NS4301Summer Term 2015Fragile Economies

Overview

• Fragile States – states in which government is unable to

• Deliver basic services, and

• Provide security to the population

• These countries face severe and entrenched obstacles to economic and human development

• Fragile states generally have a

• Combination of weak and non-inclusive institutions

• Poor governance,

• Low capacity, and

• Constraints in pursuing a common national interest

• Operationally somewhat arbitrary in classifying countries as fragile economies – often a matter of degree based on scores across a number of indices 2

FFP: Sources of Fragility I

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FFP: Sources of Fragility II

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FFP: High Fragility Countries

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FFP: Worsening 2006-2015

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FFP: Biggest Change 2014-2015

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IMF: Factors Behind Fragility

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IMF: Fragile States I

• As a result these countries typically display an elevated risk of both political and economic instability – they have an extremely difficult time absorbing shocks

• In contrast resilience defined as a condition where there are high levels of:

• Institutional strength,

• Capacity and

• Social cohesion

• If these are sufficiently strong the state is able to promote security and development and respond effectively to shocks

• Given multiple sources of fragility and reinforcing interactions among them, fragile countries have a hard time building resilience 9

IMF: Fragile States II

• Transition from fragility neither simple or rapid

• Estimated that of 26 sub-Saharan African countries identified as fragile only 12 could be expected to become more resilient by 2039

• Transition process seems to involve a number of intermediate phases running from

• State failure and conflict to

• Less extreme symptoms of weak governance and institutions

• Each phase entailing differnet challenges

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IMF: Fragile States III

• In early 1990s much of sub-Saharan Africa – 20 out of 44 countries could be regarded as fragile

• Period since has seen several important changes:

• In some countries societies and leaders have moved toward an agenda based on peace and development

• End of Cold War has but an end to surrogate conflicts

• The world economy and the demand for natural resources have grown strongly

• The international community has written-off most of the debt of the poorest countries

• Various initiatives have sought to enhance and redirect aid to respond better to recipient country needs and to build domestic capacity

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IMF: Fragile States IV

• In particular seven countries – Cameroon, Ethiopia, Mozambique, Niger, Nigeria, Rwanda and Uganda

• Have made relatively more progress in building resistance

• These countries have been able to

• Adopt more inclusive political arrangements,

• Strengthen their institutions, and

• Foster investment

• They have been also able to maintain macroeconomic stability and increase domestic revenues to support higher levels of public investment and improved social services

• However several other countries have not been able to make similar transitions and some even regressed

• Cote d’Ivorie, Malawi, Zimbabwe

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IMF Classification, 2011-13

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Fragile, Improving Resilient, 1990s-2011/13

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Building Resilience

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IMF: Case Studies I

• Given underlying causes of fragility are shaped

• not only by current political and economic conditions

• But also history of societies

• Never a single map to resilience

• Case studies however do shed some light on the factors linked to building resilience

• Look a three countries Ethiopia, Mali and Sierra Leone

• These provide perspectives on:

• Factors associated with resilience

• Approaches to reform, and

• The risks that arise in the transition process

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IMF: Case Studies II

• Ethiopia has followed a somewhat different development path compared to other countries

• Has produced positive outcomes and

• Avoided the risk of a reversal at time of a border conflict with Eritrea

• Mali has been oscillating in and out of fragility, mainly due to unresolved ethnic issues and security spillovers from other countries

• Sierra Leone has made progress since the 1990s but the Ebola crisis has threatened to erode the gains made so far.

• IMF empirical work has found the main factors in building resilience to include:

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IMF: Case Studies III

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IMF: Case Studies IV

• Countries are classified as having been in a condition of fragility in the 1990s if they had:

• Either an average rating of 3.2 or less on the World Bank Country Policy and Institutional Assessment (CPIA), of

• If they had experienced a major conflict

• This approach is similar to that used by the World Bank and the African Development Bank.

• The CPIA rates countries on a set of criteria grouped in four clusters:

• economic management,

• Structural reforms,

• policies for social inclusion and equity, and

• public sector management.19

IMF: Case Studies V

• Ethiopia – in early 1990s emerged from a long civil war (1974-1991) which reflected deep

• Ideological, and

• Ethnic divides

• Under the communist dictatorship a centrally planned system had generated

• Low economic growth

• Falling per capita income and

• High inflation

• Government polices also contributed to recurrent famines that fueled the conflict

• After overthrow of the regime – new constitution adopted and country moved to a multiparty system in first election held in 1993

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IMF: Case Studies VI

• Power sharing at the central government level remained rather limited

• However the government’s commitment to growth, poverty reduction and social policies contributed to stability and progress

• Development agenda was supported by a national poverty reduction strategy prepared under a broad and participatory process, and

• The devolution of powers (including fiscal competencies) to regional governments representative of ethnic and linguistic diversity

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IMF: Case Studies VIII

• With macroeconomic stability restored growth accelerated• Institutional and administrative capacity was rebuilt quickly

within two or three years following the change in government although progress languished thereafter

• Authorities implemented an ambitious program including price and trade liberalization, reform of interest rate structure tax reforms and public enterprise law and investment and labor codes.

• A 59 percent devaluation of the domestic crrcency (the birr) in 1992 helped restore competitiveness and shored up international reserves

• Ethiopia’s growth has accelerated from 2.5% (1980s) to 2.8% (1990s), to 8.2% (2000s) and to 9.9% (2010-15).

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IMF: Case Studies IX

• A number of shocks including a border conflict with Eritera in 1998-2000 threatened stability but progress prevailed

• Defense spending escalated peaking at 13 percnt of GDP and 40% of total expenditure

• Crowded out public investment and social spending• Fiscal space further reduced as donor support declined in

response to the conflict• In addition country hit by a severe drought and

deterionation of its terms of trade – lower coffee prices• Situation improved following a peace agreement in 2000• Allowed defense spending to be cut in ihalf and priority

spending to increase and a resumption of international aid

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IMF: Case Studies X

• Ethiopia achieved resilience in the 1990s as reflected in CPIA ratings and the absence of major conclits.

• Some generalizations:

• Fiscal Space

• International aid substantial but not as high as cases of Rwanda and Mozambique

• In addition to donor financing government relied on domestic financing rather than foreign borrowing or domestic revenues to finance public investment and social spending

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IMF: Case Studies XI• Delivering Public Serivices• Country did quite well in this area and consistentl so• Strong commitment to social development has been a

governmentpirority withspending equivalent to 10-13% GDP per year since 1999

• Public investment sharply increased from 6 percent to over 20% GDP, sprassing other high investment countries

• Private Sector• Private sector did not play a major role in Ethiopia’s

transition• Private investment increased somewhat until the mid-2000s,

but have remained at a relatively lpow level since then• Will need reforms in rule of law, requlatory quality and

control of corruption

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IMF: Case Studies XII

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IMF: Case Studies XIII

• Ethiopia is set apart from the other successful contries due to its more prominent role of government in directing resources to social sectors and infrastructure investment

• In long term such a role and the country’s high reliance on domestic financing have limitations and private sector will have to play a more central role

• While government commitment to social polices and decentralization appears to have eased ethnic and social tensions, weak governance indicators indicate that other less tangible aspects of political economy may need to be addressed

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Social Indicators: Ethiopia, Mali and Sierra Leone

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Governance

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