what they imagined was an organization that they could trust beyond question, and the campaign was based on this unpublished paper.” Collier gives this example to emphasize the importance of not merely caring about the bottom billion, not merely doing something for the bottom billion, but taking the time to connect good intentions to sound economics, to have a heart and mind for the poor.

Overcoming Poverty Traps

Collier describes the four poverty traps as challenging but not insurmountable obstacles to development. “Unlike black holes, it is not impossible to escape from them, just difficult.” Neither aid nor trade provides sufficient answers, he says, and he goes on to argue that peace must first be established in these countries to allow their economies to grow. Collier parts ways with some other prominent development experts in strongly supporting outside military intervention as a crucial development tool. Civil war in Sierra Leone was brought to an end relatively easily through effective intervention, he notes, whereas a non-intervention policy allowed the Rwandan genocide. However, he also notes that inept, misguided military interventions can make situations worse, as when they impose power-sharing agreements that are unstable and unsustainable, arrangements that leave internal conflicts festering.

Collier points to two other tools for assisting bottom-billion countries. First, international laws and charters can introduce or strengthen checks and balances that discourage the abuse of natural resources and encourage political reform. Second, developed countries can open up trade with bottom-billion regions by exempting them from tariffs imposed by wealthier nations, meaning that rather than lobbying against free trade in the manner of Christian Aid, developed countries should support trade liberalization with these poor countries.

Rethink Poverty

Subtitled in 15 languages, this six part video series that will change absolutely everything about how you approach charity and missions.