This chapter analyses the current state of responses to crises and fragility. In line with the Addis Ababa Action Agenda, it reviews the economic and financing landscape in fragile contexts and identifies risks and coping capacities beyond official development assistance financing. It then looks at approaches to policy and programming on three key issues that will impact policy and practice in fragile contexts for the foreseeable future: the economic channels transmitting shocks and reinforcing resilience, growing climate change and environmental fragility risks, and the under-developed links between development and peace.
States of Fragility 2022
States of Fragility
2. The state of responses to crises and fragility
Abstract
In Brief
Donors responded to global shocks with increased volumes of official development assistance (ODA). The volume of aid from all donors to fragile contexts peaked in 2020 at USD 91.4 billion, the highest volume ever recorded.
Within this total, OECD Development Assistance Committee (DAC) members’ aid to fragile contexts amounted to USD 61.9 billion, a 5% increase from 2019 and accounting for 60% of their country allocable aid. However, the share of their total ODA allocated to fragile contexts is at its lowest level since 2016. In extremely fragile contexts, humanitarian aid has risen significantly in recent years to outweigh development financing, despite significant development needs. Of DAC ODA to all fragile contexts in 2020, 25% was humanitarian aid, 63% was for development and 12% for peace.
Inclusive, legitimate institutions remain central to exiting fragility. There is a strong link between the ability to generate tax revenue and all of the dimensions of fragility. Only a third of the 43 fragile contexts analysed have achieved a tax-to-gross domestic product (GDP) ratio of 15%, a widely considered benchmark for effective state functioning and economic development. At the same time, 39 of the 60 fragile contexts received ODA to help enhance tax policy and administration capacity.
Fragile contexts’ economic prospects are highly heterogeneous, but risks are coalescing around food price affordability and debt sustainability. There are now more middle-income than low-income fragile contexts. While fragility remains correlated with income and economic performance, contexts cannot simply grow out of fragility. Fragile contexts attract less private investment than other developing contexts, making it harder to develop the domestic private sector. Many remain heavily reliant on remittances as a coping capacity.
Policy responses need to span the dimensions of fragility, building economic resilience while taking account of the ways that economic channels can transmit shocks and fuel conflict. Further exploration of development co-operation is needed as an agent for change in the economic dimension. The adoption of fragility strategies in international finance institutions is an encouraging recent trend. Similarly, some peace processes are now developing an economic track.
Addressing climate change and environmental fragility will be a permanent feature of operating in fragile contexts. It is important not just to increase but also to better tailor climate and environment-related action in fragile contexts in terms of programming, instruments, preparedness for shocks and losses, and links to policy.
There is a need for better coherence and dialogue between development, peace and security actors. From the Sahel to Afghanistan, blind spots and notable policy and operational missteps reflect a failure to communicate effectively across development and peace channels.
Today’s shocks, chief among them COVID-19, conflict and climate change, are long-term phenomena. As the fragility trends presented in Chapter 1 demonstrate all too well, these three Cs have overwhelmed the traditional domestic and international mechanisms for crisis response and recovery. While the donor community has responded with historically high volumes of ODA to fragile contexts, the share of total ODA is smaller than in the past, and in extremely fragile contexts a larger share is going to humanitarian rather than development or peace purposes.
This chapter analyses the current state of responses to fragility in an age of compounding and concurrent crises and reviews ODA trends as well as how, where and in what proportion ODA is being spent, in addition to the challenges of responding to fragility in middle- and low-income contexts. It then looks at policy and programming responses to the socioeconomic impacts of recent shocks, focusing on two key issues that will define the trajectory of development co-operation in fragile contexts for the foreseeable future: climate and the environment and the links between development and peace.
The multidimensionality of fragility and the diversity of fragile contexts require cohesive development and peace responses from international and local actors to mitigate both the occurrence of risks and the consequences of risks that inevitably occur. Environmental fragility is now central to development partners’ policy in most if not all fragile contexts and will drive demand for additional resources. At the same time, the divide between peace and development policies is deeply problematic. Addressing communication is the first step to overcoming this challenge. As noted in Chapter 1, responses to economic fragility or state fragility are often central to effective actions, but they are rarely if ever enough on their own.
Complex fragility and crises are reshaping financial responses to fragility
Official development assistance is one of the most salient ways in which OECD members and other countries support fragile contexts. Historically, ODA has been a stable and predictable resource for fragile contexts, and it is critical especially for extremely fragile contexts, where it often dwarfs other financial flows. In terms of volume, ODA was seven times greater than foreign direct investment (FDI) and more than three times greater than remittances across the 15 extremely fragile contexts. This section focuses on the scale and use of ODA in fragile contexts by DAC members and others, evaluating this response against the backdrop of fragile contexts’ own efforts and resources to respond to the fragility and shocks they experience.
Donors responded to global shocks with increased volumes of official development assistance
The financial response of the donor community to the shocks and fragilities of the last two years broke records in 2020. Net ODA to fragile contexts from all development co-operation providers, including outflows from multilateral institutions, reached USD 91.4 billion in 2020, the highest volume ever. Within that total, DAC members’ ODA to fragile contexts totalled USD 61.9 billion and accounted for 60% of their country allocable aid. This is the highest volume since 2006 and represents a 5% increase from 2019. This historic response occurred even as humanitarian appeals continue to consistently exceed funding.
However, while the volume of ODA going to fragile contexts from both DAC donors and all donors is at an all-time high, this reflects a broader surge in ODA more generally in response to COVID-19 rather than a specific focus on fragility (Figure 2.1). In fact, the proportion of DAC ODA going to fragile contexts has declined by three percentage points from 2019 and is the lowest share since 2016. In light of today’s crises, it is vital for DAC members to continue to strive to protect their aid to fragile contexts (Infographic 2.1). ODA remains a critical resource, especially in extremely fragile contexts and particularly in areas important for response and recovery such as social sectors, food security, and peace and prevention.
Figure 2.1. The recent surge of official development assistance to fragile contexts, and particularly extremely fragile contexts, is targeted towards the humanitarian pillar of the triple nexus
Source: OECD (2022[1]), “Creditor Reporting System: Aid activities”, https://doi.org/10.1787/data-00061-en.
There is a risk of assistance tipping towards protracted humanitarian needs and away from development and peace objectives. In 2020, 63% of DAC members’ gross bilateral ODA to fragile contexts went to the development pillar of the humanitarian-development-peace (HDP) nexus, 25% to humanitarian objectives and 12% to peace objectives1 (Infographic 2.1). DAC members’ aid to peace in fragile contexts declined by 19% from 2010 to 2020. In the same period, humanitarian assistance increased by 57%, with extremely fragile contexts receiving the largest share. Of DAC members’ country allocable aid, 4% went towards conflict prevention, a subset of peace ODA. This means that for every dollar invested in prevention, six dollars went to humanitarian assistance, even though the business case for prevention is clear and significant: Every dollar for prevention now can save 16 dollars down the road (OECD, 2020[2]).
The speed of COVID-19 responses and the need to reallocate funds to meet the crisis have reinforced an existing trend towards the use of funds for humanitarian rather than development or peace responses, especially in extremely fragile contexts. Humanitarian action is itself a critical component in global resilience, preserving human life and dignity. But it is neither built nor designed to support, on its own, longer-term reductions in risk and sustainable increases in coping capacities. Currently, humanitarian needs are constantly rising, putting enormous pressure on humanitarian budgets and system capacity. Against this backdrop, the ever-more-frequent resort to a humanitarian assistance modality to meet people’s needs is concerning, as this sacrifices investment in peace and development to emergency responses to human needs in crises that almost always extend over decades (World Food Programme, 2022[3]).
In 2020, two-thirds of DAC ODA was bilateral, and one-third was given as core contributions to multilateral organisations. DAC donors spent USD 13.8 billion of their country allocable ODA as localised ODA – that is, ODA channelled through developing country-based non-governmental organisations and subnational and national governments. This aid has increased over the last five years but is focused more on other fragile contexts than in extremely fragile contexts. Most of this ODA is channelled through national governments, with less than 1% channelled through subnational governments and about 5% channelled to developing country-based non-governmental organisations (OECD, 2022[1]).
By sector, social infrastructure and services received the most DAC ODA in 2020: USD 20.8 billion, or 42.6% of the total. ODA to the humanitarian sector, the second-largest sector category, amounted to USD 12 billion, a historic peak in terms of volume and 24.6% of the total. Economic infrastructure and services, the third-largest sector, received USD 5.8 billion, or 11.8% of the total; the production sectors received USD 3.4 billion, 6.9% of the total. Multi-sectoral and commodity aid and general programme assistance each received USD 2.3 billion, or 5% of the total. DAC donors spent USD 960 million on administrative costs, accounting for 2% of the total, which was a slight decline from the historical peak of USD 1.05 billion in 2019 (OECD, 2022[1]).
Infographic 2.1. Official development assistance to fragile contexts
Source: OECD (2022[1]), “Creditor Reporting System: Aid activities”, https://doi.org/10.1787/data-00061-en.
Inclusive, legitimate institutions remain central to exiting fragility
As the diversity of contexts on the 2022 fragility framework demonstrates, addressing fragility, building durable coping capacity and supporting contexts’ own efforts to exit fragility require multidimensional approaches. Yet such approaches must also consider the fragility of the state through analysis of governance, the political economy surrounding the state, how the state relates to citizens and how it finances itself.
The central role of inclusive national leadership, discourse and institutions is well established in development effectiveness policy (Global Partnership for Effective Development Co-operation, 2022[4]), reflecting a substantial strand of economic development literature on the importance of political economy and political institutions (North, 1990[5]; North, Wallis and Weingast, 2009[6]; Besley and Mueller, 2021[7]). One common thread throughout this academic and applied policy research is the importance of fragile contexts themselves driving their own exit from fragility in order for it to be sustainable.
Fragility should be seen as broader than simply traditional state fragility, nevertheless the role and nature of the state are central to either sustaining dynamics of fragility and conflict or finding opportunities to exit fragility and conflict. National leadership can be challenging in contexts with limited state legitimacy or institutional capacity, and state dynamics also inform modalities for working with development partners. Civil society and the private sector are important contributors to this national leadership and institution building. Deciding on which local partners to engage with requires a good understanding of the political dynamics at play. In some contexts, national priorities may not be in line with SDGs and state institutions can lack international recognition or are not perceived as representing the whole of society. In such cases, interventions to achieve SDG targets or the imperative to leave no one behind may be incompatible with the effectiveness principle of country ownership. In partnership with Chatham House and the Center on International Cooperation, New York University, with support from Sweden’s Ministry of Foreign Affairs, the OECD is undertaking work on the potential for development co-operation in such politically-constrained environments.
Recent OECD research on 124 ODA-eligible contexts shows that, globally, the number of contexts that both receive ODA and are classified as autocratic increased from 68 in 2010 to 75 in 2019, with 57 of these classified as electoral autocracies (OECD, 2022[8]). Electoral autocracies reflect a growing trend, where “there are institutions emulating democracy but falling substantially below the threshold for democracy in terms of authenticity or quality” (Boese et al., 2022[9]). Contexts with autocratic regimes absorb an increasing amount of ODA, up from 64% in 2010 to 79% in 2019, with more ODA, especially humanitarian ODA, going to contexts with closed autocracies. An OECD study of ODA by regime context shows that the regime type does not appear to weigh heavily on ODA allocations, but when a regime becomes more democratic it is generally rewarded with an increase in ODA (OECD, 2022[8]).
A key facet of state legitimacy and fragility is how the state finances itself. In 2020, DAC donors provided USD 106 million to 39 of the 60 fragile contexts to develop their tax policy and capacity (OECD, 2022[1]). Developing a sustainable tax base is not only, or even primarily, about the money itself. It requires developing the legitimacy of the state and its fiscal institutions, increasing taxpayers’ expectations of public services provided by the state, and strengthening the social contract and tax morale – citizens’ willingness to financially support their government (OECD, 2019[10]; Besley and Mueller, 2021[7]).
While stable economies may be able to choose between higher-tax approaches (e.g. Denmark) and lower-tax approaches (e.g. Singapore), in general, there is a strong link between fragility and tax-to-GDP ratios (Figure 2.2). This relationship holds true for each of the six dimensions of fragility independently (Thompson, 2022[11]) as well as for the risk of conflict, with conflict risk dropping dramatically with increases in fiscal capacity (Besley and Mueller, 2021[7]).
Figure 2.2. Low tax-to-GDP ratios are linked to fragility
Source: WIDER (2021[12]), Government Revenue Dataset, https://www.wider.unu.edu/project/grd-%E2%80%93-government-revenue-dataset.
In the economic literature on resources available to states for investments in development and stability, tax revenues are considered the only means to achieve sustainable government financing and support inclusive governance over the long term (Thompson, 2020[13]). There is evidence to suggest that other sources of revenue such as natural resource revenue and even ODA do not necessarily have the same effect and could even reduce the incentive to invest in fiscal capacity, along with the responsibility towards citizens that increased tax revenue implies (Besley and Mueller, 2021[7]). Based on the most recent data available, only a third of the 43 fragile contexts that could be analysed have achieved a tax-to-GDP ratio of 15%, a widely accepted benchmark for effective state functioning and economic development (UNU-WIDER, 2021[12]).
Beyond aid, fragile contexts’ economic and financial resources are heterogeneous, with the risks of debt sustainability and food price affordability increasingly common
Fragility is often seen as synonymous with low income and poor economic outcomes. The OECD fragility framework recognises these links by measuring risks and coping capacities for external shocks and endogenous challenges to households, businesses and the macroeconomy. Based on the 2022 OECD framework, the number of middle-income contexts that are fragile has increased. Middle-income fragile contexts (33) now outnumber low-income fragile contexts2 (26), a trend that was already noted in States of Fragility 2020, when 30 of the fragile contexts were middle income and 27 were low income. While fragility remains broadly correlated with income and economic performance, there are lower-middle-income economies and even upper-middle-income economies among the extremely fragile contexts (Figure 2.3). However, the three middle-income fragile contexts added in 2022 all entered the framework for the first time, suggesting that their fragility scores reflect better measurement of risks and coping capacities rather than the growth of fragile contexts into a higher income classification.
Figure 2.3. Fragility is not limited to low-income economies
Source: World Bank (2022[14]), World Bank Country and Lending Groups, https://datahelpdesk.worldbank.org/knowledgebase/articles/906519.
There are now more middle-income than low-income fragile contexts
The prevalence of middle-income fragile contexts presents new challenges in terms of funding sustainable transitions out of fragility. Many of the ODA funding mechanisms to respond to fragility have eligibility criteria that are linked to low income – including through the International Monetary Fund (IMF), multinational development banks and other international finance institutions – and bilateral donors tend to prioritise low-income recipients for their grant financing or concessional lending terms. Thus, such income-based eligibility criteria may make it difficult for middle-income fragile contexts to access concessional finance even though a transition to middle-income status does not necessarily mean a country faces different or lesser challenges (di Ciommo and Sergejeff, 2021[15]). Indeed, challenges such as subnational violence, conflict spillover and debt distress remain.
Steps to reinforce coping capacities and reduce risks can go well beyond aid-funded interventions, especially in more stable fragile contexts. Effective interventions to develop the domestic private sector and encouraging international investment in line with the Kampala Principles3 are two components of this picture. The domestic private sector is often a critical and continuing supplier of goods and services even when instability prevents access for humanitarian and development providers. But fragile contexts are often limited in their access to finance and to a regulatory environment, as well as in the development of their domestic private sectors (Thompson, 2020[13]). They tend to attract less FDI in general than other developing countries, risk crowding out by the public sector and can be at risk of capital flight. As shown in Figure 2.4, FDI to fragile contexts has varied considerably year to year, with significant outflows since 2011.
Figure 2.4. Foreign direct investment is highly variable in fragile contexts, with significant outflows between 2011 and 2020
Source: World Bank (2022[16]), Foreign direct investment, net inflows (BoP, current US$), https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD.
One financial coping capacity that has held up remarkably well over the last two years is remittances. Though large remittance flows are sometimes viewed negatively as a sign of dependence on external financing, they can serve as a coping capacity as they tend to be countercyclical sources of foreign revenue. At the household level, remittances can help sustain nutrition levels and shore up human capital by paying for health care or school fees (Marcelin, 2020[17]; Thompson, 2022[11]).
There are notable exceptions to the resilience of remittances through the pandemic, among them Haiti, Iraq and Niger (Figure 2.5). Among all fragile contexts on the 2020 edition of the fragility framework, Haiti was the top recipient of remittances as a share of GDP, with remittances making up over 35% of GDP in 2019 (OECD, 2020[2]). In 2020, however, flows to Haiti decreased by more than 13 percentage points as a result of the loss of employment due to COVID-19 lockdowns in major remittance-sending countries and increases in transfer costs (World Bank, 2022[18]).
The international community has worked hard to address many aspects of remittance transfer pricing, especially through shifts away from cash and towards digital channels (Global Partnership for Financial Inclusion, 2021[19]). But there has not yet been a focus on fragile contexts. The cost of transferring remittances to fragile contexts remains stubbornly high relative to other developing contexts (Thompson, 2020[13]), since financial services may not be well-developed, compliance with regulation such as anti-money laundering and counter-terrorism financing legislation can be costly, and competition among formal intermediaries is often limited (Commodore, 2020[20]).
Figure 2.5. Remittances still make up a significant proportion of GDP for some fragile contexts
Source: World Bank (2021[21]), “Migration and Development Brief 35”, https://www.knomad.org/publication/migration-and-development-brief-35
Two additional economic risks are converging to challenge fragile contexts, compounding existing fragilities: high debt exposures and inflationary pressures (Infographic 2.2). Inflation is now a high-profile concern across much of the world, fuelled in part by the effects of Russia’s invasion of Ukraine. But it was already a preoccupation in some fragile contexts where inflation had reached double or triple digits by 2020. Inflation in Zimbabwe, for instance, reached 99% in 2020, and inflation in eight other contexts was between 10% and 27% (World Bank, 2022[22]). High global inflation may exacerbate economic risks beyond the immediate impacts on food prices and food security. As countries with the ability to do so increase their benchmark interest rates in response to high inflation, this increases the attractiveness of interest-bearing investments in these countries and so may lead to capital leaving developing and fragile context economies. Supply chain disruptions and market turmoil due to COVID-19 and Russia’s invasion of Ukraine have negatively impacted the economies of many fragile contexts, though energy exporters have, to a degree, benefited from high prices.
The cost-of-living crisis facing households in many fragile contexts is hitting at the same time as governments’ fiscal buffers are eroded, reducing coping capacities further. There is evidence to suggest that even when contexts have the ability to spend to support their populations through such shocks – for example, with support from donor partners – this kind of spending may be less effective as a fiscal stimulus if fiscal buffers are low (Huidrom et al., 2022[23]). Debt trends are of significant concern for fragile contexts and their partners. Already in 2020, ratios of debt to gross national income trended upwards towards the levels experienced prior to the debt relief provided under the heavily indebted poor countries (HIPC) and multilateral debt relief initiative period of the mid-2000s (Figure 2.6). There is every indication that debt will continue to rise and reach a critical juncture for many fragile contexts, even as high-profile policy responses such as the Group of Twenty’s (G20) Debt Service Suspension Initiative come to an end.
Figure 2.6. Debt-to-gross national income ratios are increasing towards pre-HIPC levels
Note: Estimates are based on an arithmetic mean of the fragile contexts within each group.
Source: World Bank (2022[24]), External debt stocks (% of GNI), https://data.worldbank.org/indicator/DT.DOD.DECT.GN.ZS.
Looking ahead, a key question will be how to make the most of the extraordinary allocation of USD 650 billion special drawing rights (SDRs) that IMF governors approved as part of the pandemic response. These SDRs are allocated according to IMF members’ shareholding, meaning that each member could use its SDRs as liquidity to support short-term foreign exchange needs such as debt repayment or vaccine procurement. Less vulnerable members, which tend to have larger shareholdings and so larger allocations, could look for ways to use their allocations to support the more vulnerable, whether directly or through collective mechanisms (Plant, 2021[25]). The IMF, for example, recently established the Resilience and Sustainability Trust, which is structured to channel such SDRs into addressing global challenges such as climate change adaptation and pandemic preparedness that also bring macroeconomic risks to the individual member (IMF, 2022[26]).
Of the 38 IMF members that are eligible to access the Poverty Reduction and Growth Trust and are at high risk of or already in debt distress4, 25 are also fragile contexts (IMF, 2022[27]). Like other developing countries, fragile contexts face more heterogeneous risks than during the pre-HIPC era, with debts owed to private and non-Paris Club lenders creating a more challenging environment for developing a common framework for resolving debt crises (Kose et al., 2021[28]).
Infographic 2.2. Economic and financial risks in fragile contexts
Note: Eritrea was added by authors to the List of LIC DSAs.
Sources: OECD (2022[1]), Creditor Reporting System: Aid activities, 10.1787/data-00061-en; World Bank (2022[16]), Foreign direct investment, net inflows (BoP, current US$), https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD; World Bank (2021[21]), “Migration and Development Brief 35”, https://www.knomad.org/publication/migration-and-development-brief-35; World Bank (2022[29]) Food Prices for Nutrition DataHub, https://www.worldbank.org/en/programs/icp/brief/foodpricesfornutrition#1; World Bank (2022[14]), World Bank Country and Lending Groups, https://datahelpdesk.worldbank.org/knowledgebase/articles/906519; IMF (2022[27]), “List of LIC DSAs for PRGT-Eligible Countries”, https://www.imf.org/external/Pubs/ft/dsa/DSAlist.pdf; IMF (2022[30]), World Economic Outlook (database), https://www.imf.org/en/Publications/WEO/weo-database/2022/April.
Policy responses need to span the dimensions of fragility
Development partners increasingly acknowledge the multidimensionality of fragility and consequently the need for tools, approaches and strategies to help navigate this multidimensionality and complexity. An example is the United States, the largest provider of ODA to fragile contexts in 2020, which has adopted a conflict prevention and fragility strategy that looks to “adopt a multi-pronged, multi-sectoral approach to strengthen the resilience of partner nations” (United States Department of State, 2020, p. 7[31]). Other prominent partners in fragile contexts such as the European Union, Germany and the United Kingdom have followed suit in recognising multidimensional fragility (Desai and Yabe, 2022[32]).
These developments have been supported by a series of policy commitments and legal instruments from the OECD DAC in recent years to foster better and more inclusive ways of engaging in development co-operation. For example, the DAC agreed three legal instruments in the past three years related to promoting coherence, complementarity and co-ordination across the HDP nexus (OECD, 2019[33]); ending sexual exploitation, abuse and harassment (OECD, 2019[34]); and enabling civil society in development co-operation and humanitarian assistance (OECD, 2021[35]). Most recently, the DAC issued a landmark declaration on a new approach to align development co-operation with the goals of the Paris Agreement on climate change (OECD, 2021[36]). Following the DAC declaration in 2022, the International Network on Conflict and Fragility (INCAF) adopted a Common Position on climate, biodiversity and environmental fragility that establishes four good practice principles for better knowledge, analysis, financing and strategies in response to environmental fragility (INCAF, 2022[37]).
The discussion in this section builds on the principles behind these commitments, particularly on climate change, environmental fragility and the HDP nexus, to illustrate how development partners are engaging on critical issues that will shape the landscape of development co-operation in fragile contexts moving forward.
Policy responses need to build economic resilience while taking account of the ways economic channels can transmit shocks and fuel conflict
The experience of the last two years points to the economic dimension as an important transmission channel for shocks and an “arena of contestation” in its own right (UN/World Bank, 2018[38]), especially as fragile contexts have become more integrated into the global economy (Thompson, 2022[11]). The impacts of shocks on populations in fragile contexts can be devastating. The socioeconomic impacts of COVID-19, for example, are widely recognised as much broader than simply the direct health impacts in fragile contexts (Connor, 2021[39]). The pandemic-related global economic shutdown and Russia’s war of aggression against Ukraine swiftly reverberated in fragile domestic livelihoods and deepened food insecurity. As a consequence of the war and other factors driving down the global economy, growth in fragile contexts in 2023 is expected to decline by 0.45 percentage points in extremely fragile contexts compared to 0.08 percentage points in other developing countries (IMF, 2022[30]; IMF, 2021[40])
There is increasing evidence of the links between economic, fiscal and conflict risks. For example, the risk of conflict drops dramatically with increases in fiscal capacity (Besley and Mueller, 2021[7]). Control of the economy by elite groups may curtail development of an open and fair economic and business environment, increasing fragility and risks. Countercyclical policies in response to economic shocks can lower the risk of armed conflict, especially in Africa in more unequal societies and in countries with weak institutions (Alguirre, 2016[41]). Deléchat et al. (2018[42]) found that building resilience is significantly associated with the development of fiscal institutions, including the capacity to raise tax revenue, contain current spending, lower military spending and, to some degree, increase social expenditure.
The economic dimension can develop into a conflict fault line in its own right as groups fight for control of the economy, revenues, assets and economic institutions and where the development of entrenched war economies can incentivise the continuation of conflict and fragility. Yemen is an example of this dynamic: Economic competition between the Houthis in the north of Yemen and the internationally recognised government in the south has fragmented key economic institutions that control monetary policy, the currency, the financial sector and trade through the Red Sea port of Hodeida. Violent conflict in turn has significant and long-term consequences for human, physical and social capital, which are the basis of functioning economies and livelihoods (Bendavid et al., 2021[43]). For example, if Yemen’s conflict continues through 2030, its GDP is projected to be a third of what it would have been absent the conflict (Hanna, Bohl and Moyer, 2021[44]).
Revenues and assets of all kinds can create additional incentives to contest and capture state authority and territorial control, in particular natural resource revenues and quasi-taxation. An example is the reaction to the discovery in eastern DRC of deposits of Coltan, a bulky ore consisting of the rare earth minerals columbite and tantalum that is in high demand for electronics and with a bulky output that is difficult to conceal. This led non-state armed actors to create illicit customs and protection rackets at the mine sites; a similar discovery of gold led to illicit mining visas, tax-like payments and administrations at the nearby villages where income is spent (de la Sierra, 2020[45]). In Afghanistan, the Taliban takeover in 2022 was presaged by independent but linked state-like revenue collection systems. The tax-like payments included ushr, a tax on legal and illicit harvests, customs on the transportation of goods, and taxes on aid interventions (Amiri and Jackson, 2022[46]).
The economic strains currently being experienced – unsustainable debt and increased food, fertiliser and energy prices – can have particularly significant impacts on living conditions for the poorest and for a middle class whose role is critical to a country’s stability. The impacts of these strains have been felt over the last two years in Sudan and other fragile contexts as well as in some contexts not formally on the framework, notably Sri Lanka (Box 2.1).
Box 2.1. Sri Lanka and Sudan illustrate the economic challenges of navigating out of fragility
Sri Lanka is facing the worst economic crisis in its history
Sri Lanka is currently facing its worst instability since the Tamil Tiger insurgency that ran from the 1980s to the early 2000s and the worst economic crisis in its history. While not formally on the OECD fragility framework, Sri Lanka illustrates the challenges of successfully navigating out of fragility. Sri Lanka faced an unsustainable debt burden after taking on significant foreign loans to invest in infrastructure coming out of the civil war, a situation exacerbated by tax cuts aimed to shore up political support behind the then-prime minister, Mahinda Rajapaksa, who has since fled. Non-sovereign and non-Paris Club creditors hold a significant proportion of Sri Lanka’s debt, making the process of finding workable solutions harder.
The macroeconomic turmoil was compounded by severe economic hardships as tourism ground to a halt due to COVID-19 and when the government decided to swiftly outlaw chemical fertilisers, which devastated the main export crop of tea. The debt crisis and resulting civil turmoil are having devastating impacts on the Sri Lankan population and are seen by many as an example of the kind of crisis that could occur in other countries facing similar pressures.
Political fragility has undermined a delicate economic transition in Sudan
Following protests in 2019 that drove long-time dictator Omar al-Bashir from power, Sudan had a window of opportunity as a country transitioning away from autocratic rule. That changed in October 2021, when the country’s generals again seized control of the cabinet, ending a civilian-military power-sharing arrangement that was supposed to lead to elections. Even after al-Bashir’s departure, the military continued to play a significant role in Sudanese politics and the economy, with its own sources of revenue independent of civilian control that reinforced its entrenched position.
One of the major challenges for the power-sharing agreement prior to the coup was to balance the budget in the context of 1) high fuel and food subsidies and 2) the country’s limited access to development funding due to long-standing arrears with major lenders, and after 27 years on the United States’ list of state sponsors of terrorism. After retaking political control, the military announced it will stand by the economic reforms originally negotiated with the IMF. But this will likely be significantly harder now. The coup has led to the freezing of significant ODA packages and debt forgiveness, and spiralling food and fuel inflation is increasing hardships on the Sudanese population, threatening social unrest.
Sources: Salikuddin (2022[47]), Five Things to Know about Sri Lanka’s Crisis, https://www.usip.org/publications/2022/07/five-things-know-about-sri-lankas-crisis; (UN, 2022[48]), “Sri Lanka: UN experts sound alarm on economic crisis”, https://www.ohchr.org/en/press-releases/2022/07/sri-lanka-un-experts-sound-alarm-economic-crisis; Devarajan and Kharas (2022[49]), “Is the Sri Lankan debt crisis a harbinger?”, https://www.foreignaffairs.com/sri-lanka/sri-lankan-debt-crisis-harbinger; International Crisis Group (2022[50]), Sudan: Toward a Reset for the Transition, https://www.crisisgroup.org/africa/horn-africa/sudan/sudan-toward-reset-transition; Abdelaziz and Abdalla (2022[51]), “Sudan's economy sinks as post-coup leadership searches for support”, https://www.reuters.com/article/us-sudan-economy-idAFKBN2O10Y9.
These challenges underscore how important and also how challenging it is to develop tailored, conflict-sensitive approaches to achieve macroeconomic stability, de-instrumentalise economic institutions as conflict fault lines, and support household incomes. Further exploration is needed of development co-operation as an agent of positive change in the economic dimension, especially since there is the risk in some instances that aid could itself become a resource that reinforces conflict dynamics or reduces the incentives towards development of domestic institutions (Besley and Mueller, 2021[7]; Amiri and Jackson, 2022[46]).
While technical, this work must also be tailored to the needs and conflict dynamics of fragile contexts as part of implementing the HDP nexus. Contrary to the usual slower pace of development activities, economic interventions in fragile contexts and situations can be urgent; they can also be necessary prior to full stabilisation and undertaken in difficult operating environments. Such interventions require pragmatic and incremental scaffolding of policy and institutional reforms that prioritise demonstrable wins over analytical perfection as well as a higher risk tolerance than is traditionally seen. It is an encouraging recent trend that international finance institutions are adopting fragility strategies, among them the World Bank, IMF and regional development banks (ADB Independent Evaluation Department, 2022[52]). Also encouraging is the economic track of peace processes, for instance in Yemen, to identify shared incentives and the potential economic basis of peace (UN, 2022[53]). It will be important for development and peace actors to share lessons from these experiences as they move forward.
Equally important will be to include support for fragile context voices in the international economic architecture to reflect their priorities and concerns in policy development, similar to what was called for through the 2022 INCAF Common Position on climate, biodiversity and environmental fragility.
Addressing climate change and environmental fragility will be a permanent feature of operating in fragile contexts
Fragile contexts are often heavily exposed to the effects of climate change and other sources of environmental fragility that threaten human security, built infrastructure and livelihoods and that disrupt social and economic activity. Fragile contexts’ progress towards meeting Sustainable Development Goals 12 and 13 likely reflects their very limited contribution to climate change due to low levels of economic growth and/or consumption and low climate emissions, though they face very high risks and possess very low capacities to cope with the effects of climate change and environmental fragility.
Climate change, biodiversity loss and environmental degradation fuel fragility. In turn, fragility makes it hard to adapt to climate change, reduce and manage climate-related risks, and cope with the impacts of biodiversity loss and environmental degradation. Mitigating and adapting to climate change, addressing loss and damages, and dealing with other sources of environmental fragility will require actions that are balanced and informed by efforts to focus on the root causes of fragility. While they are lower emitters of greenhouse gases, fragile contexts nevertheless have extremely high adaptation and other environmental fragility needs and will often feel the impact of losses and damages more keenly than other countries since they are starting with a lower resource base and thin buffers against shocks.
The revision of the OECD fragility framework, outlined in Chapter 1, aimed to ensure that the cross-cutting nature of environmental fragility is accounted for in understanding fragility. The new indicators address ecological and resource-related risks to environmental integrity and human lives as well as the coping capacities to tackle such risks. Two main clusters of issues are considered:
The category of climate and ecological integrity captures the exposure to and impact of climate and ecological risks and a country’s ability to adapt and respond to such risks, focusing on the impact of environmental conditions on humans.
The category of food, water and natural resources accounts for the level of sustainability of the human system in benefiting from environmental services and focuses on human activities that benefit from and/or exploit the environment.
This updated evidence on how climate and environmental fragility links to the other dimensions of fragility feeds into how climate and environment-related financing and programming trends are understood, which then informs policy responses. It is important not just to increase climate and environment-related financing in fragile contexts but also to tailor such financing in terms of programming, instruments, preparedness for shocks and losses, and links to policy. This means looking at how donors are supporting a range of climate and environmental objectives and ecological integrity beyond simply mitigating climate change. It also means considering how populations interact with their environment to generate livelihoods (economic dimension), control resources (political dimension), or support food security and nutrition (human dimension). Evidence is also increasing on the interlinkages between environmental degradation, climate change impact, negative financial shocks and conflict.
In general, climate change and environmental fragility are not yet as much a priority for financing and programming in fragile contexts as they are in other developing countries. As noted, only a small proportion of ODA to most fragile contexts has climate mitigation or adaptation objectives, and an even smaller proportion targets biodiversity and desertification. Across three of the four environmental objectives captured in the OECD dataset (biodiversity, climate adaptation and climate mitigation), this proportion is lower across fragile contexts than in other developing countries.
There is a volume gap in funding between fragile and other developing countries, but the most significant gap is between fragile and extremely fragile contexts: In the latter, the volume and proportion of financing with an environmental objective or objectives have remained static over the last decade despite the fact that climate and other environmental risks continue to grow (Infographic 2.3). Other fragile contexts, by contrast, have continued to focus more of their ODA, both in volume and proportion, on environmental objectives. These contexts have even exceeded other developing countries in the proportion of ODA with an environmental objective, though this is mainly due to large increases in non-environmental ODA to other developing countries in recent years.
There are additional challenges to tailoring, accessing and mainstreaming financing for climate and environmental objectives in fragile contexts. Many of the dedicated climate funds require a nationally led process and can include relatively heavy access requirements. Governments often do not highlight climate change and environmental fragility as a priority or an integral part of national or urban development plans. Fragile contexts also present the challenges of so-called greening of humanitarian operations, conflict prevention, crisis management and response, and peacebuilding and the additional challenge of making reconstruction and development financing climate-smart as part of applying a fragility and conflict lens.
The increase in climate and environment-related ODA parallels an increased prevalence of loans (Infographic 2.3). The financing tools used must be tailored to work in fragile contexts and support debt sustainability, especially for fragile contexts already facing fiscal difficulties. Much of the dedicated climate finance today is debt financing. For the middle-income fragile contexts, this has implications for the terms they could face. While the investments made can generate value for money in foregone costs – since upfront adaptation, for example, will likely be cheaper than responding to climate impacts down the road – they are not necessarily income-generating investments in a way that could contribute directly to the repayment of debt financing. There may be an opportunity to leverage any debt restructuring discussions to make progress on longer-term climate and ecosystems goals.
Infographic 2.3. Climate and environmental fragility
Source: Ritchie and Roser (2022[54]), “C02 emissions”, https://ourworldindata.org/co2-emissions; CRED/UCLouvain (2022[55]), EM-DAT Public - EM-DAT, the International Disaster Database, https://public.emdat.be/; Gender Climate Tracker (2022[56]), “Women's Participation on Party Delegations”, https://genderclimatetracker.org/womens-participation-party-delegations; OECD (2022[1]), Creditor Reporting System: Aid activities, 10.1787/data-00061-en; INFORM (2022[57]), “INFORM subnational model of Sahel”, https://drmkc.jrc.ec.europa.eu/inform-index/INFORM-Subnational-Risk/Sahel/moduleId/1798/id/383/controller/Admin/action/Results.
Inaction on prevention and poor communication are restraining progress where development and peace agendas overlap
Peace and security are both preconditions for development. But development is also vital for sustained security (OECD, 2008, p. 3[58]). The declining peacefulness and significantly rising fatalities from armed conflict in fragile contexts discussed in Chapter 1 only underscore the importance of the peace pillar of the HDP nexus. This is embodied in the adage at the heart of the DAC Recommendation on the Humanitarian-Development-Peace Nexus: “Prevention always, development when possible and humanitarian when necessary”. Working effectively in fragile contexts thus entails finding coherence across humanitarian, development, and peace and security activities (World Bank, 2011[59]). In practice, this coherence has proved difficult to establish. In each fragile context, there is a changing and diverse constellation of aid channels, donors and policies. When analysed alongside regional or context-level fragility, this mix often highlights imbalances and blind spots (Figure 2.7).
Figure 2.7. DAC members’ official development assistance (across the triple nexus) is not associated with levels of fragility
Source: OECD (2022[1]), Creditor Reporting System: Aid activities, https://doi.org/10.1787/data-00061-en.
Development partners are still slow to act on the potential of prevention
The flagship Pathways for Peace report argued that it is vital for external actors to focus on building the capacity of local actors to achieve the goal of sustaining peace (UN/World Bank, 2018[38]); this is particularly important for the most vulnerable groups in society (World Bank Group, 2017[60]). It is equally important to consider the politics of such local actors, who will differ in their incentives to pursue peace (Marley, 2020[61]). For violent contexts, this highlights the value of approaches such as political settlements analysis that look at national, local and sector-based settlements, with focused attention on the relationships between these types of settlements (Di John et al., 2017[62]). The application of tools such as political settlements analysis also offers valuable opportunities to consider the politics of prevention, especially in societies that rely on customary and informal systems to build incentives for peace (Desai, 2020[63]). This is significant in light of a recent analysis of early warning and action models that shows that increases in peace and security ODA only come late in conflict cycles and that donors do not use governance aid as a tool for conflict prevention (Mueller, Rauh and Ruggieri, 2022[64]). While further research is needed, these findings suggest that peace and development actors do not take opportunities for early prevention against drivers of crises and conflict in many fragile contexts. The modesty of the response from development and peace partners to the recommendations of the Pathways for Peace report arguably points to a more fundamental weakness – inadequate or ineffective communication among development, peace and security actors on strategy and approaches, and building awareness of their respective activities’ impact on others in a shared space.
Communication shortfalls are driving incoherence
Experience from Afghanistan illustrates the consequences of a lack of communication or ineffective communications (underlying the lack of coherence) between the development and peace pillars of the triple nexus. These pillars are linked in often underestimated and underappreciated ways (Forsberg, 2020[65]). A recent meta-analysis that identifies gaps between peace, security and development found that interventions associated with security and justice in Afghanistan were less effective than development-related activities over a 20-year period, while stabilisation projects were “mostly ineffective” (Zürcher, 2020[66]). The Afghan government’s objective of “improving domestic revenue collection, and improving efficiencies through preventing corruption, misuse of funds and strict spending monitoring mechanisms in the security sector” (Islamic Government of Afghanistan, 2017[67]) crumbled within a wider failure to address governance and institutional capacity (Zürcher, 2020[66]).
From Afghanistan to the Sahel, these failures to communicate effectively across development and peace channels produce blind spots that undermine analysis, connections and complementarities between peace, security and development policy responses. A variety of factors compound this dynamic: diverse and fragmented funding approaches by donors; failure to address the intersections between security and development issues, for example, reflected in the lack of progress with the women, peace and security agenda (Banjo, 2022[68]); insufficient state capacity to manage funding; disconnected political processes; and disagreements and confusion over the strategic purpose of often-segregated peace, security and development processes. All bear the hallmark of weak or insufficient communications at several levels and especially at the highest where strategic coherence among development and peace partners is often lacking (Special Inspector General for Afghanistan Reconstruction, 2021[69]).
Analysing multidimensional fragility can help inform more politically astute approaches for development and peace
Analysis of multidimensional fragility at the regional and national levels can help identify areas that offer the greatest potential for promoting resilience and prevention across dimensions of fragility. One of the advantages of focusing on fragility is that it can capture drivers that may not be as easily identified with sector-specific tools, particularly a focus on political, societal or human fragility that can be significant for the credibility and confidence of donors’ and partners’ approaches. The consideration of political fragility, for instance, can help refine assumptions around democratic freedoms and challenge the influence of political dynamics across other dimensions of fragility, thereby facilitating more nuanced policies that keep the focus on whom and what resilience is for in a given context (Brown, 2022, pp. 11-13[70]).
It is significant that many fragile contexts themselves have consistently presented the case that peacebuilding and statebuilding should be prioritised in every development intervention (The g7+, 2022[71]). This thinking is supported by analysis that emphasises the transition from assistance and co-operation based on “Western blueprints” to local processes that “strengthen state institutions, capacities and legitimacy driven by state-society relations” (Papoulidis, 2022[72]). Developing this idea, multidimensional fragility analysis can also be used to identify potential “pockets of effectiveness” across governments, institutions and/or coalitions in fragile contexts (Kelsall et al., 2022[73]). Even in contexts where political settlements are more narrowly dispersed – i.e. they are often dependent on point-source resource exploitation or criminal activities – donors can use an understanding of multidimensional fragility in considering reform of the regional or international system within which such goods are traded or activities take place to help “shift elite attention into economic sectors with more positive spillovers” (Kelsall et al., 2022[73]).
This perspective is valuable for peace and development partners striving to embed peace and development gains over the long term but whose resources have not sufficiently aligned with potential in fragile contexts. For example, security sectors can enable economic development, societal cohesion, and the formation of inclusive and holistic political settlements by creating space for renewal and investment across the socioeconomic spectrum (UN/World Bank, 2018, p. 161[38]). Functioning security sectors are essential for the delivery of security as a regional and global public good. However, the role of development co-operation in the promotion of security sector governance and reform is limited to date: In 2020, ODA to security system management and reform amounted to only 0.6% of DAC members’ total ODA to fragile contexts (Marley, forthcoming[74]). For positive peace to endure beyond the basic absence of violence and conflict, progress related to development goals – from raising tax revenues to providing education and health – can support an effective, efficient and accountable security sector. In this way, the merits of bringing peace, security and development together are as relevant for long-term conflict prevention and resilience as they are for the shorter-term objectives of post-conflict transitions (Marley, forthcoming[74]). Given the political sensitivities often associated with peace and development approaches in fragile contexts, it also underlines the importance of collective action and effective organisation across the nexus to strengthen resilience to complex, interacting risks and their root causes, especially in contexts in conflict or with a high risk of experiencing conflict.
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Notes
← 1. In the OECD’s fragility framework, ODA to peace-related sectors is tracked using the following Creditor Reporting Sector codes: 15110 (Public sector policy and administrative management), 15111 (Public finance management (PFM)), 15112 (Decentralisation and support to subnational government), 15113 (Anti-corruption organisations and institutions), 15130 (Legal and judicial development), 15150 (Democratic participation and civil society), 15152 (Legislatures and political parties), 15153 (Media and free flow of information), 15160 (Human rights), 15170 (Women's equality organisations and institutions), 15180 (Ending violence against women and girls), 15190 (Facilitation of orderly, safe, regular and responsible migration and mobility), 15210 (Security system management and reform), 15220 (Civilian peace-building, conflict prevention and resolution), 15230 (Participation in international peacekeeping operations), 15240 (Reintegration and SALW control), 15250 (Removal of land mines and explosive remnants of war) and 15261 (Child soldiers (prevention and demobilisation)).
← 2. This total is based on the July 2022 World Bank income classifications. Missing from these figures is the 60th fragile context, Venezuela, which was previously classified as upper middle-income but is now unclassified due to an absence of data through its ongoing economic and political crisis.
← 3. The Kampala Principles on Effective Private Sector Engagement in Development Cooperation – a set of standards for effective private sector partnerships – provide practical guidance on how to design, develop and deliver in partnership with the private sector at country level to harness their potential to stimulate markets and sectors where the most vulnerable people have jobs and livelihoods.
← 4. The Poverty Reduction and Growth Trust provides concessional IMF resources. A different debt sustainability framework is used for so-called market access countries, several of which are also experiencing debt sustainability issues.