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ENSURING FRAGILE STATES ARE NOT LEFT BEHIND 2011 Report on Financial Resource Flows

DAC INTERNATIONAL NETWORK ON CONFLICT AND FRAGILITY

About this report

table 1. working list of fragile states

This report is part of a project to monitor resource flows in fragile situations, which was launched by the OECD Development Assistance Committee (DAC) in 2005. While originally focussed on official development assistance (ODA), this annual report of the DAC International Network of Conflict and Fragility (INCAF) has evolved to include sources of development co-operation from beyond DAC membership, as well as domestic revenues, peacekeeping expenditures, private flows (mainly foreign direct investment, trade and remittances) and illicit outflows. In recognition of the fact that aid is only one part of the equation in fragile situations, and that it can be dwarfed or have its effects swept away by other flows, this report provides evidence on the main resources in fragile situations, how they interact, and what issues and countries should be of concern. The 2011 report compiles and analyses the latest available data, which is mostly from 2009 for ODA flows, and includes data on forward spending for 2012-15. It was prepared by a team led by Juana de Catheu, including James Eberlein (editorial and data visualisation) and Franziska Nix (research assistant) of the OECD Secretariat, and Sumedh Rao (GSDRC, data collection). It draws on OECD-wide research, including statistics on development co-operation; reviews of whole-of-government donor performance; data on aid effectiveness; regional economic outlooks; and policy work by DAC-INCAF and its members. It has benefitted from valuable comments from the INCAF Task Team on Financing and Aid Architecture, including Henrik Hammargren (Sweden), Chair of the Task Team, Kristoffer Nilaus Tarp (UN Peacebuilding Support Office), and Yasmin Ahmad, Elena Bernaldo, Olivier Bouret, Ben Dickinson, Fredrik Ericsson, Masato Hayashikawa, Hanna-Mari Kilpelainen, Stephan Massing, Erwin Van Veen, Simon Scott and Asbjorn Wee (OECD DAC Secretariat). However, any error or omission remain the authors’ responsibility. It builds on the factsheet Ensuring Fragile States Are Not Left Behind (2011), which was launched at the Fourth High-Level Forum on Aid Effectiveness in Busan (Korea).

Will fragile states meet the MDGs by 2015? The international community cannot claim success in the fight against global poverty, as most fragile states will simply not meet the Millennium Development Goals (MDGs) by 2015, and the lack of progress is most acute in fragile states (see list in Table 1). Six out of ten people living under the poverty line live in a low- or middleincome fragile state, and seven out of ten school-age children in fragile states are not enrolled in primary school. A child living in a fragile state is twice as likely to be undernourished as a child in another developing country (see Figure 2). While the poverty target is within reach for more than 70% of low-income countries as a result of recent economic growth and an improvement in policies, GDP growth in fragile states was about one-fifth that of other lowincome countries (World Bank, 2011d). Although those low-income countries not affected by violence closed 40-70% of their MDG gap between 2000 and 2010, fragile states have closed only 20% of the same gap (World Bank 2011d, 2011e).

2

2007 2008 2009 Afghanistan Angola Bangladesh Burkina Faso Burundi Cambodia Cameroon Central African Republic Chad Comoros Congo, Dem. Rep. Congo, Rep. Côte d'Ivoire Djibouti Equatorial Guinea Eritrea Ethiopia Gambia Georgia Guinea Guinea-Bissau Haiti Iraq Kenya Kiribati Korea, Dem. Rep. Laos Lebanon Liberia Malawi Mauritania Myanmar Nepal Niger Nigeria Pakistan Papua New Guinea Rwanda Sao Tomé & Principe Sierra Leone Solomon Islands Somalia Sri Lanka Sudan Tajikistan Timor-Leste Togo Tonga Uganda Uzbekistan Vanuatu West Bank and Gaza Yemen, Rep. Zimbabwe

FINANCIAL RESOURCES FLOWS IN FRAGILE AND CONFLICT-AFFECTED STATES: 2011 REPORT

Figure 1. Where are the fragile states?

The list of 45 countries in fragile situations used for this analysis (neither an official DAC list nor an official definition) is a compilation of two lists: the 2009 Harmonised List of Fragile Situations (World Bank, African Development Bank, Asian Development Bank) and the 2009 Fund for Peace Failed States Index (“alert” and “warning” categories). It is worth noting that not all fragile states are low-income countries: 19 of the countries considered fragile in 2009 were middle-income countries (see pages 12-13).

  

LOW-INCOME FRAGILE STATES (< USD 1 005) LOWER MIDDLE-INCOME FRAGILE STATES (USD 1 006 TO USD 3 975) UPPER MIDDLE-INCOME FRAGILE STATES (USD 3 976 TO USD 12 275)

Figure 2. most of the MDG DEFICIT is found in fragile states

77%

65%

... of children not in primary school

... of people without access to safe water

70%

60%

... of infant deaths

... of undernourished people

Source: Adapted from World Bank 2011a (World Bank calculations based on Gates and others 2010). Note: Current fragile and conflict-affected states account for 33 percent of the population in developing countries, and countries recovering from fragility and conflict account for an additional 14 percent of the population. Therefore, if the MDG deficit were borne evenly, these countries would account for 47 percent each of the ills described. The dark purple figures represent the percentage of the deficit for selected MDGs in fragile, conflict-affected and recovering countries. The light purple figures represent the persons afflicted in other non-OECD countries. Excluded here are Brazil, China, India and the Russian Federation, all significantly ahead of or on par with other non-OECD countries on the MDGs. Due to their size, including them in the calculations would skew any discussion involving the global population.

DAC INTERNATIONAL NETWORK ON CONFLICT AND FRAGILITY (INCAF)

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But there is evidence that progress towards the MDGs is still possible in countries that are recovering from conflict and fragility. For example, Mozambique more than tripled its primary school completion rate in just eight years: from 14% in 1999 to 46% in 2007. Rwanda cut the prevalence of under-nutrition from 56% of the population in 1997 to 40% in 2005 (World Bank WDR, 2011). The correlation between fragility and poor MDG performance suggests that the structural causes of conflict and fragility must be addressed in order to accelerate and sustain progress towards the MDGs.

How have financial, food and fuel crises affected resource flows? In fragile states as in all developing countries, the international community needs to look beyond aid and harness the full range of resource flows to take advantage of their potential contributions to development results. For example, over the last decade, the telecommunications industry has invested USD 77 billion in subSaharan Africa, boosting the number of mobile subscribers from 10 million to 400 million, creating thousands of jobs, injecting cash into cities and remote communities alike, and improving the ease of doing business across the board.

700

700

600

600

Figure 700 3. RESOURCE FLOWS IN FRAGILE STATES (2005-09) 597.7

600 600 500 500

400

400 400

476.4 421.2

300

355.5

300 300 200 200 100 100

00 -100 -100 2005

2006

2007

2008

2009

Note: Resource flow totals include outflows by trade. ODA is based on figures for gross disbursements. Data: OECD CRS, UN Statistics, UNCTAD, IMF, World Bank (2011).

500

Angola’s growth has been driven by oil wealth during a period of rising200 resource prices. 200 Other sectors 200 of the 200 economy, notably financial services and construction, have also been growing. However, the 2008 global economic cri100drop in oil revenues 100 100 a negative100 sis and the related have had impact on the Angolan economy, which contracted by 10.3% in 2009. In March 2009 the government indicated it would 0 spending by 0 40%. To prevent 0 cut planned budgetary future 0 fiscal shocks caused by volatile oil prices, it is important for Angola to further diversify its industries. Some of the promis-100 -100 -100 -100 ing sectors that could be developed to a more significant level include agriculture, fisheries and livestock, and forestry. Currently only 3% of Angola’s arable land is used. 2005 2005 2006 2005

4

1 The top three aid-dependent countries in 2010 were Liberia (CPA-to-GNI ratio of 64%), Afghanistan (59%) and the Solomon Islands (41%).

480.0

500 500 500 Angola is one of the world’s fastest growing economies. It received USD 11.6 billion in FDI inflows in 2009, making Angola 400 the second 400 top recipient 400of FDI in Africa, behind Nigeria. Angola is also the least aid-dependent fragile state with an ODA to GNI ratio of 0.2% in 2009. 300 300 300

Source: UNCTAD (2011), OECD (2011f).

The overall mix of resource flows to fragile states has changed significantly between 2005 and 2009 (see Figure 3). Nonetheless, the composition of resource flows and their relative importance varies from country to country.

USD BILLIONS (current prices)

700 700 box 1. Vulnerability to boom-and-bust cycles 600 600 in Angola

The main resource flows in fragile states are domestic revenue, FDI, remittances, trade, aid and peacekeeping expenditures (see Figure 3). Domestic revenue and FDI dominate the resource equation, even in countries that are highly aid dependent.1 While all of these financial flows have a different impact on development, the coherence of international policies for trade, investment, agriculture, energy, migration and illicit transnational flows with the aid agenda is of crucial importance. Adverse or incoherent policies can wipe out the benefits of millions of dollars in ODA, for example as a result of externally-stimulated brain drain and commodity price bubbles (see Box 1). A whole-of-government approach is particularly important in fragile states, given the acute and inter-related challenges faced by these countries: for example, a lack of investment in security or reconciliation can derail the whole post-crisis transition.

2006 20052007 2006 2005 2007 2006 2008 2007 20062008 20072009 2008 2007 27.0 33.0 42.2 52.2 54.7 

REMITTANCES



DOM REVENUE

164.8

208.2

230.6

311.6

230.3



FDI

110.4

134.4

169.4

188.8

214.6



ODA

53.9

48.6

44.4

49.4

46.8



TRADE

-0.6

-3.0

-10.2

-4.3

-66.4

FINANCIAL RESOURCES FLOWS IN FRAGILE AND CONFLICT-AFFECTED STATES: 2011 REPORT

GROWTH IN FRAGILE STATES DECLINING SINCE 2008 Although fragile states are largely isolated from international financial markets and were thus insulated from the initial stages of the 2008 financial crisis, the subsequent economic downturn led to a sharp fall in growth after 2008, with fuel exporters particularly hard-hit (see graph below). Looking ahead, growth in fragile states may rebound. Growth projections for fragile states are at 6.9% in 2012. These projections are more positive than those for the overall world economy (3.3%) and the collective projection for emerging and developing countries (5.4%) (IMF, 2012). Most notably, Niger is expected to grow by 12.5% in 2012 and Angola by 10.8%. Not all fast-growing fragile states are fuel or mineral exporters: Ethiopia is expected to achieve a 5.5% growth rate in 2012, and almost 10% between 2013 and 2015. As for commodity exports, prices are expected to fall from their 2010-11 levels, but the risk of further price volatility still remains high (OECD-FAO, 2011). At the same time, there is a risk of new or aggravated situations of fragility. The societal pressures for change that brought about the Arab Spring, the possibility of prolonged financial turmoil, continued commodity price volatility, rapid urbanisation, youth unemployment, demographic pressures and environmental degradation are all factors that will challenge state stability and resilience. Between the projected negative growth in the Eurozone for 2012 (IMF 2012) and continued pushes for fiscal austerity, aid budgets are under pressure. Fragile states may therefore face not only more challenges to stability but also less international development support.

30%

25%

25%

20%

20%

15%

15%

10%

10%

5%

5%

0%

0%

growth (% CHANGE IN gdp; IN constant usd)

30%

2001

-10%

2003

2004

2005

2006

2007

2008

2009

-5%



FUEL-EXPORTING FRAGILE STATES 2001

2002

2003 % OF TOTAL EXPORTS





NON-FUEL MINERAL EXPORTERS

2004

2005

2006 % OF TOTAL EXPORTS

OTHER FRAGILE STATES

2007

2008

2009

Angola

98.6

DR Congo

78.3

Afghanistan

Nepal

Iraq

98.4

Guinea

65.2

Bangladesh

Niger

Chad

90.8

Sierra Leone

54.3

Burundi

Korea, DPR

Nigeria

90.5

Papua New Guinea

54.0

Comoros

Pakistan

Yemen

90.1

Burkina Faso

40.7

Eritrea

Sao Tome & Principe

Sudan

88.5

Central African Rep.

35.8

Ethiopia

Solomon Islands

Congo

81.3

Georgia

33.7

Guinea Bissau

Sri Lanka

Timor-Leste

74.6

Somalia

33.4

Haiti

Tajikistan

Cameroon

49.2

Zimbabwe

26.8

Kenya

Togo

Myanmar

32.7

Kiribati

Uganda

Côte d’Ivoire

32.6

Lebanon

Uzbekistan

Liberia

West Bank & Gaza

Data: UNCTAD / World Bank (2011)

-5%

2002

Data: World Bank (2011).

35%

Malawi

DAC INTERNATIONAL NETWORK ON CONFLICT AND FRAGILITY (INCAF)

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Foreign direct investment (FDI) and remittances: These financial flows have continued to grow throughout the crisis in both fuel-exporting and other fragile states. Remittances to fragile states overtook ODA volumes in 2008. ODA: The percentage of bilateral ODA from DAC countries to fragile states is shrinking: from 53% in 2005 to 35% in 2009. Bilateral ODA from DAC countries to fragile states fell by 35.6% during the period 2005-09 (constant prices). This decline is explained by the fact that ODA in 2005 and 2006 included exceptionally high debt relief, particularly for Iraq and Nigeria (see Figure 12). When debt relief is excluded from the equation, ODA to fragile states increased slightly over the same period (12%). It is also worth noting that ODA has been less affected by the 2008 financial crisis than other flows, such as domestic revenue and trade. Between 2008 and 2009, DAC donors cut their ODA to all countries by 1.6%. In fragile states this figure was 11.2%. The fragile states that lost the most ODA between 2008 and 2009 were Iraq (-72%), North Korea (-67%) and Liberia (-58%). Domestic revenues: There was a dramatic contraction of domestic revenues between 2008 and 2009, threatening cuts in education, health and social protection programmes. In Kenya, for example, domestic revenues contracted by half in the two-year period. In Angola, the economy contracted by 10.3% in 2009, in response to which the government indicated budgetary cuts of 40% (see Box 1). Trade: The overall trade deficit has worsened since 2005. In 2009, 40 out of 45 fragile states faced a trade deficit — all of them with a trade deficit exceeding 6% of GDP (see Figure 4). No African country exceeded USD 250 billion in merchandise trade in 2010. For Africa, fuels and mining products constitute the main exports, accounting 66% of their total merchandise exports in 2010 (WTO International Trade Statistics 2011). In addition, fragile states suffer from illicit outflows of capital, which are estimated at USD 1.3 trillion globally, in addition to legal forms of capital flight.2 Illicit flows from the 48 least developed countries (LDCs), of which 43 are affected by a recent conflict, have increased from USD 9.7 billion in 1990 to USD 26.3 billion in 2008, a nearly three-fold increase (UNDP, 2011). For example, an estimated USD 2 billion in illegal narcotics trade transits through 2 Illicit flows are defined as “flows of money associated with tax evasion, criminal activity such as drug trafficking, and corruption and theft by government officials” (Task Force on Financial Integrity and Economic Development, 2011).

West Africa every year (UNODC 2009). An estimated 90% of gold exports from the Democratic Republic of the Congo (DRC) go undeclared (Global Witness, 2009). These huge outflows fuel instability, exacerbate poverty and limit the domestic resources available to finance development (See OECD, 2012). Peacekeeping expenditures: In 2011, ten fragile states hosted a UN peacekeeping mission, with a combined budget of nearly USD 7 billion, of which nearly USD 1.7 billion for UNAMID (Darfur) and USD 1.5 billion for MONUSCO (DRC). In DRC, UN peacekeeping expenditures represented half of the country’s ODA in 2009.3

Are fragile states raising domestic revenues? Raising domestic revenues is essential to build capable states, to encourage engaged societies and to strengthen domestic accountability. Raising taxes in order to reduce aid dependency is an explicit goal for several fragile states (e.g. Liberia). Many developing countries, including DRC, Haiti, Mozambique, Nicaragua, Rwanda and Sierra Leone, have implemented far-reaching administration reforms since the early 1990s. Where these reforms have enjoyed success, a common factor has been sustained political commitment at the highest levels (IMF, 2011b). Between 2005 and 2009, domestic revenues alone represented half of the total resource flows in fragile states — over USD 230 billion in 2009. All but four fragile states managed to mobilise government revenue representing more than 15% of GDP in 2009 which is usually considered a reasonable target for developing countries. But compared to 2008, when 12 fragile states mobilised 35% or more of their GDP in tax revenue, only four fragile states continued to manage this level of mobilisation in 2009 (IMF 2011a) (see Table 2). 3 Peacekeeping includes developmental and non-developmental activities, and is generally not counted as ODA, except i) the net bilateral costs to donors of carrying out the following activities within UN-administered or UN-approved peace operations: human rights, election monitoring, rehabilitation of demobilised soldiers and of national infrastructure, monitoring and training of administrators, including customs and police officers, advice on economic stabilisation, repatriation and demobilisation of soldiers, weapons disposal and mine removal. (Net bilateral costs means the extra costs of assigning personnel to these activities, net of the costs of stationing them at home, and of any compensation received from the UN.); and ii) similar activities conducted for developmental reasons outside UN peace operations.

box 2. Central African Republic: oda offsets reductions in other resource flows In the Central African Republic (CAR), 2006 and early 2007 saw a worsening of the conflict between the Union of Democratic Forces for Unity-led rebels and government-led forces, before a peace agreement was signed in April 2007. Over this period, there was a significant drop in domestic revenue (27%) and FDI (32%). During the same period, ODA nearly doubled to USD 118 million. Though overall resource flows were lower in 2007 than in 2006, the rise in ODA helped compensate for the 2007 fall. Source: OECD-DAC (2011)

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FINANCIAL RESOURCES FLOWS IN FRAGILE AND CONFLICT-AFFECTED STATES: 2011 REPORT

TABLE 2. government revenue (2009); in % of gdp

15-25% 6.11 Uganda

25-35%

35-45%

15.10 Yemen

25.00

15.40 Papua New Guinea

27.45 Guinea

Uzbekistan

>45% 36.72

Solomon Islands

49.80

41.00

Iraq

71.73

Bangladesh

10.50 Sudan

Sri Lanka

14.53

Eritrea

15.91 Georgia

29.27

Kiribati

78.39

Pakistan

14.70

Central African Republic

16.07

Liberia

29.90

Burundi

109.16

Ethiopia

16.29 Angola

30.86

Timor-Leste

347.93

Zimbabwe

16.71

São Tomé and Príncipe

32.42

Nepal

16.78

Malawi

34.16

Haïti

17.68

Cameroon

18.38

Togo

18.47

Niger

19.11

Burkina Faso

19.36

Côte d'Ivoire

19.49

Sierra Leone

19.74

Nigeria

19.93

Chad

20.01

Afghanistan

20.57

Tajikistan

23.41

Kenya

23.67

Congo, Dem. Rep. of

24.32

Congo, Rep. of

24.32

Lebanon

24.35

Guinea-Bissau

24.80

Data: IMF (2011). Note: Data unavailable for DPR Korea, Somalia and West Bank & Gaza.