Studies in Fragility

"Donor countries need to be careful that their generosity in supporting emergency relief efforts in the areas devastated by the tsunami does not divert funds from existing foreign aid programs. We must ensure the world's poor and fragile countries do not suffer cutbacks in aid and are not forgotten."
-- James D. Wolfensohn, World Bank president

January 10, 2005— Two new studies have warned that turning the aid tap on and off to some of the world's poorest countries can do more harm than good.

The studies, commissioned by the World Bank and the OECD Development Assistance Committee examine different aspects of what the OECD calls "difficult partnership countries" low income countries with weak policies and institutions.

One study says the countries - also known as fragile states or LICUS countries (Low Income Under Stress) - have a dramatic adverse economic impact on their neighbors.

A Costly Neighbor

The study by Lisa Chauvet and Paul Collier, Professor of Economics and director of the Center for the Study of African Economies at Oxford University, estimates that two thirds of the economic damage done by a fragile state are costs imposed on its neighbors.

It estimates the cost of the average fragile state is  $100 billion - twice the global aid budget.

Titled Development Effectiveness in Fragile States: Spillovers and Turnarounds, the study also says without assistance, countries in a "fragile state or LICUS status" are likely to be that way for decades, and they lose their neighbors 1.6% in lost GDP every year. 

"There is a high cost to doing nothing and letting these countries stew in their own juice, "Collier says. "So really the question is how to use aid efficiently. It's not just a matter of aid anywhere and at any time for these countries."

Getting It Right

The fragile states or LICUS countries have the greatest need, but are often the most difficult environments in which to create sustainable aid programs, according to the World Bank's Victoria Levin and David Dollar, authors of  a new study, The Forgotten States: Aid Volumes and Volatility in Difficult Partnership Countries.

Their study finds substantial diversity within the group of fragile countries, including the existence of "aid orphans" - poor countries with weak institutions that are all but forgotten by the aid community.

Findings also show the overall level of aid given to fragile states is two times more volatile than that given to other low income countries - a result the authors call troubling.

More or Less

Despite the tremendous need for and obstacles to development in the difficult
partnership countries, the study cites a widening gap in aid allocations between those fragile states and other low income countries.

In the last decade, Levin and Dollar say the largest amount of aid has gone to middle income countries.

And they say the future looks even bleaker for some of the world's most fragile states...

"We draw a very discouraging picture regarding aid that will be disbursed to these fragile  countries for years to come," they say.

Orphans Lose Out

Overall, Levin and Dollar say the countries they call the - "aid orphans" -- receive about 40% less aid than what they could absorb - primarily because of the disproportionately low flows from bilateral donors.

	International support for improvements in policies comes not only through financial and technical aid but also through dialogue and diplomatic engagement. Aid orphans receive less aid and they may also have fewer donors, indicating they are likely to have lower levels of diplomatic engagement.

The authors say the "aid darlings" - similar low income countries with weak institutions - attract more aid dollars.

In general, the significant characteristic of "aid darlings" seems to be their emergence from conflict.  Donors, it seems, increasingly take advantage of opportunities to support post-conflict countries. This fits with previous research by Paul Collier which identified the high returns to aid investments after a conflict.

Unpredictable Aid

The authors say one of the more troubling findings of their report is the high level of aid volatility to the fragile states.

"Aid to these difficult partnership countries comes in spurts - one year the majority of donors can be moved by the suffering of people in one of the countries, and the next they could all move on to alleviate the poverty in other difficult partnership country," they say.

"This makes aid flows unpredictable and such aid volatility could put an additional strain on already-struggling institutions of these countries."

The study emphasizes that turning off and on the aid tap creates an excessive burden on the struggling economies. There is a need for longer term donor commitment to produce results in countries with weaker capacity.

"Turning the tap of aid on and off frequently may therefore be the wrong way to achieve the results donors are looking for."

With the fragile states facing far greater development challenges than other aid recipients, the report says it's important for the donor community to "look more closely at their aid allocation patterns to the forgotten states."

Getting it right

In their study, Collier and Chauvet warn against the donor community simply providing technical assistance to the fragile states to help get them out of their situation.  They say their results suggest technical assistance is primarily effective only after domestic leadership have launched a reform process.

They also note it is important to get aid interventions in the right order. They say prior to reform, donors should support long term initiatives, particularly in education. After a reform opportunity appears, there should be rapid technical assistance followed by a scaled up aid program.