How to Spend $50 Billion to Make the World a Better Place
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Not only is income from natural resources poorly converted to growth in many conflict-prone countries, but revenue
from primary commodities is actually a risk factor in civil war. There are a number of reasons for this, including the fact that valuable resources can encourage regional seces-sions and provide finance for rebel movements.
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The Challenge of Reducing the Global Incidence of Civil War 47
There are two ways in which the international commu-
nity can act collectively to improve this situation:
1. Increase the transparency of revenue streams. A partic-
ular campaign, backed by a range of NGOs, the G8 gov-
ernments, and international institutions is known as the
Extractive Industries Transparency Initiative (EITI).
2. Encourage greater medium-term revenue smoothing to
avoid destabilizing booms and busts.
Such international action would provide a template for government reform and would give clear guidelines against
which poorly performing governments could be measured.
International agreements are difficult to achieve, and only a limited number can be negotiated at one time. There is
therefore an opportunity cost of pursuing this particular
strategy in preference to some other initiative that could also bring equal or greater benefits.
It should be feasible to halve the adverse effects of poorly managed natural resource incomes (complete elimination
may be an overly ambitious target). This would create a
knock-on effect: reducing conflicts via increased growth
rates. To halve the adverse effects, growth rates would be raised by 0.067%, assumed to be permanent once reforms
are in place. The benefit in present value terms would be
$12.1 billion.
There is also a much larger benefit realizable. Greater
transparency in the revenue flows can reduce regional
grievances and the incentives for secessionist groups to take control of the income. If such action reduced the risk from
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How to Spend $50 Billion to Make the World a Better Place natural resource dependence by 10%, the overall risk of war for a typical country would fall from 13.8% to 12.7%. This would be worth $3.9 billion annually and, assuming it is
permanent, gives a present value benefit of $77 billion.
The total benefit from conflict reduction by this route is then $89 billion.
Opportunities for shortening conflicts
Civil wars last typically for seven years. Unfortunately, there is no systematic evidence of the effectiveness of either financial or military intervention by the international commu-
nity. However, rebel movements tend to be self-financing,
so controlling international markets in commodities and
armaments could reduce their ability to be self-sustaining.
When the world was alerted to the problem of “con-
flict diamonds” as a funding source for rebel movements in Africa, a government certification process was put in place.
This appears to have been at least partly responsible for
the collapse of both the RUF in Sierra Leone and UNITA in
Angola, and the concept is now being extended to trade in
timber. Certification does not totally exclude rebel groups from the market, but it introduces a two-tier market where uncertified goods are sold at a discount.
In addition to diamonds and timber (and extending this
to oil), it is even conceivable to consider creating a two-tier market in hard drugs, 95% of which originate from civil war environments. This would be analogous to the situation in
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The Challenge of Reducing the Global Incidence of Civil War 49
the UK in the 1960s, where registered addicts could obtain drugs legitimately via the country’s health service.
In 2002, conflict diamonds were trading at an approx-
imately 10% discount. This figure can be taken as a min-
imum expectation, since diamonds are difficult to police
and proper monitoring was not in place at the time. Using
a 10% discount as an estimate for commodities in gen-
eral, and using a figure of 12% for the conflict shortening effect (derived from estimates of the actual effect of commodity price changes), this would reduce the length of the war by a little under a year. Given the number of countries which significantly depend upon commodity exports, we
arrive at a figure of $5.9 billion for the present value of this intervention.
Reducing post-conflict risks
During the first decade following a war, there are very high risks of repeat conflict: around half of all civil wars arise in this way. However, typically there are only about 12 countries in this post-conflict category at any given time, making it relatively easy to direct resources to them. Two policy approaches to reduce post-conflict risks are the use of aid, and military spending.
Post-conflict aid
Countries typically have higher growth rates in the post-
conflict decade, but these are neither assured nor evenly
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How to Spend $50 Billion to Make the World a Better Place spread. Growth is, in fact, driven entirely by the amount of aid, and is concentrated in the middle years of the decade.
Although the need is great immediately post-conflict, there is limited capacity to use aid effectively; by the middle
years, resources can be managed better and the needs
addressed properly. The opportunity identified is then to
provide increased aid at the time when it is most useful:
The analysis is for an aid increase of 2% of GDP for the
middle five years of the decade.
There are typically 12 countries in their first post-conflict decade at any one time, with a combined GDP of about $163
billion. The cost of the additional aid averages $1.6 billion per year over the decade, with a net present value of $13
billion. The gain in growth rate in the years when extra
aid is received would be 1.1%, more than five times the
increase seen in normal non-conflict situations. The ben-
efits of this targeted aid in terms of avoiding conflict can be calculated as $31.5 billion across the 12 countries. This intervention is clearly cost-effective for the additional security benefits alone, in addition to its main purpose of poverty reduction.
Military expenditure
In a country’s vulnerable years immediately post-war, gov-
ernment military spending is maintained at a high level and actually appears to be counter-productive in terms of peacekeeping. There is a case for international military intervention, on condition that the government makes deep cuts
in its own military expenditure. Merely by reducing this
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The Challenge of Reducing the Global Incidence of Civil War 51
>
spending to pre-conflict levels, GDP would increase by 2%
in the decade.
Assuming that an international peace-keeping force
completely avoids the outbreak of another war during the
ten years it is in place, a risk of 38.6% in the first five years and 31.9% in the second is averted. With the average civil war costing $64 billion, the present value of this intervention is $29.9 billion. In addition, a gain of $3.2 billion can be attributed to the reduced risk of war because of reduced military spending and increased GDP, making a total of $33.1
billion.
Costs will vary with the individual country’s situation,
but as a typical example the current British force in Sierra Leone has cost, on average, $49 million each year. If we
assume that such forces will be in place for the full 10
years, the net present value comes to only $397 million. The benefit-cost ratio is therefore enormous: an expenditure of less than half a billion dollars securing a benefit of $30 billion. Extending this approach to all 12 typical post-conflict situations would deliver a benefit of $397 billion for a cost of less than $5 billion.
Conclusion and comparison
All the estimates in this chapter are gross approximations.
Nevertheless, they enable us to distinguish between those
policies offering very high rates of return and those which are uneconomic. Clearly, the option of international military intervention under Chapter VII of the United Nations
Charter offers enormous benefits, but is also the most
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How to Spend $50 Billion to Make the World a Better Place difficult politically. At the other end of the scale, aid has very limited effectiveness in conflict prevention unless it is much better targeted. Reforms of the commodity trading
system fall between the extremes, offering significant benefits at reasonable cost.
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THE CHALLENGE OF CONFLICTS
OPPONENTS’ VIEWS
In their challenge paper, Paul Collier and Anke Hoeffler
estimate the costs of civil war and propose a number of
opportunities to reduce their total incidence. Their favored options in economic terms are to avoid conflicts recurring by targeted use of aid or international military intervention.
Tony Addison and Michael Intriligator make constructive
criticisms of the analysis and conclusions in their separate opponent papers.
While acknowledging that the challenge paper presents
the most comprehensive estimate to date of the cost of a
typical war, Addison has some concerns about the authors’
methodology. In particular, he criticizes their valuation of Disability Adjusted Life Years (DALYs), necessary to calculate the health costs of conflict. Collier and Hoeffler use a figure of $1,000, effectively valuing the economic loss rather than the value of life itself. He regards this approach as largely discredited, and supports instead a “willingness-to-pay” valuation of life, which typically gives figures some five times greater.
Addison’s second criticism of methodology relates to the
discount rate used (5%). This is a mechanism to account for 53
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How to Spend $50 Billion to Make the World a Better Place a preference to receive a benefit now rather than a larger one at some time in the future. He believes there is a case for DALYs not to be discounted at all, but accepts that, whatever the methodology used, a constant discount rate must be
used for opportunities across all challenges to allow them to be ranked properly.
Moving to the opportunities themselves, Addison’s view
is that the value of aid in conflict prevention has been understated because, properly targeted, it can have far-reaching effects. However, he also recognizes that poorly targeted
aid can actually do great harm to the prospects for peace
when it merely bolsters dictatorships and allows inequality to grow.
He agrees that the proposal for the improvement of
transparency in handling natural resources is sound, since billions of dollars of revenue are diverted from the public purse, but thinks the potential benefits are overstated.
Nevertheless, since costs are low, the net benefit of implementation would still be large.
Collier and Hoeffler’s second identified opportunity is
to shorten conflicts by reducing rebel access to commodity markets, as has already been done successfully for “conflict diamonds” via the Kimberley process. Addison suggests that conflicts could similarly be shortened by means of agricultural trade liberalization. For example, removing subsidies to American cotton farmers would raise the international
value of the crop relative to opium, giving growers in conflict countries such as Afghanistan the option of an alternative livelihood.
When it comes to reducing post-conflict risks by delay-
ing aid until the state is in a position to use the money
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The Challenge of Conflicts
55
properly, Addison takes issue with the authors of the challenge paper. In his view, aid is needed immediately post-
conflict both for poverty reduction and to ensure that sound institutions are put in place. He also questions the estimate for the cost of foreign peace-keeping troops, which he thinks could be much higher in some cases (indeed, in Afghanistan it runs at about $1 billion a month). Nevertheless, he thinks that this is a valuable suggestion, particularly if developing country troops can be used.
Finally, Addison makes his own additional proposal: to
reduce the intensity of conflicts, (as measured by the number of casualties). This would include, for example, mea-
sures to reduce the flow of weapons, to bring war crimes
suspects to justice, and to protect refugees.
Intriligator takes a somewhat different, and broader, per-
spective. In his view, Collier and Hoeffler’s conclusion that the highest payoff would come from interventions to prevent conflicts restarting in post-war situations is questionable. In particular, he draws attention to the huge costs of wars in their early stages – Rwanda being a recent case in point – and believes that public policy should focus on a
balanced approach to all three opportunities.
Moving to the first of the three opportunities – con-
flict prevention – Intriligator is doubtful that higher growth fueled by international aid will necessarily lead to a lower incidence of civil war. Equally, he points to examples of
countries heavily dependent on exports from extractive
industries that have not had a civil war, so doubts that
greater transparency in this area is necessary or effective in all cases. Instead, he emphasizes the need to reduce access to arms and other resources for the potentially warring
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How to Spend $50 Billion to Make the World a Better Place parties (for example, the Oscar Arias proposa
l for an
embargo on all arms shipments to sub-Saharan Africa), and
to use peacekeeping forces and the tools of diplomacy to
prevent conflicts.
He believes that there are other ways to reduce the length of conflicts (the second opportunity) including economic
sanctions and the use of small, well-targeted UN peacekeeping missions (which have been more successful than larger
ones).
His doubts about the use of aid extend also to its pro-
posed use to reduce the chance of conflict restarting (the third opportunity). Equally, he thinks the focus on the use of international military intervention only for this opportunity is too narrow. Selective use of all the tools can be beneficial in preventing conflicts occurring in the first place, reducing their intensity, and avoiding them flaring up again.
While there are clearly major challenges presented by
civil wars, Intriligator also believes that the dangers of international wars should receive more consideration. Indeed,
such factors as regional conflicts developing into wider
problems, regional arms races, international arms sales,
and proliferation of nuclear weapons present major chal-
lenges, which might be addressed in part in the same ways
as proposed for civil wars.
In summary, the two opponents agree wholeheartedly
that reducing the incidence of civil conflict is a global challenge that demands our attention, but have different views on the most effective way of doing this.
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LANT PRITCHETT
4
Toward a New Consensus for
Addressing the Global Challenge
of the Lack of Education
The scope of the challenge and a framework
“Lack of education” as a global challenge must be under-
stood, at an individual level, as a failure to master the many distinct competencies necessary to thrive in a modern economy and society. Remedying this is not simply a question
of providing more schools, more teaching aids, or reducing drop-out rates. The challenge is to create competencies and learning achievement rather than just educational tools.
Because it is easy to measure, data on enrolment (the
percentage of school-age children actually starting school) is often used as a proxy for educational progress. However, enrolment levels have little bearing on actual achievement.