Tale of fragile economies

This year’s World Economic Forum (WEF) on Africa held in South Africa brought up an important subject: economic fragility and fragile economies.

By Jealous Chishamba

Fragile situations pose significant risks of undermining the momentum of Africa’s growth transformation. In extreme scenarios, the myriad of old and new unresolved challenges within the continent continue to perpetuate cycles of poverty. This is despite the greater demands for economic empowerment which continue to shape the global agenda of development.

During the WEF panel discussions, an open ended debate on whether Zimbabwe is classified as a fragile economy took centre stage. Notably, since 2005, the Organisation for Economic Co-operation and Development (OECD) has been publishing a yearly report on Fragile States to monitor aid to a list of countries that are considered most fragile. Africa has more countries affected by this condition than any other region in the world.

There is no commonly agreed definition of the terms “fragile states” or “fragility”, and the use of these terms is always contested. The precise description is much like the witticism of the late Russian novelist, Leo Tolstoy (1828 – 1910), who wrote that each unhappy family is unhappy in its own way. Loosely inferred from this quip, it means that a fragile state is fragile in its own way with varying degrees.

It follows that it is too often unhelpful to reduce the definition of fragility to standardised, static lists or indicators. Because, in doing so, we miss the complexities and nuances of fragility in some situations and miss other fragile situations altogether. According to the OECD, by focussing on lists, there is a great risk of overlooking critical situations that may have pockets of sub-national fragility. Thus, identification of a threshold below which a country is considered fragile has always been a challenge. In sum, it seems to be more helpful to think about understanding fragility rather than defining it.

In the context of economic growth and development, fragility tends to be characterised by lower economic growth rates than the average for low-income countries and have uneven income and wealth distributions. Based on this view and other related fragility parameters, the International Monetary Fund (IMF) and OECD currently categorise Zimbabwe as a fragile economy even though this is open to diverse opinions. When restricting the concept of fragility within the boundaries of economic growth and development, there are some economic factors which offer opportunities for a transition out of fragility. The strength and basis of the economy, including historical patterns of economic growth and levels of foreign direct investment, are important factors that can impact on the stability and resilience of developing countries. In support of this conception, there is fairly consistent evidence of a correlation between low levels of economic development and fragility. Economic resilience requires diversity which can provide growing opportunities for employment and economic management that can adapt to changing circumstances.

Fragile countries contain more than 10% of the world’s population but account for nearly 30% of those living on less than USD1 a day. As such, they significantly reduce the likelihood of the world meeting global development goals. Therefore, addressing the challenges facing fragile economies adds a voice to making progress on Sustainable Development Goals. The drivers of fragility include economic, social, political and environmental dimensions, but all too often, demands for inclusion and equity underlie these drivers. Effectively addressing fragility means building resilient economies and societies in all these dimensions through inclusive and equitable patterns of growth and development that can meet societal expectations. Greater economic inclusion of the poorest is an essential ingredient of sustained growth. Experience shows that the challenge of building capacity in fragile situations is immense and efforts need to be sequenced and paced realistically because ad-hoc and reactive responses are clearly not enough.

Based on the understanding of the key drivers of fragility, stronger reform emphasis on transparency measures, accountability institutions, and engagement of civil society may enhance legitimacy and help sustain the demand for public financial reforms. According to the IMF’s report on building resilience in Sub-Saharan Africa’s Fragile States, public financial management reforms (including revenue management in resource-rich countries) are critical as they can build the legitimacy by increasing transparency, accountability, and efficiency.

Fiscal institutions cover the entire range of entities responsible for public resource management which are revenue collection, budget preparation, budget planning, expenditure execution, procurement, reporting, and oversight. The importance of revenue collection and public financial management which underpin the government’s ability to re- establish its core economic structures and efficiently deliver public services cannot be underestimated. Tax collection strengthens the social contract, giving the National Treasury an interest in promoting economic development and to broaden its tax base. In addition, the role for deeper policy dialogue, partnership and advocacy around issues of fragility is also important in this process.

Such approaches may also have a broader appeal for developing countries’ governments to secure greater public credit for reform efforts. Capacity substitution can be a necessary measure, but strategies for developing local capacity should be targeted from the outset. Even if false starts are likely, repeated attempts to generate sustainable solutions may be needed. Other policy approaches include focussing on trade as an engine for poverty reduction and stimulating investment to spur economic growth.

There is some, albeit limited, evidence that links unemployment to fragility. Some of the commonly cited elements for sustainable job creation in fragile economies include an enabling framework, a consultative process that involves social dialogue and the adoption of market development and supply chain approaches

Policymakers need to develop sector-based priorities. For instance, there is need to appreciate the significance or power of infrastructure development to come out of fragility. The relationship between infrastructure and fragility is clear evidence to suggest that infrastructure investment plays a significant role in the processes of stabilisation.

According to the World Bank and Energy in Africa, energy blackouts reduce growth rates on the continent by an average of 2.1% per year. It is imperative to note that no economy can achieve high, sustained growth without the right infrastructure. For example, power, transport, water and communications infrastructure can be equally vital to private sector investment and building competitive businesses. These elements of infrastructure produce a significant proportion of gross domestic product (GDP) and stimulate economies by bringing customers closer to suppliers, employees closer to employers and facilitate the clustering of firms to form industries.

Additionally, the promotion of foreign direct investments has stronger evidence on mitigating fragility due to the impact of FDI on growth and stability. This also needs to be supported by trade openness. Well-defined institutional settings and trade openness can contribute to stability while weak settings exacerbate fragility.

In sum, increasing levels of economic development can have substantial effects in reducing the risks of various crises. Adequate fiscal space, favourable debt dynamics, higher revenue-raising capacity, and expenditure flexibility is critical in fragile economies as it provides room to meet pressing development needs as well as the ability to respond to adverse shocks by running expansionary fiscal policies and therefore smoothing or cushioning the impact of shocks on the population. Suffice to say that, economic development is not a prerequisite for preventing fragility, but a lack of growth will mean that institution building is more difficult than otherwise.

The World Bank acknowledges that Zimbabwe has enormous potential given its generous endowment of natural resources, existing stock of public infrastructure, and comparatively skilled human resources. Realising this will require prompt action to correct fiscal policies, re-stabilise the monetary system, and resolve arrears to international lenders that would allow for a resumption of development financing. It will also require the renewal of capacity in the public sector, and investment reforms hence addressing fragility issues. Unorthodox approaches should not be ruled out, but, as is generally the case, they need to be used with care. The current fundamentals provide a strong base for development and the existing challenges are not insurmountable.

Chishamba is a Zimbabwean banker with experience in treasury and corporate banking. He writes in his personal capacity.

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