First, it has devised a system of decentralization that has sharply reduced ethnic conflict. And second it has a major metropolis that increasingly is acting like one of a handful of city development states–large urban areas in developing countries that are driving progress forward in a way typically associated with well-managed central governments.

In Nigeria’s case, the central government has worked so badly for so long and is so poisoned by its access to and dependence on oil money that state and city led development may be the only way to achieve progress.

The country’s history and continued sad performance make the achievements of Lagos, one of the world’s largest and fastest growing cities, all the more remarkable. Although more associated with the miseries of overpopulation, poverty, and deplorable living conditions than with good governance, the city has over the past decade achieved remarkable improvement in a number of key areas.

Governors Bola Tinubu (1999-2007) and Babatunde Fashola (2007-) have transformed how the state government is run. Fashola in particular has come in for much praise. Since coming to power, he has reduced traffic jams, set up new bus routes, cleaned up streets, increased security, and raised taxes to invest in new expressways, commuter rail lines, and affordable housing. His administration is one of the few in the country which has a detailed and structured budget (made fully available to the public online). He was reelected in 2011 with 81 percent of the vote and is widely considered one of the few “performing” governors in the whole country.

The education reforms are especially noteworthy. The city government has enhanced the inclusiveness of the school system by reducing the financial burden faced by parents, extending services into rural areas, providing free textbooks, and arranging for transportation and meals for children with special needs. It invested heavily in infrastructure and equipment (especially laboratories) and built up capacity by improving technical and vocational schools, promoting sporting and science competitions, and requiring membership in a state-sponsored scout organization aimed at building leadership skills and providing children with teamwork experience.  These initiatives were all complemented by an emphasis on teacher training and awards to incentivize good teaching.

There are a number of structural factors that have contributed to this success.

First, the state earns most of its revenue (73 per cent of the total) from local sources, giving it an incentive to perform well. Unlike other government bodies, it does not depend on the central authorities for hand-outs. It does not have natural resources either. Instead, many departments–including lands, environmental protection, works and infrastructure, transportation, and even the judiciary–earn sufficient revenues to cover at least their personnel costs. The lands department even produces a profit. Each government department that offers services charges some fees to cover all or part of the cost of the service. This is a great example of how the dependence for taxation on local residents can spur governance improvements. (Fashola describes how he reformed taxes here.)

Second, Nigeria’s federal structure gives local leaders substantial powers, something relatively rare in the developing world, where central governments usually monopolize authority and resources. Fashola has had the freedom to work on improving education, infrastructure, transport, and so on whereas many of his counterparts in other countries don’t.

Third, multiple elections since the late 1990s have created a dynamic where candidates can compete on policy and not identity. Lagos is, like many developing world cities (especially business and political centers), more of a melting pot of various ethnic and religious groups than other parts of the country. Urbanization has reduced traditional allegiances while providing the opportunity for new ways of thinking to form. Being the commercial capital of the country, residents are less likely to tolerant leaders who cannot deliver the goods.

Lagos’ success exemplifies a broader trend. There are a number of cities across the developing world that are playing significant roles promoting development—sometimes even outclassing their central governments (as in Nigeria).

In Medellin, Colombia, Mayor Sergio Fajardo broke up clientelistic political networks, raised tax receipts, improved public services, introduced transparency fairs, established civic pacts and restored citizens’ sense of hope during his term in office in the mid 2000s, transforming the city administration. The poor have especially benefited from new transport links, publicly funded business support centers, and a locally managed program of cash grants. (See a case study describe his work here.)

Curitaba, in southern Brazil, has been a world leader in urban planning, public transport, and environmental protection. It received the Globe Sustainable City Award in 2010 and has consistently been rated the country’s best “Brazilian Big City” in which to live.

Some of China’s success can be attributed to strong provincial and urban governance. The country gives lower levels of government much more power and money than other developing countries, enabling local leaders to experiment, compete, and lead change from below. Shanghai and others have taken advantage.

These places suggest that urban areas may be better placed than central governments to promote development in many countries. Closer to populations, more likely to have local tax revenue, more easily held accountable, and less hampered by the difficulties in projecting authority across distance, large cities could be the basis for a new urban based development model. If a substantial portion of a state’s resources and responsibilities were funneled to major cities (who would assume control for their surrounding hinterlands), greatly empowered mayors—or district governors—could be tasked with a much larger range of activities than is the case today. Restructuring the state around where people lived would reduce some of the social conflicts and dysfunction produced by national politics, and create leaders who are more likely to focus on the pragmatic concerns of their constituents.

What type of ethnic divisions and political circumstances are most likely to produce conflict?

There is no easy answer, but there are formulas that can provide a guide.

Joel D. Barkan, Professor of Political Science at the University of Iowa, provides a good one in his chapter on East Africa in the new book On the Fault Line: Managing Tensions and Divisions within Societies. He argues that the presence or absence of severe social divisions and their varying ‘depth’ is a function of the interplay between three variables:

1. The extent of ethnic, religious, or clan fractionalization and the relative size of competing groups
2. Whether the country in question is marked by uneven levels of development and incorporation into the world economy that has privileged some groups over others
3. The extent to which political leaders seek to mobilize populations on the basis of appeals to ethnic, religious, or clan identification and grievance

Where populations are divided into a small number of large identity groups, development is highly uneven (and is perceived as being highly favorable to some groups over others), and political leaders encourage the disadvantaged to feel aggrieved, politics becomes focused on a zero sum competition for state resources. Conversely, where populations are divided into a large number of small identity groups, the pattern of uneven development is less pronounced, and politicians do not stress identity politics, the probability that ethno-regional communities will conflict is low. Instead, policies and occupational or class interests are likely to matter more to political competition.

In Africa, Kenya, Uganda, Ethiopia, and Nigeria fit into the first category. Tanzania the second. In the Middle East, Lebanon, Syria, and Iraq fit the first category.

The problem for leaders in countries with difficult political geographies and a history of uneven development is that they cannot change the first two variables, at least not in the short-to-medium term. “It is thus the approach taken by a country’s political elites and their interaction with the two structural variables that accentuate or mitigate the fault lines that divide society [italics in source].”

Elections can easily exacerbate these divisions, as Kenya has shown a number of times in its history. “Politics … become a never-ending game of ethnic ‘musical chairs.’ In the run-up to each election, coalitions form and reform among the largest groups, but in the process divide their countries, often deeply, into what becomes a zero-sum game between rival ethnic coalitions.”

What can a country do in these circumstances?

Forming a compensatory system that mitigates against these factors requires some form of federalism that is tailored to the particular permutation of ethnicity and development. Breaking up the largest identity groups: appears to be the most effective way to both accommodate and navigate the existence of ethnic fault lines. However, to be financially viable and mitigate the impact of uneven development, federalism requires a system of equalization grants managed by the central government. This is because residents of poor areas are rarely able to raise sufficient revenue to finance their local and state governments.

Nigeria has avoided severe ethnic and religious conflict since its civil war in the late 1960s by adopting just such an approach.

Ethiopia is trying to mitigate conflict by decentralizing power directly to major identity groups, without any attempt to break them up. Time will tell whether this approach, which has worked well on other continents (in Canada, Belgium, India, and so on), can work in Africa.

Regionalism, which he does not discuss, can also mitigate identity conflict by making the state less relevant to individual groups. In places such as West Africa where many tiny fragile states exist side-by-side, only a regional approach is likely make a substantial difference given the weakness of state institutions.

Recruiting professionals from outside the country to work either in specific positions or as special assistants to senior officials is one of the best ways to fill immediate needs, transfer skills, and encourage highly qualified people to relocate permanently to the country. Focusing on young members of the diaspora–including at times diaspora from neighboring countries–increases the chance that individuals will be familiar with local culture and conditions and will be interested in staying longer-term.

As Todd Moss discusses over at CGD, the Scott Family Fellows is a good example of how this should work in practice. The program recruits young professionals to work as special assistants (not advisors) to senior Liberian government officials. Recruitment is open and competitive but targets the Liberian diaspora, aiming to boost public sector capacity and also provide a vehicle for Liberians living abroad to contribute to their country’s reconstruction.

The fellows typically have a Masters degree and one to two years of relevant experience. They work long hours on a range of activities from administrative tasks to policy issues, all with the goal of helping Liberia in its urgent reconstruction and development efforts.

Started with a grant from the family of Edward W. Scott, Jr. in 2007, the program has expanded to include other fellows funded by Humanity United, the McCall MacBain Foundation, the Open Society Institute, and the Nike Foundation. JSI Research & Training Institute, Inc., now fully administers the program.

Click here to view the embedded video.

Thanks to New York University’s Development Research Institute’s Annual Conference 2012.

Many in the development field think the reduction of inequality in poor countries should be a high priority. But this shows a misunderstanding of the problems the poor face in these countries—and what steps must be taken to help them.

Inequality has become a major issue around the world over the past few years. The financial crisis and its aftermath show how widening inequality threatens the vitality of democracy across the developed world. The Arab Spring shows the myriad advantages narrow elites have across the Middle East to enrich themselves at the expense of everyone else. Growth that benefits only a sliver of populations in many developing countries shows how large are the differences in access to opportunity across the developing world.

As Claire Melamed and others have argued, inequality can reduce growth rates, slow down poverty reduction, and increase political instability—all of which ought to matter to people working in development.

But fragile states, which include most of the world’s poorest countries (as well as a number that are reasonably well off because of their natural resource wealth), have more fundamental problems than inequality. Divided by stark ethnic, religious, clan, or caste differences, and lacking governments able to “get things done,” they need to focus their limited capacities and resources on increasing stability and getting the state to work better. In such places, enhancing “horizontal social cohesion” (the complex cultural, psychological and social glue that ties people together) and developing stronger institutions are both more important than reducing inequality.

History shows that the most successful countries at promoting development and poverty reduction were both cohesive and equipped with capable governments. Places like China, Vietnam, South Korea, and the rest of East Asia have improved the lives of over a billion poor people over the past two generations not because they sought to reduce inequality (in many cases it increased while poverty was dropping) but because they sought to develop dynamic nations and considered all (or almost all) their citizens an essential part of this process.

The higher the level of social cohesion, the less likely a country will have the identity and spatial differences that contribute so much to poverty in the poorest states. The more cohesive a country, the more likely it will have a leadership with an interest in introducing programs that help the poor because elites see impoverished people as “one of us” and think poverty holds back the whole nation.

The more robust the government the more likely it will be able to offer a wide range of quality public services and ensure equal access to them—no matter who is in charge. Governments able to implement policy effectively are much better positioned to focus on reducing inequality and designing programs that target poverty than those whose reach barely extends across a territory.

Where neither is present, the poor are at their most disadvantaged. Lacking access to many public services (including, often, the rule of law and good schools) and faced with elites who are ambivalent—or worse—about their situations, the poor have little hope of improving their lot no matter how hard they work.

This does not mean inequality does not matter. But efforts to reduce inequality are more likely to gain traction when these two elements have been tackled first.

Brazil, Mexico, and other Latin American have introduced the most innovative poverty reduction programs over the past decade or so—and not earlier—because they are more cohesive than at any time in their histories. Whereas elites once saw social exclusion as a natural product of racial differences and very much in their own self-interest, today there is a much greater commitment to inclusion and a much better understanding of the practical and ethical importance of helping the poor. In Brazil, for instance, leading business people created a partnership called Todos Pela Educação (Education for All) to push for improvements in schooling because they were unsatisfied with government performance in the sector, and saw the deficiencies as a major disadvantage compared to Asian competitors.

Chile has introduced the region’s most comprehensive poverty reduction program, the Chile Solidario Programme, because it has the region’s most capable government.

The push to place inequality at the top of the development agenda echoes many similar attempts to impose a one-size-fits-all strategy on poor countries. And like other ideologies (such as the Washington Consensus), it may make sense at times. There are, however, many poor countries whose contexts require other solutions.

The Millennium Development Goals will only prove useful to fragile states when they focus more on improving how states and societies work. The current set of goals has, in contrast, mainly focused on improving the lives of individuals (by reducing poverty, increasing schooling, reducing child mortality, and so on). As a result, they have proven much more useful to states that already work reasonably well than fragile states. Whereas the former have governments that can use the MDGs to prioritize where they should invest money, the latter are still struggling to forge a basic political compact and build a set of functioning government bodies.

Indeed, no fragile state has achieved a single Millennium Development Goal. The proportion of the world’s poor living in fragile states is projected to rise from 20 percent in 2005 to over 50 percent by 2014. They are now home to one-half of all children not in primary school and one-half of all children who die before reaching their fifth birthday.

Formulating a set of MDGs that focus on improving how states and societies work rather than improving the condition of individuals is much harder to do. Many important issues are hard to quantify. Comparisons across countries often do not work well. There is a shortage of reliable data. Difficulties in measurement partly explain why aid agencies find it so hard to focus on issues such as politics despite wide recognition that they ought to do so.

But there are a few areas that could be targeted now and others that could be used with improved measurement tools. Improving governance and investment environments should be a priority. There are many widely available indicators, including the World Bank’s governance indicators, its Doing Business standards, and Goldman Sachs’ Growth Environment Score, that could be used as a starting point. Horizontal social cohesion needs to be taken into account. One way would be to examine horizontal inequities (i.e. inequalities between culturally formed groups). Another would be to look at spatial inequities (i.e. inequalities between different parts of a country). A third would attempt to measure the degree of political mobilization based on ethnic, religious, or clan identification with the aim to create political systems that reduced this tendency. Longer-term, a way to measure horizontal social cohesion better than existing tools ought to be sought.

Equity should matter, but not the equity of outcomes. Better to focus on the equity of access to public services and opportunity. Measuring differences in access to schooling, roads, jobs, and so on would highlight social exclusion, show how uneven development hurts the poor, and provide information that can change how governments and donors spend their money.

Indicators need to be chosen in a way that allows each country the flexibility to shape the development path they take. Better governance, for instance, can be achieved in many ways, not all of which may show up under the World Bank’s system. Many Asian countries, for instance, have done quite well despite performing badly on these.

Aid agencies are increasingly focusing their money on fragile states. Some, such as Australia, have committed half their budgets to them. These countries have proven to be a wicked problem for donors in the past because they are unable to creatively rethink their own paradigms for how societies and states work and evolve. In order to succeed, they will need to prioritize more fundamental issues than inequality.

As the competition for president of the World Bank approaches its final stages, it is worth considering what changes ought to be brought in by the new person. One area in need of reform is the Bank’s system of country classifications. Although Robert Zoellick pushed the World Bank to open its much-prized treasure chest of data to the public during his five-year term as president, he did little to reform how the World Bank conceptualized that data. Changing how countries are classified would have a wide impact on the whole development community.

For instance, look at all the discussion in development policy circles about the sharp reduction in the number of low-income countries in recent years. Some believe this news should be trumpeted as a policy success. For others, the reduction suggests that there is a “New Bottom Billion” of poor people living in middle-income countries, forcing a change in donor focus. For yet another group, it indicates that foreign aid as a concept should be updated to blend more loans with grant money.

But has all that much changed? Does the World Bank country classifications accurately identify the countries in need of outside assistance?

The World Bank’s country classifications divide its 187 member countries into four categories: low income ($1,005 or less); lower middle income ($1,006–$3,975); upper middle income ($3,976–$12,275); and high income ($12,276 or more). Whether a country is low income (LIC) or middle income (MIC) affects many things, from eligibility for concessional lending from the multilateral banks, to donor aid policy (see, for instance, the 2006 European Consensus on Development), to trade access (low-income countries are more likely to have access to rich-world markets).

The system, however, presents a distorted picture. Using just one number—income per capita—to determine a country’s status may be “convenient,” as the World Bank puts it, but it produces results that do not reflect real-world situations. Ignoring issues such as inequality, human development, social exclusion, and government capacity—all of which matter tremendously to the robustness of states and the lives of the poor—does a disservice to the organizations and people who use the system.

There are many ways that this single number can be misleading. When a state has oil or other natural resources that can be exploited in small enclaves unconnected to the rest of the economy, average incomes say little about development progress and the welfare of the population. Nigeria, Angola, and Sudan all are middle-income by the World Bank’s reckoning, but have problems typical of less developed places. A substantial drop in commodity prices would immediately have a large effect on their average incomes.

If a state runs up its debt in an unsustainable manner, as many developing countries did in the 1970s, income levels may not be sustainable no matter how widely they are distributed.

In both these cases, countries may achieve a higher status that is not sustainable. In fact, between 1978 and 2003, 25 countries fell from MIC to LIC. Most of the countries that have graduated from LIC to MIC status in the last decade were actually MIC at some point in the past.

There is also the question of cut-off points. Why are countries with $1,005 average incomes a LIC while those with $1,006 a MIC? Are countries that are one dollar wealthier that much more developed? The rationale for how bandwidths are drawn is not available and seems fairly arbitrary, as Jonathan Glennie has pointed out.

Changing the parameters that determine a country’s status would change the results substantially. If the cut off point were $1500, for instance, 18 more states would be considered LICs.

If countries with low levels of human development, as measured by the UNDP’s Human Development Index, were chosen instead, there would be 46 countries in the lowest category instead of 35. If a country’s dependence on natural resource exports mattered, perhaps a dozen MICs would lose their status.

The United Nations uses a different classification system, whereby its “least developed countries” are selected because they have low incomes (under $750 to be added to the list, above $900 to graduate from it), weak human assets, and high levels of economic vulnerability. According to Simon Maxwell, under its stricter system 18 MIC countries would still be classified as least developed.

A better system would completely change the conversation about the reduction of LICs for a number of reasons.

First, the most populated mover, China, had many of the qualities of a low middle-income country well before it reached MIC status in 1999. Its human development indicators and state capacity were far superior to most low-income countries. And its poverty rolls were declining sharply throughout the 1980s and 1990s (something that quite a number of the newer middle-income countries have not achieved yet).

Second, the third-largest mover, Indonesia, was actually regaining a status it had lost during the Asian financial crisis, when its average incomes fell due to political instability. Its poverty levels began falling in the 1970s. It probably did not deserve to be a LIC a decade ago.

On the other hand, the fourth and fifth most important movers, Nigeria and Pakistan, do not really deserve to be considered MICs now. Both have enormous governance problems and very low levels of human development, making their inclusion in the higher category rather tenuous, and even misleading. The former is only a MIC because of its oil exports.

Of the five most populous countries that shifted from lower- to middle-income status in recent years, only India really has seen changes that can be classified as increasing its development level from low to lower medium, and this shift hides great differences between various parts of the country. The north and northeast are still comparable to a LIC.

Therefore, only one of the five largest countries that moved up a notch according to the World Bank since 1999 can be said to really deserve this accolade during this time period. And, the great shift in global poverty from LICs to MICs depends almost exclusively on what has happened in these five countries. If we remove them from the equation, there has hardly been any change in the percentage of poor people living in MICs since 1990.

A more accurate classification system would affect a wide range of debates and policies concerning the poor besides this one example.

For instance, while it may be correct to say that 36 percent of the United Kingdom’s total bilateral aid budget is allocated to MICs between 2010 and 2015, the high proportion of this money going to places such as Nigeria, Pakistan, and Yemen (all of which are seeing a doubling of aid) means that the proportion going to medium developed countries is far lower. An accurate picture would completely change the conversation—and many policies along with it.

Formulations such as MIFFs—middle-income, failed, or fragile states, as designated by the Economist—would be irrelevant if countries were better categorized. Most of the countries on that particular list are either oil producers (Nigeria, Angola, Iraq, Sudan), heavily aid dependent (East Timor, Djibouti, Papua New Guinea), or weakly governed (Pakistan, Yemen). Few have decent development indicators.

So what should a more sophisticated and less arbitrary system look like?

First, it should aim to measure levels of development rather than levels of income. This would require taking into account political and social development in addition to economic development and taking a more nuanced view of the latter. Making clear that the Bank considered all these important would by itself mark a break with the past, and give a much needed boost to efforts across the development community to focus more on non-economic issues.

Second, it should depend on many more factors, more akin to what the United Nations uses now to what the World Bank has. These should include a variety of social, economic, and political factors, such as the average level of human development, the quality of public services, macroeconomic conditions, the degree of export diversification, and the extent of social conflict. Income would still matter but much less than it does now.

Third, it should consist of more categories to better reflect the complexity of the world. Ideally, this should mean creating groupings based on unique characteristics instead of putting all countries onto the same scale. For instance, middle-income countries that depend almost exclusively on petrochemical exports (such as Nigeria and Sudan) and have done little to raise the human development of most of their citizens would be grouped together. Especially violent societies (such as Honduras and El Salvador) might fit into another grouping.

A gradualist approach, whereby countries did not abruptly graduate to higher levels, but were grouped into multiple categories or were moved upward only slowly over time would better take into account the messiness of reality.

At the least, the current three (or four if you consider lower and upper MIC two categories) needs to be reformulated into 5 to 7 categories.

Making these changes would improve the ability of the Bank and the rest of the development community to fight poverty, promote development, and improve the workings of poorer countries.

More than a dozen authors contribute case studies on a broad range of countries including South Africa, Northern Ireland, Iraq, Ethiopia, Nigeria, Kenya, India and even Canada and seek solutions that can be transferred elsewhere.

Over and over again, they learn that “the nature of the fault lines was far more complicated than the simple headline assigned to a country.” In the Democratic Republic of the Congo, for instance, Pierre Englebert finds an extraordinarily complicated picture, with “multiple and overlapping local fissures, widely distributed across the country, which contribute to a fragmentation of identities and networks at the local level and increased polarization of social life.” Christopher Clapham writes that Ethiopia is “riven by conflicts along almost every fault line–ethnic, religious, ecological, class, ideological, political–many of which are broadly aligned . . . Conflicts within Ethiopia itself spread across state frontiers–especially those with its three most important neighbors.”

An interesting thread that runs throughout the book is that though elections are important and can be effective in countries with established democratic institutions, when countries lack these they can exacerbate and perpetuate fault lines, leading to a wide range of problems. “The construction of other democratic institutions, including federalism, the appropriate set of voting rules, free media, control of the military and, above all, rule of law (and unfettered access to it), is often more important than the act of holding elections.”

Conflict can be prevented by ensuring that the “constituency of losers,” what Joel D. Barkan refers to as “the ‘smalls’ and the ‘have nots,’” does not become too large. Good governance and the fair distribution of resources can dramatically diffuse the threat of societal violence.

“The international community’s response to fault-line violence has generally not become more effective over time. External actors can rarely successfully re-engineer societies. . . .  There is a real need for . . . greater flexibility in developing responses to fault lines.” What works in one state will not work in another.

For more information, see On the Fault Line: Managing Tensions and Divisions within Societies.

Religion has played an important part in the Arab Spring, either as a ideological influence behind calls for change or, more recently, as a major force in elections. Islamic parties already dominate the political scene in Tunisia and Egypt, and will likely do so anywhere else democracy allows a free vote.

Most Westerners assume that that these trends can only end up hurting the region.  For them, religion is a major cause of the problems that plague the Middle East, and greater secularism is essential for democracy and progress. But such notions show just how little outsiders understand the region, its dominant faith, and the political dynamics driving change from Morocco to Iran.

One of the few Western writers to understand why Islam and Islamic groups are the keys to progress in these countries is Reuel Marc Gerecht. His The Wave: Man, God, and the Ballot Box in the Middle East (completed in October 2010–two months before the start of the Arab Spring) is the best book on democracy and Islam that I have read, with sharp insights into why Muslim groups are driving the democratization process forward, and why “the path to political stability and basic human decency runs through the Holy Law and not . . . around it.”

His interpretations are worth quoting:

When democracy arrives in the Arab Middle East, it will arrive via Shiite clerics and Sunni fundamentalists, and not via Westernized liberal Muslims or Westernized dictators . . . Legitimacy in the Arab Middle East now springs from both God and the common man . . . . The Middle East’s great drama . . . involves this collision and mixing of Islamism and democracy . . . which so many in the West don’t seem to know is taking place. . . . What needs to be better appreciated are the historical forces and philosophical ideas–from the earliest days of Islam–that make Islamic democracy the likely wave of the future. . . .

[Many important Islamic leaders] are religiously and politically evolving, marrying as best they can, sometimes in a highly contradictory manner, Islam and the West. They are trying to figure out how to take the best of the latter . . . without betraying the former. This evolution isn’t pretty, but these Muslims are trying to answer a need among the faithful, felt long and widely, to integrate the two civilizations and hence revivify their own. . . . For an increasing number of devout Arab Muslims, democracy is seen as the only means for returning Muslim Society to a more virtuous state.

The book is full of insights from a person deeply immersed in the region and empathetic to its existing reality. Unlike most commentators, he understands that progress depends on building on what the region has (societies and values highly dependent on religion) instead of importing something the region has not (secularism and Western ideas of state legitimacy).