Chapter 4. Moving from fragility to resilience post-2015

This chapter addresses the following questions:

Question 7: What opportunities exist to address fragility?

Question 8: What should international support look like in the future in order to be “fit for purpose”?

Question 7: What opportunities exist to address fragility?

The post-2015 negotiations have created an unprecedented and inclusive debate about the opportunities for all countries to achieve development. This political will can be translated into more significant action for building peaceful and inclusive societies in the post-2015 era. Untapped opportunities for development exist in many fragile countries and economies. Seizing these opportunities will require ownership on the national and local level, and international support for those plans and for tackling the external drivers of fragility. Innovation will be needed to deliver multi-sectoral responses for reducing violence, to build trust in government and to improve the quality and not just the quantity of public services. Galvanised global action can be underpinned by an emerging revolution in data and knowledge about effective project and programme designs.

International political will has created more sustained attention to the challenge of fragility

The Millennium Development Goals (MDGs) injected urgency into global development efforts, catalysing innovation in development assistance from finance through to more inclusive and innovative partnerships that have attempted to accelerate progress towards the goals. There has been increased national ownership of development policies and greater mutual accountability for delivering results.1

The post-2015 process has built on this momentum. It has spurred an unprecedented debate about how to overcome obstacles to sustainable development through a process that has been much more inclusive than that which developed the MDGs. During 2015, this debate will gain further profile, as leaders prepare for the summit that will finalise the new agenda and public awareness grows of the ambition of the new goals. There will also be opportunities for all development partners to:

explore how goals and targets can be implemented and financed, and the mechanisms that are needed to create accountability for them
reassess their strategies in order to make them “fit for purpose” in the new development environment
begin to develop a new generation of multi-stakeholder partnerships that can support implementation in countries and economies with the greatest need.

As discussed in Chapter 2, fragility poses considerable risks to the delivery of the new goals. But the reinvigorated debate around the setting of goals presents valuable opportunities to focus more attention on building functional and resilient institutions and preventing violent conflict. States in fragile situations have advantages that can be harnessed to support growth and poverty reduction, but this requires tackling the political obstacles that make development difficult. Country-led processes to reduce fragility require greater support, and more active efforts are needed to respond to stresses and shocks that threaten to reverse development.

Greater international political will is also needed to create an external environment that reduces stresses on vulnerable states and limits the transmission of fragility and violence across borders. Implementation of the new development agenda offers an opportunity for existing initiatives to address the global and regional dimensions of fragility to be taken to a new level (OECD, 2014a).

Fragile states have untapped opportunities for development

In the coming decades, several features of long-term fragile countries – relatively young and rapidly urbanising populations, new opportunities in global markets and large natural resource endowments – will present opportunities to accelerate development as well as potential sources of risk and instability.

Most fragile states have young populations and this creates both opportunities and threats. Especially in Africa, fragile states will continue to enjoy increased economic potential as a “youth bulge” increases the size of the workforce. This can generate a demographic dividend if young people find productive employment and enjoy opportunities to save. Its achievement relies on policies to expand labour markets and create institutions that support growth, and on investment in education and training of sufficient quality to generate skills that are competitive in regional and global markets. Labour market stagnation, however, will mean more unemployed or underemployed young people – a factor linked with social and political instability, and with the potential to intensify a demographic disaster that could have broader regional consequences (Ortiz and Cummins, 2012).

Urbanisation will continue to reshape many states. According to UN population projections, the 50 countries on the fragile states and economies list will account for nearly 30% of the global increase in urban population between 2015 and 2030, with an additional 303 million people living in towns and cities. On average, fragile states will experience more than a 60% increase in urban population – more than double the global average (WHO, 2014). Urbanisation is a potentially powerful driver of economic growth. Moreover, as a 2013 World Bank/IMF study suggested, density can improve economies of scale around service provision, opening up potential for virtuous circles of development. However, rapid urbanisation can overwhelm capacity for planning and development, leading to gridlocked transport systems and spikes in insecurity. In sum, increasingly concentrated populations in fragile states will offer policy makers and aid actors an opportunity to rapidly improve conditions for large numbers of people – and a costly challenge if they fail to do so.

New market opportunities are opening up for countries with growing labour forces. For the last two decades, the People’s Republic of China has been the manufacturing hub for the global economy, but rising labour costs are increasingly pushing manufacturing to new markets; over the next decade, China’s rise will open new economic opportunities. Even the poorest countries are increasingly connected to global markets. Whether they can compete will depend on their success in improving regulation, countering corruption and strengthening infrastructure. Realism is, of course, necessary. Today’s fragile states will not become the manufacturers of tomorrow without substantial improvement, not least in basic security and infrastructure. However, increasingly extended global supply chains will offer potential niches and there is evidence that countries can emerge from fragility to compete effectively in global markets. For example, Cambodia – fragile from 2007 to 2009 – is increasingly drawing in manufacturing across a range of industries, and in 2012 it received USD 1.4 billion in foreign direct investment (FDI). External investors, especially in the manufacturing sector or from the emerging powers, also bring new pressure to raise productivity and reduce costs for bringing products to global markets.2

For many countries, natural resource wealth has long posed a challenge to development. The relationships between natural resource rents and institutions are complex. Resource rents can erode the quality and accountability of institutions by reducing state dependence on taxes for revenue; weak institutions can also allow for rent seeking and misuse of scarce public resources. These interlocking relationships pose challenges to reformers. Nevertheless, there is an increasing body of knowledge on how to improve the management of natural resources across all links of the value chain, in particular by mobilising broader constellations of stakeholders and by supporting the development of high-quality “pockets” of governance capacity around resource management (Barma et al., 2012; Leonard, 2010). Likewise, there is increasing normative pressure for responsible sourcing and supply chain management. Sustained attention to helping fragile states harness resource rents could be transformative.

Through all these factors, the boundary between opportunity and risk is a narrow one. Young urban populations, connected to global markets, can rapidly boost growth and create a virtuous cycle where domestic resource mobilisation, increased political participation and more effective investment in human capital create the foundations for further development. States with limited capacity will need increased support if they are to respond both to these medium-term trends and to more immediate changes in the external environment – mitigating a fall in resource prices, for example, or a slowdown in an important export market requiring capacity for more resilient and adaptable development strategies.

National ownership and international commitment are needed to seize these opportunities

As the post-2015 development agenda is finalised, the debate about how to implement it must continue and intensify, leading to a renewed commitment to building peaceful and inclusive societies as a foundation for ending poverty.

Fragile communities and countries are increasingly directing their processes of recovery by conducting their own assessments of the factors driving their fragility and using those assessments to establish consensus behind the direction for reform. At the national level, the New Deal pilot countries, in particular, have begun to set out an agenda for co-operation with the international system. Both community-based and nationally defined agendas will offer new ways for development partners and aid recipients to align interests, priorities and international assistance.

The African Union (2014) has united around a common position for the post-2015 agenda, identifying priorities that combine economic, growth and development objectives; environmental sustainability, natural resource management and disaster risk management; and a commitment to peace, security and the “good and inclusive governance” needed to address the root causes of conflict and instability. As the African countries move to operationalise the Sustainable Development Goals (SDGs), they will have opportunities to strengthen their own plans to address fragility and to increase resilience, based on the African Union’s commitment to “adopt additional measures to fight corruption, promote good political and socio-economic governance, transparency and accountability, especially in the field of natural resources management” (ibid.). In all regions, the early years of the new development agenda will offer fresh opportunities to strengthen local and national consensus around development needs and priorities, and to drive policies and the global partnerships needed to underpin sustainable development.

Internationally, efforts to jointly address external drivers of fragility will be essential for containing illicit globalised flows of finance, narcotics, people and arms. Global policies on drugs, migration and finance flows provide criminal opportunities for arbitrage profit (Gilman et al., 2011). As noted in Kilcullen (2013), these globalised criminal opportunities offer violent actors the ability to “manipulate and mobile[s]e populations on the other side of the globe, and vice versa”. Countries with weak institutions will be especially vulnerable to these global threats because state institutions lack the policing and regulatory capacity, and sometimes the political will, to curb criminal profits and networks and stem growth in local violence. In these contexts, non-state armed groups exploit the weakness of fragile states’ institutions. In the Niger Delta, for example, profits from stolen oil financed the Movement for the Emancipation of the Niger Delta (MEND) (Asuni, 2009).

To mention but a few, important international initiatives already exist to: fight tax evasion (global standard on Automatic Exchange of Information); tackle tax avoidance (OECD/G20 Base Erosion and Profit Shifting project); curb illicit financial flows (the Financial Action Task Force); make natural resources concessions more transparent (the Extractive Industries Transparency Initiative); end the trade in conflict minerals (the Kimberley Process); improve responsibility of supply chains (OECD Due Diligence Guidance); reduce corruption of companies overseas (foreign corrupt practices acts); strengthen due diligence in conflict-prone environments (the UN Global Compact and OECD Guidelines for Multinational Enterprises); and counter the proliferation of small arms and light weapons (UN Programme of Action).

Implementation of the post-2015 agenda will offer an opportunity to build on and strengthen these initiatives with the aim of demonstrating measurable reductions in external stresses on vulnerable countries. In particular, urgent action is needed to return stolen assets to fragile states, and to stem illicit flows from fragile states and their use in funding criminal enterprise within countries’ borders. For example, the proceeds of corruption alone, which are only a part of the stolen funds leaving developing countries each year, are estimated at USD 20-40 billion. Returns from OECD member countries are only around USD 60 million per year (OECD/The World Bank, 2014). All major economies, including those outside the OECD, will need to develop and implement a comprehensive strategy to dramatically reduce illicit flows. A successful outcome would see steady increases in finance available for implementing the SDGs in fragile states and a reduction in criminal profit opportunities in countries with weak institutions. Question 4 of this report proposes elements of a new global partnership to address illicit financial flows.

Finally, a knowledge revolution is underway that could underpin more effective strategies to reduce fragility. Since the agreement of the MDGs, there has been considerable progress in engagement with fragile states. As noted in Chandy (2011), “A supporting set of institutions has sprouted, built around the g7+ group of fragile states and the network of donors with whom they partner, resulting in more honest dialogue, the sharing of experience, and the agreement of shared objectives, norms and metrics of progres”. Major investments in mapping the evidence base, identifying gaps and supporting evaluations – such as the International Initiative for Impact Evaluation (3ie) Evidence for Peace Initiative – are all underway.3 While data standards remain problematic, important improvements have been made in availability, quality and openness, and donors and investors have increased their commitment to transparency.

Much more needs to be done, however. In a range of areas critical to escaping fragility – reducing sexual violence in conflict, designing political transitions and early-stage electoral processes, and building civil service capacity – evidence is lacking. The policy implications of new knowledge also need to be developed. Much remains to be learnt about how flows of funding and technical assistance interact with governance and livelihoods, and then to translate findings from research in ways that are relevant to policy makers. Yet it is important to bear in mind that development assistance is a relatively young field. We are at the cusp of releasing new knowledge that can transform development, with increasing attention given to quantitative impact evaluation (Vinayak and Duflo, 2011), and more focused and rigorous qualitative studies of the causal processes through which aid interventions work.

It will take time to assemble sufficient knowledge on how aid interventions work in disparate contexts, and policy makers will need to devote sustained attention and investment to evaluating portfolios of comparable projects. Yet these investments will begin to produce dividends as aid actors work to deliver on the post-2015 agenda, yielding better designed and more locally rooted projects. Taken together, a combination of stronger national ownership, more forceful international co-ordination and the fruits of a knowledge revolution have the potential to increase vulnerable countries’ ability to benefit from the new development agenda.

Innovation is needed to address fragility

The post-2015 agenda should catalyse further innovation and experimentation that will accelerate progress in reducing fragility, especially if a peaceful and inclusive societies goal is backed up by well-constructed targets and indicators and by appropriate finance, partnerships and mechanisms for accountability.

As argued in Chapter 2, the new development agenda will increase understanding that fragility is a challenge – not just for the poorest countries but for all countries where high levels of violence and a lack of access to justice and to robust institutions point to in-country inequality.

In connection with a peaceful and inclusive societies goal:

There is considerable potential to explore strategies that aim to reduce levels of all forms of violence suffered by a society, whether collective, interpersonal or self-directed (WHO, 2002). In addition to setting targets on violence prevention proposed for the post-2015 agenda, the World Health Assembly (2014) has mandated WHO to produce the world’s first global action plan for ensuring health systems play a full role in preventing violence against women and children. This is intended to contribute to a comprehensive multi-sectoral response that would have normative, legal, institutional and technological dimensions.
Innovation is needed in efforts to rebuild low levels of trust in government. This is a challenge for all governments, including those of OECD member countries, but is especially pressing in countries where conflict and political instability have eroded public confidence in the ability of state institutions to deliver (OECD, 2013a). Diffusion of information technologies has led to growing visibility of corruption and other forms of states’ failure to discharge their responsibilities. Action is needed to explore how to make the public sector more reliable, responsive, open and fair, especially in contexts where government capacity is very low.
Renewed investment is needed in the public servants who are expected to deliver more effective, accountable and inclusive institutions – in government itself; in the justice sector, where better policing is critical to tackling instability; or in the social sectors, where health and teaching personnel account for the majority of government expenditure. Reform is only possible with the support of better-qualified and more highly motivated public servants, an objective that is complicated by vested interests and political obstacles. If more peaceful and inclusive societies are to be developed, new ways must be found to build a relationship of trust between citizens and those whose job it is to serve them.

Question 8: What should international support look like in the future in order to be “fit for purpose”?

The post-2015 development agenda will be the most ambitious international development framework yet. As countries negotiate the “means of implementation” for the SDGs, this question reviews major aid and finance priorities for reducing fragility in the post-2015 period.

National governments can do more to engage all parts of government and society in peacebuilding and statebuilding processes. Greater international political commitment and risk tolerance are needed to align aid to nationally owned priorities. Aid instruments and modalities can be put to better use to build national, both state and non-state, ownership. These can also help to mobilise new sources of development finance and align incentives of governmental, private, civil society and external actors behind national visions. Sources of development finance will also need to be scaled up to meet global ambitions by 2030.

Many processes in 2015 will offer entry points to consider aid and measures beyond aid. The International Dialogue on Peacebuilding and Statebuilding (IDPS); international negotiations on the post-2015 development agenda; financing for development, climate and trade; the UN Secretary-General’s Review of Peacekeeping; and the review of the UN peacebuilding architecture will all offer opportunities for the international community to consider priority reforms to global governance institutions. The international community can commit to a number of key actions to make international support “fit for purpose” in the post-2015 period. This chapter concludes with a potential roadmap for decisions in 2015 to address fragility.

Meeting universal development ambitions will be harder than ever

In many developing countries the easiest challenges have been addressed. Ensuring that development resources reach the poorest and most marginalised communities and households will be the priority. Question 2 of this report underlined that a core of poverty is likely to be increasingly concentrated in long-term fragile situations: 43% of the world’s poorest people live in countries on the 2015 list of fragile states and economies. By 2030, this figure could rise to 62% in a best-case scenario. Addressing poverty in the post-2015 era will require urgent attention to building effective, accountable and inclusive institutions; mitigating shocks; and reducing and preventing conflict and violence.

To these ends, the international community will need to draw on a range of collective tools, including aid and extending beyond aid. These can include peacekeeping and peacebuilding, whole-of-government approaches for reducing fragility, a stronger focus on building global public goods, and engagement by civil society and the private sector. Aid actors must rise to the challenge by offering a broader menu of aid instruments and modalities that develop national capacities and help to align the incentives of national and international public and private actors towards reducing fragility.

Yet, fragile countries are the hardest environments in which to deliver aid. Governance can be weak, institutional capacity low and absorptive capacity for aid limited; geopolitical constraints and considerations loom large. Although donors place a heavy emphasis on co-ordination in fragile situations, in many contexts, they still pursue distinct agendas. As a result of these pressures, aid is often less than the sum of its parts – it is not always delivered in ways that align with national priorities or that sustainably build institutional capacity. This status quo perpetuates a “sovereignty gap” (Ghani and Lockhart, 2009). This means governments are seen by citizens to fail to deliver on basic priorities. Their revenues are low, as are public service pay and morale, while corruption can be high. The international community fails to support the development of functioning institutions, and compounds low morale by sidelining national institutions and political processes in favour of direct implementation. These challenges, at their root, are political. They reflect often misaligned interests of national (state and non-state) and international actors that are difficult to shift.

The New Deal framework was a landmark for fragile countries that had been poorly served by supply-driven aid approaches designed for other environments (Da Costa, 2014). The g7+ countries are now defining national priorities and plans. While it is too early to judge the impact of the New Deal, a review of partial implementation to date suggests that greater political commitment is still needed on all sides to build momentum and effect real change. So far, many national processes have been rushed and often driven by technical considerations and donor imperatives to allocate funds, rather than national and inclusive processes to define priorities (Hearn and Zimmerman, 2014).

Much more systematic change is needed across donor implementation practices (IDPS minimum standard for building national ownership [Hughes et al., 2014]). Donors must find ways to improve their flexibility, tolerance for risk and adaptation to each national context. With sufficient national and international political will, better alignment of aid to national priorities is possible. A recent OECD study offers insight into the ways that donor institutional development assistance practices can change for the better (see Question 6). Viable reforms are demand-driven and must be grounded in the local political context and correspond to realistic scope for change. The likelihood of success may improve if programmes have national political support and leadership; have longer (six to ten years) timelines; and build in flexibility in funding and implementation and multi-stakeholder accountability for achieving results.

With international political will, traditional aid modalities can better meet needs in fragile situations

Many existing aid modalities can better meet the needs of both donors and recipients in more equal partnerships towards common ends. In some contexts, donors have attempted to modify traditional aid instruments that are designed to build national systems and capacities – such as general and sector budget support and pooled funds – to the specific circumstances of fragile situations. These modalities are especially appropriate for building ownership, flexibility and mutual accountability, and have been most prevalent in situations where there is international political will to take fiduciary and political risks and national commitment to spend funds on agreed priorities. These modalities are also well suited to enabling national actors to pursue innovative and comprehensive multi-sectoral approaches to addressing fragility. Table 4.1 (Q.8) summarises existing aid modalities, their use of country systems, their time sensitivity to the needs in fragile situations and their tolerance for risk in fragile countries.

Table 4.1. (Q.8) Traditional aid modalities adapted to fragile situations
Instrument	Time sensitive	Risk tolerant	Use of country systems	Joint ODA and non-ODA eligible approaches such as security
Bilateral on-budget special facilities	Yes	Yes	Yes
Bilateral conflict and stabilisation project support	Yes	Yes	No	Yes
General and sector budget support	No1	Yes	Yes
Multilateral joint trust funds and pooled funds	Yes	Yes	Yes (parallel systems)	Yes (United Nations)
Multilateral project and programme grants	Yes	Yes	No	Yes (United Nations)
Hybrid facilities	No	Yes	Yes (parallel systems)
Project support in traditional areas such as DDR, SSR, public works, civil service reforms, transitional bodies and elections, mediation, civil society participation	Yes	Yes	No	Yes (SSR)
← 1. With the exception of the EU’s state building contracts.
ODA: official development assistance; DDR: disarmament, demobilisation and reintegration; SSR: security sector reform.

The Somalia Special Finance Facility is an example of speedy and risk-tolerant support to meet the national immediate needs. This bilateral on-budget special facility reimburses the government for the most urgent recurring and project costs. Such facilities are especially appropriate to the immediate aftermath of conflict when government revenue, public financial management systems and civil services have collapsed. Additional safeguards can address fiduciary risks.

Box 4.1. (Q.8) The Somalia Special Finance Facility

The Somalia Special Finance Facility (SFF) was developed by the Norwegian government to provide urgent assistance to the newly formed federal government of Somalia. The facility reimburses the government in tranches for recurring costs and quick-impact projects upon verification of expenditures. The facility delivered early pay-offs in injecting urgent cash into the fledgling administration and in demonstrating that risk-tolerant funds could be managed in Somalia (Hearn and Zimmerman, 2014). The SFF is intended to lay the foundations for multilateral pooled funds, which can take longer to become operational. The facility was apportioned 70% to recurring costs and 30% to federal government quick-impact projects to support stability in insecure areas. The SFF laid the foundation for the World Bank Multi Partner Fund, a multi-donor fund which took over the payment of recurrent costs in July 2014.

General and sector budget support harmonises aid behind national priorities and builds country systems by spending resources through national budgets and institutions. These instruments have been adapted to fragile situations, especially those more advanced in the transition from conflict such as Liberia, Rwanda, Sierra Leone and Uganda. Non-traditional providers of development co-operation such as Turkey and the United Arab Emirates are increasingly providing budget support for a range of fragile countries. Channelling aid through country systems raises fiduciary risks, including leakage and corruption. To address these risks, partners have experimented with additional safeguards including independent audit checks and independent monitoring of financial flows to effectively mitigate these risks (Manuel et al., 2012). Communities can be actively engaged in monitoring resources and the quality of services. More recently, the European Union introduced state building contracts (SBCs) to deliver more rapid budget support to countries in times of crisis and upheaval. The SBCs have been initiated or planned in ten countries, including during the onset of crisis in Mali and during the upheavals of the Arab Spring (OECD, 2014e). They are agreed on for a two-year period to help countries reduce crises, and can be succeeded by other EU budget support instruments (Hauck et al., 2013).

Multilateral joint trust funds and pooled funds. World Bank Multi-Donor Trust Funds (MDTFs) and UN Multi-Partner Trust Funds (MPTFs) have been established in a wide range of fragile situations, either aligned to key sectors or to broader national policy priorities. Because they pool risk for donors and are managed by the multilateral system, these instruments have increased donor tolerance for the risks of using country systems in fragile situations (Manuel et al., 2012). Trust funds and pooled funds are also well suited to enabling collaboration between the public sector, private actors and civil society and experimentation in new approaches to reduce fragility.

Conflict and stabilisation funds can support official development assistance (ODA) and activities not eligible for ODA. This is advantageous when investing in early actions to lay the political, security and justice foundations for peace. However, they have tended not to use country systems, and their support for national and sub-national policy coherence and capacity has been questioned. For example, a major criticism of the Provincial Reconstruction Team (PRT) model in Afghanistan is that large volumes of stabilisation funds were delivered outside of government priorities and generated hundreds of millions of dollars of unsustainable and unused projects and leakage.4

Hybrid facilities combine multiple funding sources and funds under a single joint governance and oversight mechanism and national policy framework. The Somalia Development and Reconstruction Facility has been established with four “windows” of support tied to implementation of the Somali New Deal Compact. The advantage of the facility is that it offers a mechanism through which to increasingly align all support to government priorities under one oversight umbrella, although many donors and conflict and stabilisation funds are yet to be reflected within the framework.

Box 4.2. (Q.8) The Somalia Development and Reconstruction Facility

The Somalia Development and Reconstruction Facility (SDRF) is a centrepiece of the Somali New Deal Compact and is intended to serve as the primary mechanism by which the federal government of Somalia guides financial support for the compact. The financial governance committee of the SDRF is designed to improve transparency and integrity and to build donor confidence in government systems. The SDRF is composed of four financing windows.

The Special Financing Facility (SFF) provides urgent support to the federal government of Somalia for recurring costs and quick-impact projects.
The World Bank Multi-Donor Trust Funds (MDTF) will be on-budget funds and dedicated to the Peacebuilding and Statebuilding Goals (PSGs) for economic foundations and revenue and services. It will not accept earmarked funds from donors. The fund will finance government recurring costs and priority projects. An oversight committee for the fund will include regional and federal officials. In doing so, the fund can enable Somalis to negotiate political priorities.
The UN Multi-Partner Trust Fund for Somalia (MPTF) is aligned to the PSGs. It will disburse funds through UN agencies, eligible non-governmental organisations (NGOs) and country systems. It brings UN programmes under the government umbrella, and is able to fund justice, security and political priorities.
The African Development Bank Facility will fold the African Development Bank’s programmes into the SDRF and will focus on enhancing jobs and livelihoods and building national institutions.

The SFF and the MDTF accept high levels of risk in order to support Somali political negotiations on the most urgent priorities within the New Deal Compact framework. However, the bulk of funds within the facility are dedicated to revenue, services and economic PSGs. The SDRF may be lacking a window to support joint decision making and implementation on the most urgent political and security tasks, and donors’ security, conflict and stabilisation funds are not yet reflected within the SDRF framework. Discussions are ongoing about how best to leverage private-sector investment.

Source: Hearn, S. and T. Zimmerman (2014), A New Deal for Somalia? The Somali Compact and its Implications for Peacebuilding, Center on International Cooperation, New York University, New York, available at: http://cic.nyu.edu/publications/new-deal-somalia-somali-compact-and-its-implications-peacebuilding.

Multilateral funds for peacebuilding and statebuilding include the UN Peacebuilding Fund, the World Bank State and Peacebuilding Fund and the African Development Bank Fragility Facility. These are able to make disbursements across fragile situations. The funds aim to test innovative approaches and to catalyse longer term support to scale up effective initiatives based on regionally, nationally or locally owned fragility assessments and priorities. An advantage of these funds is that they can be targeted to innovative local, national and regional plans for reducing fragility.

Innovative aid instruments and partnerships are needed for fragile situations

More innovation and more investment to test new ideas are needed to meet the challenges of achieving results in fragile situations. Aid innovations could be more closely linked to rewarding growth in domestic revenue generation. New opportunities will arise as access to technology – and the energy sources it requires – expands. A growing number of Southern actors and non-traditional providers of development co-operation are now testing new approaches to demand-driven institution-building initiatives. Greater efforts can also be driven into funding regional capacities and joint innovations.

“ Matching funds ” models can match ODA to transparent public financial management, growth in tax revenues and the use of remittance revenues. The advantage of these models is that they can support domestic revenue generation. Unless correctly calibrated, they also have the potential to penalise countries that are challenged to raise revenues quickly.
New technology and communications are already facilitating direct cash transfers for social protection and salaries. These mechanisms do not require heavy state bureaucracies to be developed before individuals can access social protection support or pay from the state. They also reduce the potential for corruption.
South-South and triangular co-operation and non-traditional donor models provide opportunities for actors from countries that have recently experienced transitions and poverty reduction to bring their empathy, political awareness, and relevant technical skills and experience to bear in fragile states (UNSG, 2011). Southern actors have demonstrated a high level of tolerance for risk and flexibility in supporting nationally defined priorities. This is because all support responds to specific demands rather than traditional donor aid frameworks. Southern actors are experimenting with new forms of development partnerships that draw on the national assets and experiences of countries. Using these tools, the BRICS, Gulf states and Turkey are increasingly active in fragile situations. The experiences and impact of these new approaches can offer valuable lessons, and significant opportunities exist to scale up South-South and triangular co-operation.
Building regional capacities to address fragility. An array of regional and sub-regional institutions aims to reduce the transnational drivers of fragility and to build regional peace and security capacity. For example, the African Union’s African Solidarity Initiative was launched in 2012 to mobilise regional state and non-state support for post-conflict countries in Africa. The West Africa Coastal Initiative (WACI) is an example of regional co-operation among the Economic Community of West African States (ECOWAS), Interpol and the UN to address organised crime. The Intergovernmental Authority on Development (IGAD) – an eight-country bloc of countries in the Horn of Africa, Nile Valley and Great Lakes – pursues co-operation in development, peace and security. It has mobilised civil servants to support institutional development in post-conflict countries in the region, including South Sudan. Supporting institutional development and building implementation capacity of regional institutions will be a smart way of empowering national and regional actors to meet regional challenges, and to develop nationally and regionally owned solutions to fragility.

Box 4.3. (Q.8) Demand-driven South-South and non-traditional donor co-operation in fragile situations

Brazil has provided innovative “whole-of-government” support, which draws on Brazilian government skills in areas including security, justice, agriculture and urban planning. In Haiti, Brazil provided peacekeepers and supported justice and urban police reforms, which drew on Brazil’s relevant experience in safety and security in urban dwellings (Muggah and Szabó de Carvalho, n.d.).

Turkey has introduced a hybrid public-private, civilian and military partnership model of support to Somalia that pools governmental, civil society and private-sector resources and expertise for the country. Turkey’s approach is to draw upon its own experiences and expertise in public and private models of development to support Somali infrastructure and institutional development (Murphy and Woods, 2014).

The India, Brazil and South Africa Fund is administered by the United Nations Development Programme and financed by the three countries. It provides support for demand-driven projects such as rapid South African support for emergency prison reform in South Sudan (Lucey et al., 2014).

Aid can be used to leverage new sources of development finance and private investment

Table 4.2 (Q.8) summarises financial flows as a percentage of GDP to least developed countries (LDCs) and lower middle-income and upper middle-income countries on the list of fragile states and economies. Private and public finances are low as a percentage of GDP. In the post-2015 period, it will be crucial to support capacities for sustainable growth in these fragile situations. This includes scaling up low and lower middle-income countries’ capacity to negotiate complex private-sector and infrastructure deals and leverage international public financing to attract private investment.

Table 4.2. (Q.8) Sources of finance for fragile situations, by income group, 2012
% of GDP
Flow	Fragile least developed countries (%)	Fragile low and upper middle-income countries (%)
Official development assistance excluding debt relief	6.73	1.08
Remittances	6.64	4.85
Foreign direct investment	3.51	1.48
Other official flows excluding debt relief	0.15	0.05
Sources: Remittances, FDI and GDP from World Bank (2014a), “Foreign direct investment, net inflows (% of GDP)”, World Development Indicators (database), available at: http://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS; FDI as a percentage of GDP converted to USD using World Bank (2014b), “GDP figures (in current USD)”, World Development Indicators (database), available at: http://data.worldbank.org/indicator/NY.GDP.MKTP.CD; World Bank (2014c), “Personal remittances, received (current USD)”, World Development Indicators (database), available at: http://data.worldbank.org/indicator/BX.TRF.PWKR.CD.DT; OECD (2014c), “Detailed aid statistics: ODA official development assistance: Disbursements”, OECD International Development Statistics (database), https://doi.org/10.1787/data-00069-en; OECD (2014d), “Detailed aid statistics: Other official flows OOF”, OECD International Development Statistics (database), https://doi.org/10.1787/data-00075-en.
https://doi.org/10.1787/888933185209

A range of financial instruments can also help countries to leverage private finance. These include risk guarantees, new debt instruments and equity investments. All are beneficial because they can leverage private finance for infrastructure, jobs and growth and contribute to aligning private and public incentives and goals. The impact of these new instruments in mobilising private development finance is likely to be far greater in fragile than in non-fragile situations. That is, they attract investment that would not otherwise be made available in riskier contexts with lower investor confidence (OECD, 2013b). Table 4.3 (Q.8) summarises the functions and benefits of these instruments.

Table 4.3. (Q.8) Leveraging new development finance
Instrument	Source	Function	Benefits
Risk guarantees	International finance institutions (and the Overseas Private Investment Corporation, OPIC)	The guarantor agrees to pay the amount due on a loan, equity or other investment in the event of non-payment or loss of value.	Leverage private loans or equity for development that would not otherwise be mobilised.
Direct equity and investment shares	Official flows, private flows from non-governmental organisations and foundations, market-based financial flows	Raise investment in companies.	Direct investment by highly rated investors (e.g. aid agencies) increases the creditworthiness of a company and attracts finance.
Asset-backed securities	Official flows, private flows (mainly Islamic development finance institutions, commercial banks, investments funds)	Common in Islamic finance. Loans are secured through a pool of underlying assets that cannot be individually sold. Returns are derived from the value of assets.	Mobilise loans for development. Have become popular in developing countries since the global financial crisis.
Source: OECD (2013b), “Possible update to classification of types of finance: Revised proposal”, Working Party on Development Finance Statistics, DCD/DAC/STAT, OECD, Paris.

International financial institutions and development finance institutions are key sources of public finance for leveraging private investment. The International Finance Corporation of the World Bank (IFC) and the African Development Bank (AfDB) have committed to increasing these investments in fragile states. For example, in Côte d’Ivoire, the IFC loaned approximately USD 125 million for expansion of the Azito thermal power plant, as part of a USD 350 million debt package involving several other development finance institutions. The expansion will allow the mobilisation of another USD 450 million in FDI.

However, the poorest and most fragile countries are not drawing on the full complement of instruments to exploit potential sources of development finance, and uptake of instruments among bilateral donors and fragile countries is low. For example, fragile states benefited from less than 23% of finances leveraged through risk guarantees between 2009 and 2011 (Table 4.3 [Q.8]).

The disincentives to apply these instruments in fragile situations may include:

A lack of knowledge by policy and private-sector actors about new instruments.
A lack of experience in designing safeguards in fragile situations.
Weak legal systems and enabling investment environments that cannot reliably enforce contracts or set the policy conditions for complex deals. (Commercial and property laws and policies receive less attention in post-conflict situations than other immediate needs.)
The need for the current OECD-DAC system to better reflect and incentivise the ways in which donors are engaging with the private sector, including through the use of market-like instruments such as risk guarantees and equities. Work has already been carried out in developing a modern Development Assistance Committee (DAC) taxonomy of financial instruments and methodologies to measure private-sector resources mobilised through public actions, for example through guarantees (Mirabile et al., 2013).

Table 4.4. (Q.8) Funds leveraged by risk guarantees in fragile and non-fragile states, 2009-11
Fragile vs. non-fragile subtotal	Amount of foreign direct investment mobilised (USD million)	% of total
Fragile	3079.2	22.8
Non-fragile	10442.7	77.2
Total1	13521.9
← 1. Excluding “country not specified” or “multiple regions” (Mirabile et al., 2013).
https://doi.org/10.1787/888933185210

The risks of investing more in fragile situations can be managed

The potential for operational failure, financial losses and risk to national and international aid workers is real. Development partners should explore and develop effective practices to share and jointly manage risks in order to reach the poorest households and communities.

Risk management involves identifying financial, operational and project risks – and weighing these against the potential benefits. Every government and institution has a different system for risk management, and the combination of these disparate systems does little to improve the coherence and complementarity of aid or government interventions, or improve donors’ risk tolerance. Harmonisation of systems is difficult to achieve. Different stakeholders have different objectives, incentives, definitions, funding mechanisms, information and intelligence – and all of these are often at odds with one another or not shared. This inhibits a co-ordinated effort. The negative consequences of disjointed efforts and risk aversion can then fall on fragile states and economies with the weakest capacity to handle them.

There are ways partners can share risk and improve joint risk management in fragile situations, and efforts are underway in the OECD to rethink practices and to draw on lessons from private-sector actors:

At minimum, international and national actors can adopt common definitions of risks and a common risk management framework. More ambitiously, donors could develop a set of common minimum risk management standards for use in fragile settings.
Guidelines should be introduced for joint donor and government risk management assessments. Joint assessments can improve harmonisation of risk management strategies.
Be open and realistic. In many fragile contexts, aid workers are asked to manage and deliver projects, but have limited freedom to move and limited ability to form local relationships and to understand location conditions and risks. This poses obvious constraints for aid project quality and management. Donors working in fragile situations will need to continually assess risks versus reward, and adopt corresponding risk management practices to accommodate their goals and operational risk tolerances (Jacquand and Ranii, 2014).

Accountability for the impact of aid could be improved

Aid is undergoing a small but important renaissance of learning. Rigorous impact evaluation, both quantitative and qualitative, is getting greater investment from the policy community and academia. More attention is also being paid to identifying the mechanisms through which interventions work (or do not work) and the range of contexts in which particular project designs can be expected to function. Still, more investment in learning will be needed. Donors also will need to build evaluation designs that explore how projects intersect and interact, rising above project-level analysis to understand portfolio effects. Across the board, more systematic and comparable aid evaluations could help to advance knowledge and improve aid design and delivery.

At the local and national levels, fragility assessments and agreement of mutual priorities offer opportunities for governments and societies alike to hold aid more accountable. At the international level, many fragile countries and economies are on the agenda of the UN Security Council. As a result, their political and security progress is regularly monitored. No part of the global governance system, however, currently holds the international community to account for the quality of institution building and alignment of aid to national priorities in fragile situations.

In the post-2015 period, peer review and oversight mechanisms could help to inject political momentum into aligning priorities and improving the impact of aid in fragile situations.

Sources of development finance need to be scaled up for reducing fragility

ODA will continue to fill an important finance gap in the fragile countries that find it hardest to raise domestic revenue and attract international private investment. Chapter 3 of this report highlighted how many fragile situations are starting from a lower base of domestic revenues, FDI and remittances. In 2015, international negotiations on financing for development will play a pivotal role in enabling – or constraining – progress in fragile situations. Over 2014, the OECD DAC in its discussions explored various aid targets to countries most in need, including a target to allocate 50% of net ODA to the most vulnerable. Most recently it has called in a high-level meeting communiqué for increases in ODA to countries most in need, including LDCs and fragile and conflict-affected states (OECD, 2014g). It has agreed to commit to reversing the declining trend of ODA to LDCs, a significant number of which are fragile. It will also be crucial to live up to the UN target of 0.15-0.20% of gross national income (GNI) as ODA towards LDCs, a commitment which some DAC members recently reconfirmed (ibid.) – but not all.

The post-2015 financing framework will also need to address under-investments in aid in some countries and track sources of development finance for all countries that are vulnerable to fragility in the post-2015 era. Question 4 highlighted the need for more non-concessional loans to fill development finance gaps in middle-income countries.

On a global level, there are significant gaps in development finance data, and only an imperfect picture of total non-ODA sources of finance available for development. A system is needed to collate credible, accurate, timely and relevant global statistics for all available sources of development finance – not just from DAC donors, but also from non-traditional providers of development finance and private actors. Monitoring will need to more closely track results and financial flows for achieving national and international goals and targets in the future.

Next steps: A possible roadmap

The post-2015 debate offers a historic opportunity to reconsider the international approach to fragility and financing. Key decisions can be made about better tracking of fragility risks and financing to address fragility at a universal level, and about better ensuring that the poorest and most vulnerable countries and communities get the scale and quality of support they need to pursue nationally owned priorities.

These decisions will determine the trajectory of sustainable development for the security and well-being of people everywhere. The process of setting goals and targets and agreeing on a financing for development framework sets the stage for innovative approaches and thinking. Measures outlined in this report could facilitate discussions or decisions on whether to:

Introduce a new tool for monitoring universal fragility risks and vulnerabilities and finance flows in the post-2015 era. This report has proposed a working model based on five dimensions of fragility that can form the basis for further international discussion in 2015 and agreement on an international tool when post-2015 goals, targets and indicators have been agreed and as data become available. Future OECD States of Fragility reports could monitor trends across countries in the five dimensions of fragility discussed here, or others, and track resources and gaps in finance available to all of the most vulnerable countries. Tracking of ODA alignment to national peacebuilding and statebuilding priorities can also be improved through introducing updated aid sector codes to the OECD-DAC’s Creditor Reporting System that encompass the post-2015 goals and targets and the PSGs.
Allocate more of total ODA to the poorest and most fragile countries and reverse the declining trend of ODA to LDCs. The existing UN target to allocate 0.15-0.20% of national income to least developed countries is an important guide. Imbalances in the distribution of ODA across fragile situations can also be rectified by addressing the persistent issue of underfunded “aid orphans”.
Agree on quantifiable targets for mobilising sources of finance beyond aid for scaling up non-concessional resources to middle-income countries; for boosting countries’ own domestic revenues; for firm international commitments to scale up support for public financial management; for reducing the transaction costs of remittances; and for a new global partnership for stemming illicit financial flows.
Agree on targets and norms for tracking spending on global public goods such as peace and security, climate, food security and health.
Adapt traditional aid modalities – such as sector and budget support – to more fragile contexts. These modalities support national ownership and capacity by harmonising and disbursing aid through national systems.
Test innovative smart aid modalities that reward national reforms such as domestic resource mobilisation; that are demand-driven by national actors; that enable multi-sectoral approaches; that build trust and quality – not just quantity – of services; that make more use of technology for reaching the poorest and most vulnerable people; and that scale up South-South, regional and triangular co-operation.
Scale up the use of public finance instruments that leverage private finance – by expanding awareness of potential instruments and incentivising their use through updating of ODA eligibility and reporting requirements.
Ensure that peer reviews and oversight mechanisms capture performance and accountability of aid actors in fragile situations, to enable knowledge sharing and to improve the impact of aid.
Implement a global system for collating credible, accurate, timely and relevant global statistics for all sources of development finance – not just from traditional donors, but non-traditional providers of development co-operation and private actors too.

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Notes

← 1. An example was the Accra Agenda for Action of 4 September 2008, available at: http://siteresources. worldbank.org/ACCRAEXT/Resources/4700790-1217425866038/AAA-4-SEPTEMBER-FINAL-16h00.pdf.

← 2. New market opportunities in Asia are widely described. See, for example: http://blogs.wsj.com/corporate-intelligence/2014/05/15/why-made-in-ethiopia-could-be-the-next-made-in-china; www.worldbank.org/en/results/2014/04/11/cambodia-trade-development-support-program; www.worldbank.org/content/dam/Worldbank/document/EAP/cambodia/Cambodia_EAP_Update-Oct2013_ENG.pdf; www.bloomberg.com/news/2014-07-22/ethiopia-becomes-china-s-china-in-search-for-cheap-labor.html.

← 3. Notably: www.rescue.org/blog/mapping-evidence-base-conflict-and-post-conflict-contexts. See also, www.3ieimpact.org/en/evidence/impact-evaluations/impact-evaluation-repository.

← 4. For example, see the audits produced by the Special Inspector General for Afghanistan Reconstruction, available at: www.sigar.mil.