Download Fragile Economies

NS4301
Summer Term 2015
Fragile 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
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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
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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.
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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 mid2000s, but have remained at a relatively lpow level since
then
• Will need reforms in rule of law, requlatory quality and
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control of corruption
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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