In fragile situations, cases to better align, and look beyond, aid

While official development assistance continues to represent a significant source of funding for fragile states and economies, other kinds of financial flows emerge as the dominant resources in some situations. According to an Organization for Economic Cooperation and Development report on “states of fragility” — a name change that reflects the reality that “fragility exists in all states in different ways and to different degrees,” Alan Whaites, team leader of the effective and accountable institutions team at the OECD’s Development Cooperation Directorate, told Devex — per capita ODA to fragile situations has nearly doubled since 2000, but aid has not been distributed evenly. Afghanistan and Iraq, for example, received the bulk of ODA flows — 22 percent — to fragile states and territories in the era of the Millennium Development Goals. Foreign direct investment, however, overshadowed aid to Iraq in 2012, the latest year for which comparison of different financial flows to fragile situations could be made. In certain countries that have witnessed a surge of aid in recent years — Haiti in the aftermath of the 2010 earthquake, Guinea, Liberia and Sierra Leone amid the scramble to contain the Ebola epidemic, and Nepal after the April 2015 earthquake — ODA notably assumes a subsidiary role to either remittance inflows or FDI. In some fragile states and economies, ODA is overshadowed by either remittances or FDI. Remittances and FDI as dominant flows Compared with developing countries, fragile states receive more ODA and remittances per capita. For FDI flows, which have been extremely volatile in developing countries, there has been an opposite movement: Since the 2008-09 crisis, FDI in fragile states has been on a steady decline. Still, in countries with large diaspora populations and resource-rich countries, the share of remittances and FDI as a percentage of gross domestic product often exceed ODA. Haiti, which became the poster child for the failures of foreign assistance even before the renewed rush of aid after the 2010 earthquake, has seen remittances exceed ODA flows and FDI in the past decade. In 2012, remittances to Haiti made up 20.4 percent of the Caribbean country’s GDP, while aid to Haiti was 16.2 percent of GDP. While remittances, according to World Bank lead economist Dilip Ratha, should not replace aid or public spending in rebuilding efforts, they are a vital lifeline for a country where a huge part of the population lives in surrounding countries. Meanwhile, the strength of FDI in Guinea, Liberia and Sierra Leone before the Ebola crisis — Liberia and Sierra Leone, in particular, experienced strong growth because of investments in their mining sectors — and the subsequent contraction of the three economies as a result of the outbreak point to the financial costs of an epidemic on developing countries. In 2012, FDI and aid as a percentage of GDP in Guinea, Liberia and Sierra Leone were 10.7 percent and 5.2 percent, 56.8 percent and 32.9 percent, and 14.5 and 11.7 percent, respectively. Guinea and Sierra Leone were even considered aid orphans — countries in need of aid but receive assistance from only a few active donors — before 2012: A development brief from the OECD’s Development Assistance Committee shows that Guinea has been an aid orphan since 2006, while Sierra Leone, which according to the OECD’s states of fragility report “has been penalized for its strong performance in tackling violent conflict,” has seen donor presence dwindle and has been an aid orphan since 2011. Donors in Guinea, Liberia and Sierra Leone were also found to be wanting in their support for health systems before the epidemic. Lastly, like Haiti, Nepal relies more on remittances than foreign assistance. Remittances, which reached 25 percent of Nepal’s GDP in 2012, dwarfed ODA to the country, which accounted for 4 percent of GDP in the same year. As in the case of Haiti, these inflows have served as a critical form of assistance, especially in the wake of the recent earthquake. But unlike Haiti, and like Guinea, Nepal was considered an aid orphan from at least 2006-12 — an indication of the lopsidedness of aid allocations to the corresponding needs of countries. Going beyond ODA The OECD’s new approach to assessing state fragility hinges on five dimensions: violence; access to justice for all; effective, accountable and inclusive institutions; economic foundations; and capacity to adapt to social, economic and environmental shocks and disasters. The OECD analysis of aid flows to fragile situations using these five indicators reveals imbalances across all sectors except the institutions dimension, which has some alignment among ODA funding, need and institutional capacity: Countries with authoritarian and semi-authoritarian governments, as defined by the Economist Intelligence Unit’s Index of Democracy, receive very little ODA. Meanwhile, least-developed countries and lower-middle income countries that are in the midst of reform but have weak institutions have greater ODA financing. While the peace- and state-building goals endorsed in 2011 by conflict-affected and fragile countries do not have an agreed framework for tracking ODA flows, a working model found that assistance to support these goals was at a low level in 2012. A closer look at aid flows to fragile situations shows, however, that aid is not necessarily the panacea to funding gaps in these contexts. FDI, for example, is an essential financial flow for several fragile states, as highlighted by the West African countries affected by last year’s Ebola outbreak. In Cameroon, FDI even complements aid: In 2012, both FDI as a percentage of GDP and FDI per capita were almost the same levels as ODA. Nonconcessional other official flows, meanwhile, represent a far smaller share of external financing in fragile states, but are nevertheless important. For example, in 2012, OOFs exceeded 2 percent of GDP in Guinea, Liberia, Mauritania and the Solomon Islands. “Alignment of efforts to partners’ peace-building efforts is insufficient yet crucial,” Jolanda Profos, a peace and conflict adviser for the OECD and the main author of the yearly report on state fragility, told Devex. “At the same time it’s good to note that there’s broad recognition that partners and donors shouldn’t focus only on aid when it comes to addressing fragility.” Check out more insights and analysis for global development leaders like you, and sign up as an Executive Member to receive the information you need for your organization to thrive.