States of Fragility 2018

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States of Fragility

17 July 2018

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Chapter 8. What do financial flows look like using a multidimensional lens?

Rachel Scott

Abstract

Chapter 8 analyses external financial flows to fragile and non-fragile contexts that are eligible for official development assistance (ODA), using the multidimensional fragility lens introduced in Chapter 2. It begins with an overview of aid flows to extremely fragile, other fragile and non-fragile contexts across the five dimensions of the fragility framework. It then demonstrates how a clustering technique provides a more fine-grained look at the ways ODA, foreign direct investment and remittances play out across the economic, environmental, political, societal and security dimensions. The chapter pays particular attention to whether these international flows are sufficiently calibrated to the specific needs of fragile contexts and the severity of their fragility.

The OECD fragility framework uses a clustering technique, which is discussed in Chapter 2 and the methodological Annex. It is employed to determine the severity of fragility in each dimension by clustering together contexts that perform similarly on certain indicators. The outcome of the mixed-method analysis (quantitative and qualitative) is applied to the results of the clustering exercise. This generates a ranking of clusters on a six-level scale of severity on which 1 is severe fragility, 2 is high fragility, 3 is moderate fragility, 4 is low fragility, 5 is minor fragility and 6 is not fragile.

The clustering technique was run on all contexts that passed the data threshold for this report, i.e. on 172 contexts. Because the main focus of this chapter is development finance such as official development assistance (ODA), however, the results included in the analysis are limited to the 125 contexts that are ODA‑eligible. These contexts then are divided into the categories of fragile contexts and non-fragile contexts.

This chapter first presents a brief, graphic depiction of ODA flows to extremely fragile, other fragile and non-fragile contexts across the five dimensions of the OECD multidimensional fragility framework. It then breaks out each of the five dimensions to take a closer look at the main international financial flows – ODA, foreign direct investment (FDI) and remittances – within each dimension. The discussion of each dimension begins with a map showing the contexts included in the clusters across that dimension according to their level of fragility; the variation in the different financial flows depending on the level of fragility of each cluster; and the breakdown of ODA allocation based on the five dimensions across the fragility clusters.

8.1. The multidimensional fragility lens and official development assistance

The following sections analyse external financial flows to 125 fragile and non-fragile contexts across the five dimensions used in the fragility framework. The analysis begins with Figure 8.1, which presents a synthesis of the spread and balance of ODA flows among the 15 extremely fragile, 43 other fragile and 67 non-fragile contexts. It takes account of the caveats discussed in Chapter 5 about matching OECD Creditor Reporting System codes to the five dimensions.1

Figure 8.1. Multidimensional ODA to fragile and non-fragile contexts, 2016

ODA allocations differ significantly between extremely fragile contexts and other contexts, as is discussed further in Chapter 4. In extremely fragile contexts, nearly half of all ODA (46%) is in the form of humanitarian finance and therefore does not directly address structural drivers of fragility. However, most of the remainder of the ODA (48%) in these extremely fragile contexts is targeted either at reducing the risks of one of the five dimensions of fragility or at strengthening related coping capacities. The economic fragility dimension receives the most of this fragility‑targeted ODA (USD 6.4 billion, or 20% in 2016) followed by the environmental (USD 2.9 billion, or 9%), political (USD 2.8 billion, or 9%) and societal (USD 2.6 billion, or 8%) dimensions. The security dimension of fragility receives the least. Only 2% of total ODA to extremely fragile contexts, or USD 512 million, was spent on risks and capacities related to the security dimension in 2016. This is surprising given that 9 of the 15 extremely fragile contexts are experiencing some form of violent conflict and that all 15 are either severely or highly fragile in the security dimension.

The fact that many security expenditures are not ODA-eligible may partially explain this phenomenon. ODA-eligible security activities are those with a clear developmental benefit to the partner country. The impact of security activities that are not ODA-eligible is not clear; they may be having a positive effect on reducing fragility or, in a worst-case scenario, they may be exacerbating it.

There is relatively little difference between ODA allocations to the different dimensions of fragility across the other fragile contexts grouping and other, non‑fragile, developing countries. The only slight differences are that more ODA is invested in addressing the societal dimension in other fragile contexts than in non‑fragile contexts (13% versus 7%, respectively) and that less ODA is spent on addressing the economic dimension in other fragile contexts than in non-fragile contexts (41% versus 52%, respectively). Additionally, in terms of volume of aid flows, other fragile contexts received significantly less ODA (USD 17.5 billion) in 2016 than non-fragile countries (USD 26.4 billion).

The proportionately high amounts of ODA that all fragile contexts are receiving should be taken as further indication that aid alone – even when it is allocated across the five dimensions – does not address fragility. Chapters 9 and 10 continue the discussion of this issue.

8.2. Economic fragility

Figure 8.2 shows the regional spread of ODA-eligible countries experiencing different levels of economic fragility.

Figure 8.2. ODA-eligible countries by levels of economic fragility

Figure 8.3 shows the mix of financial flows in fragile and non-fragile contexts according to their level of economic fragility.

Figure 8.3. Remittances, FDI and ODA in fragile and non-fragile contexts by levels of economic fragility, 2016

Two main factors determine the mix of FDI, ODA and remittances to economically fragile contexts: the severity of each one’s economic fragility and the context’s overall classification as either fragile or non-fragile.

Logically, a more economically fragile context has a more difficult and risky investment climate and thus will attract less FDI. This holds true, more or less, for contexts in the 2018 fragility framework. FDI to severely economically fragile contexts made up only a small percentage of total international development finance flows in 2016 – 14% for contexts that are considered fragile overall and 19% for contexts that are considered non-fragile overall. Contexts with the less severe classification of high economic fragility received higher FDI levels, or 35% of total flows in places considered fragile overall and 45% of total flows in contexts that are non-fragile overall. FDI then becomes a majority flow, or 62% of the total, in moderately economically fragile contexts that are not considered fragile.

However, the severity of economic fragility is not the sole determinant of the mix of international development finance flows. For example, ODA makes up 40% of international development finance flows in contexts that are severely economically fragile and also are considered fragile overall, a group that includes Somalia and South Sudan. A very different picture emerges in severely economically fragile contexts that are considered non-fragile overall due to their better performance in other dimensions, for instance Namibia and Senegal. In this group of contexts, ODA makes up only 27% of the mix. This demonstrates that ODA is an important source of financing for fragile contexts that rank poorly on the economically fragile scale.

Although economic fragility might affect some aspects of remittance flows – for example, if currency controls make remitting funds difficult – there does not seem to be a correlation overall between remittance flows and the severity of economic fragility.

Figure 8.4 shows the breakdown of ODA by different levels of economic fragility using the five dimensions of the fragility framework.

Figure 8.4. Multidimensional ODA to fragile and non-fragile contexts by levels of economic fragility, 2016

ODA targeting the risks and capacities that together drive economic fragility is significant across all categories of severity of economic fragility, with the surprising exception of those contexts where economic fragility is most severe. In contexts experiencing high, moderate, low or minor economic fragility, ODA that targets its drivers ranges from 23% to 53% of total aid expenditure. However, in contexts that are severely economically fragile and whose overall fragility puts them in the fragility framework – i.e. contexts where the need to address the economic drivers of fragility is arguably the greatest – ODA targeted to these drivers constituted only 23% of total ODA disbursed. A much higher proportion, or 38% of ODA, was spent on humanitarian assistance in these severely economically fragile contexts. One other notable trend is that non-fragile contexts consistently receive higher proportions of ODA targeted at economic fragility factors than do fragile contexts. This seems perverse but perhaps reflects the need for some level of overall stability in a country as a pre-condition for investments in economic growth-related factors.

8.3. Environmental fragility

Figure 8.5 shows the regional spread of ODA-eligible countries experiencing different levels of environmental fragility.

Figure 8.5. ODA-eligible countries by levels of environmental fragility

As shown in Figure 8.6, ODA is the most significant international financial flow to fragile contexts that show high levels of environmental fragility.

Figure 8.6. Remittances, FDI and ODA in fragile and non-fragile contexts by levels of environmental fragility, 2016

For example, ODA makes up 61.7% of all international flows to fragile contexts with severe environmental fragility and 43.5% to those with high environmental fragility. In contexts with moderate, low and minor levels of environmental fragility – and regardless of whether they have been assessed overall as being fragile or non‑fragile – FDI is a much bigger part of the picture. This can be seen in the 40 non-fragile, developing countries that have low environmental fragility, where FDI is the largest flow (69.1%).

ODA therefore is playing a significant role in addressing environmental fragility. This is important because it is difficult to attract climate financing mechanisms to fragile contexts given their lower risk tolerance levels (Chapter 9).

Figure 8.7 shows the breakdown of ODA by different levels of environmental fragility using the five dimensions of the fragility framework.

Figure 8.7. Multidimensional ODA to fragile and non-fragile contexts by levels of environmental fragility, 2016

In high-risk environmental contexts, more ODA is being spent on the drivers of economic fragility than on environmental issues. In consequence, it would be useful to examine these investments in economic factors to determine if they are being applied in an environmentally friendly, sustainable manner or if they are building in new risks. Allocations of ODA seem to increase as the severity of environmental fragility increases. In fragile contexts that are only moderately environmentally fragile, for example, 8.3% of ODA in 2016 was targeted to environmental factors; in highly environmentally fragile places, this percentage was 16.2%; and in contexts with severe environmental fragility, it was 21.4%. It is notable that the two contexts that are non-fragile overall and have only minor environmental fragility (Mauritius and Uruguay), received the highest share of ODA targeted to drivers of this dimension of fragility.

8.4. Political fragility

Figure 8.8 shows the regional spread of ODA-eligible countries experiencing different levels of political fragility.

Figure 8.8. ODA-eligible countries by levels of political fragility

Figure 8.9 shows the mix of financial flows in fragile and non-fragile contexts according their level of political fragility.

Figure 8.9. Remittances, FDI and ODA in fragile and non-fragile contexts by levels of political fragility, 2016

It is commonly thought that a certain level of political stability is necessary for investor confidence. Some research also shows that factors such as government effectiveness, corruption levels, accountability and the rule of law are important for increasing the capacity of states to attract FDI (Rodríguez-Pose and Cols, 2017[5]). Indeed, in 2016, more severe political fragility corresponded with lower levels of FDI in fragile contexts. Thus, in severely politically fragile contexts, FDI made up 25% of total international financial flows; in contexts with high political fragility, FDI represented 27.7% of total flows while in contexts of moderate political fragility, it made up 28.5%.

FDI to non-fragile contexts in this dimension, however, did not show this same pattern. FDI represented 61.1% of international development flows in non-fragile contexts with severe political fragility, suggesting that other factors worked to attract investment in compensation for the extreme levels of political fragility.

As in the other dimensions, in 2016, ODA was the major source (51.2%) of international development finance in fragile contexts with severe political fragility, underscoring the key role that donors must play in addressing the underlying drivers of this type of fragility (Chapter 5). Remittances also were a significant flow in all contexts with political fragility, which suggests there may be opportunities for involving diasporas to help resolve some aspects of political instability.

Figure 8.10 shows the breakdown of ODA by different levels of political fragility using the five dimensions of the fragility framework.

Figure 8.10. Multidimensional ODA to fragile and non-fragile contexts by levels of political fragility, 2016

As discussed in Chapter 5, ODA allocations targeted to the drivers of political fragility were very low in all contexts, regardless of whether they were assessed with minor, low, moderate, high or severe political fragility. This means that even where political fragility is severe, there is no increase in aid to reduce its risks or to strengthen coping capacities.

The mix of other ODA investments in these severely politically fragile contexts, and the activities they targeted, is worth noting. Contexts in this grouping that are classified as non‑fragile overall received proportionately high levels of economic-focused ODA, or 57.4% of total aid; environmental-focused ODA represented 15.7% of the total and humanitarian aid made up 11.9%. However, a very different picture emerges in the contexts that are severely politically fragile and also assessed as overall fragile. The ODA to these contexts was largely humanitarian aid (43%) and, to a much smaller extent, economic‑focused (22.9%). This breakdown supports the assumption that political stability is a pre-condition for economic growth and related donor investments. It would be interesting to calculate – although this has not yet been done – how much of the humanitarian aid spent in severely politically fragile contexts would have been saved had there been corresponding investments in political stability.

8.5. Societal fragility

Figure 8.11 shows the regional spread of ODA-eligible countries experiencing different levels of societal fragility.

Figure 8.11. ODA-eligible countries by levels of societal fragility

Economic remittances do not seem to have a strong correlation with societal fragility either in fragile or non-fragile contexts, as is shown in Figure 8.12.

Figure 8.12. Remittances, FDI and ODA in fragile and non-fragile contexts by levels of societal fragility, 2016

Remittances are the largest international development finance flow in contexts with high societal fragility. This is the case for both fragile contexts, where remittances make up 50.9% of total flows, and for non-fragile contexts, where they make up 53.8% of the total. As societal fragility increases, however, remittances make up a smaller portion of finance flows. They represent only 27% of flows to contexts that are severely fragile in the societal dimension and fragile overall and only 24.9% to such contexts that are non-fragile overall. The same pattern is evident as societal fragility decreases: in contexts with only moderate societal fragility, remittances make up 33.7% (fragile contexts) and 27.4% (non-fragile contexts) of all international financial flows.

The lack of a correlation between societal fragility and remittances is interesting in itself, as diaspora communities also contribute what have been termed social remittances to their home countries. These take the form of transferring skills and knowledge and bridging cultural divides, for instance, as well as breaking down gender stereotypes by promoting the financial inclusion of women. Social remittances are thought to transform or challenge values in countries of origin (UN, 2017, p. 2[6]).

In terms of other types of flows, ODA is the most significant flow (48.8%) in fragile contexts with severe societal fragility. In non-fragile contexts with severe levels of societal fragility, FDI makes up a much greater proportion, or 72.8%, of international development finance flows. This suggests that FDI is not particularly deterred by heightened levels of societal fragility.

Figure 8.13 shows the breakdown of ODA by different levels of societal fragility, using the five dimensions of the fragility framework.

Figure 8.13. Multidimensional ODA to fragile and non-fragile contexts by levels of societal fragility, 2016

As seen in the political fragility dimension, investments in reducing the risks or increasing capacities to cope with societal fragility are low. This is the case even in contexts with severe societal fragility, where the proportion of ODA allocations for societal factors is 5% for non-fragile contexts and 9.7% for fragile contexts. It is also true in the highly fragile cluster, where ODA allocations targeted at societal fragility amount to 7.4% of aid in non-fragile contexts and 13% in fragile contexts. Indeed, in contexts with severe societal fragility that were also overall considered fragile, 33% of ODA was humanitarian assistance, thus far outstripping investments in societal factors. In addition, investments in societal factors seem to be largely indifferent to the severity of societal fragility, with the ratio of such aid not varying much across all levels. ODA allocations, then, do not appear to be either focused on or targeted at reducing societal fragility.

8.6. Security fragility

Figure 8.14 shows the regional spread of ODA-eligible countries experiencing different levels of security fragility.

Figure 8.14. ODA-eligible countries by levels of security fragility

Figure 8.15. Remittances, FDI and ODA in fragile and non-fragile contexts by levels of security fragility, 2016

In the eight contexts that are severely fragile in the security dimension, ODA is the dominant international development finance flow, making up 72.2% of the total. ODA remains a significant flow (38.1%) in fragile contexts that have high security fragility and in those with moderate security fragility (24.8%). Reliance on international donors is even greater than the figures for this dimension of fragility show, however, as several of these contexts with high levels of security fragility have peacekeeping missions. These missions constitute a financial flow into fragile contexts but are not fully represented in Figure 8.15. In such contexts, it will be important to consider how to compensate for the loss of this financial flow – to the economy but also to the livelihoods of communities and families – following the drawdown of these missions.

In non-fragile contexts, ODA is only a minor portion of total international development finance flows, regardless of the severity of security fragility. Instead, in these contexts, FDI is the major flow, at 43.9% of total flows in contexts with high security fragility and 73.8% in contexts with moderate security fragility. This may indicate an opportunity for foreign investors to play a role in the reduction of security fragility in non-fragile contexts.

Figure 8.16 shows the breakdown of ODA by different levels of security fragility, using the five dimensions of the fragility framework.

Figure 8.16. Multidimensional ODA in fragile and non-fragile contexts by levels of security fragility, 2016

As represented at the beginning of the chapter in Figure 8.1, only 2% of ODA targets the security dimension in extremely fragile contexts, and 1% of ODA in other fragile contexts. Therefore, it is not surprising that the share of ODA going to addressing security overall is negligible regardless of the severity of security fragility in different contexts. Instead, as might be expected, humanitarian aid makes up the major proportion of ODA (60%) to severely security fragile contexts. In other contexts where security fragility is assessed as minor, low, moderate or high, most ODA is targeted at the drivers of economic fragility and, to a lesser extent, drivers of environmental fragility. Comparatively little ODA for economic factors is allocated to contexts with severe security fragility, which could be expected. But in these severely fragile contexts, there is more investment in reducing political fragility than in any of the other clusters, which appears to recognise a correlation between political and security fragility. It will be interesting to see how the refocus on the conflict prevention agenda changes this mix of ODA investments in the future and to gauge the optimal mix of investments for prevention, particularly as concerns security, political and societal fragility.

References

[4] OECD (2018), “Aggregate DAC Statistics Table DAC-2a: ODA official development assistance: 2016 disbursements”, International Development Statistics, OECD, https://stats.oecd.org/qwids/ (accessed on 23 May 2018).

[1] OECD (2018), “Creditor Reporting System: Aid Activities”, OECD International Development Statistics (database), https://stats.oecd.org/Index.aspx?DataSetCode=CRS1. (accessed on 15 May 2018)

[5] Rodríguez-Pose, A. and G. Cols (2017), “The determinants of foreign direct investment in sub-Saharan Africa: What role for governance?”, Regional Science Policy and Practice, Vol. 9/2, https://doi.org/10.1111/rsp3.12093.

[6] UN (2017), “Issue Brief #4: Contributions of migrants and diasporas to all dimensions of sustainable development, including remittances and portability of earned benefits”, No. 4, United Nations, https://refugeesmigrants.un.org/sites/default/files/ts4_issuebrief.pdf.

[2] World Bank (2018), “Foreign direct investment, net inflows (BoP, current USD)”, World Development Indicators (database), http://data.worldbank.org/indicators. (accessed on 14 May 2018)

[3] World Bank (2018), “Personal remittances, received (current USD)”, World Development Indicators (database), https://data.worldbank.org/indicator/BX.TRF.PWKR.CD.DT. (accessed on 16 May 2018)

Note

← 1. To avoid double-counting, humanitarian ODA shown in this section excludes aid flows that are spent on the OECD Creditor Reporting System category of disaster prevention and preparedness (DPP). These are included instead in the environmental dimension.

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