1. Art and Diseño

BRIEFING NOTE
Fragile and conflict-affected states: the new norm in development finance recommendations for negotiators
There has been limited focus in Financing for Development (FfD) negotiations on issues related to
Fragile and conflict-affected States (FCAS). The emphasis has been placed on ‘source’ and ‘quantum’
of finance rather than ‘how’ and ‘where’ it is delivered. In this note International Alert analyses,
through applying an FCAS lens, the January 2015 Preparatory Process Elements paper (‘the Paper’)
to coincide with the first drafting session on 27-29 January 2015. It provides recommendations on
how FfD negotiations might better reflect the particular needs of this group of states that will grow to
represent the mainstay of international efforts to alleviate extreme poverty. A summary of this
document is available at www.international-alert.org
Context – why a focus on FCAS?
The centre of gravity of global poverty has shifted and will continue to shift. It is estimated by the
OECD that in 2015 half of the World’s people surviving on less than 1.25 dollars a day will be found in
fragile situations. This figure will climb to around 75 per cent by 2030. So for finance directed at
reaching the poorest, delivering in fragile and conflict environments will be the new norm. Further
complicating this new reality is the fact that while most countries in fragile situations were lowincome a decade ago, today almost half are middle income 1.
What makes increasing attention on FCAS so urgent in the FfD process is that it was this category of
states that made the least progress against the MDGs. The majority of MDGs will not be met in
fragile countries and six of the seven states who will not meet any of the MDGs at all are FCAS. But
more development finance does not correlate to more peace. To reduce the likelihood that such
states will be left behind again we must increasingly tailor the way finance is mobilised and delivered
in such contexts.
FCAS have often faced the greatest challenges in mobilising finance. Fragile states struggle to
attract FDI, with three-quarters of FDI to fragile states going to just seven countries, all resource rich.
Trade deficits outweigh new FDI inflows two to one and about half of fragile states are expected to see
a drop in programmable aid between 2012 and 2015 despite ODA remaining their largest inflow.
FCAS are likely to lose more in illicit outflows than they receive in aid.
1
OCED, ‘Fragile States 2013: Resource and Trends in a shifting world’ page 11
1
The ability to mobilise finance and the effectiveness of its implementation are highly affected by the
presence of violence and conflict. Indeed, conflict, whether open conflict or criminal violence
undermines and reverses finance mobilisation. The experiences of Ukraine, Syria and Central African
Republic attest to this. The average cost of a civil war is equivalent to more than 30 years of GDP
growth, meaning far less domestic resources available to promote development. It also acts as a
significant deterrent for Foreign Direct Investment (FDI) apart from that attracted by war economies.
FCAS are also prone to relapse into conflict. Conversely, investment in peacebuilding and
development that addresses the underlying drivers of conflict (e.g. aiding reconciliation programmes)
makes financial investments more sustainable, effective and durable helping to avoid future conflicts
and building resilience against destabilising shocks. It is often the case that responses to insecurity
follow a train and equip model. Serious and durable solutions to the challenges facing FCAS will need
to go far beyond this approach to address the causal social tensions and fractures that such societies
face with a focus on people’s security.
Finance also interacts with the context. The way financing for development is delivered can be a force
for stability but it can also have negative, albeit unintended, consequences. Taking a conflictsensitive approach can help mitigate the later. This means, based on a strong understanding of the
local context and drivers of conflict, adapting the way that finance is mobilised and delivered. The
need for such an approach applies irrespective of the source of finance – traditional and nontraditional donors, multilateral, national public, international or domestic private. Indeed, large
influxes of money can in some circumstances be counterproductive, reinforcing grievances such as
those around corruption and inequality unless carefully adapted to the political, security and
development context. Flows of finance can also further entrench the structural factors such as
inequality that drive conflict. Increasingly it is becoming clearer that inclusive political settlements
and sufficient levels of reconciliation are required before large sums of finance are directed towards
statebuilding.
Beyond making finance conflict-sensitive, the way in which it is mobilised and applied has great
potential to enhance peace and stability whether that is through national development and finance
strategies or through the individual and collective efforts and actions of international investors or
domestic enterprise. Overall, taken together, it represents an opportunity to ‘promote peace
conducive economies’. These are economies which are conducive not just to prosperity but also to
sustaining peace. In other words an economy which motivates people to act peacefully, resolving
their conflicts without violence, and in which the presence of positive peace enables economic
improvement in a virtuous circle. This reflects the concept that lies at the heart of the proposed SDG
16 – that peace and security is a pre-requisite to development, growth and prosperity and that these
again, reinforce peace.
A basis for negotiation?
The challenge for those negotiating the next generation of financing commitments will be recognising
the degree to which FCAS will influence effective implementation. As with most UN processes,
negotiations build upon what has gone before – in this case the 2002 Monterrey consensus and 2008
Doha Declaration. We know much more now about the challenges of operating in FCAS and their
2
specific needs related to finance than we did when Monterrey was concluded. Indeed, Monterrey did
not consider FCAS at all. Doha recognised FCAS as a class of states requiring attention but did not
articulate a way forward. As such, the negotiation base for the current round of discussions is
insufficient to reflect the realities articulated above and some innovation is required.
While the Intergovernmental Committee of Experts report faced the same challenges in addressing
issues related to FCAS it did usefully reaffirm that financing remains ‘ rooted in the principles
expressed in the…United Nations Millennium Declaration ’ which includes ‘peaceful and inclusive
societies’2. This recognition highlights that the promotion of peaceful societies should lie at the core
of our ambitions when considering the mobilisation of the resources designed to implement the
SDGs. This language could provide a useful complement to the existing FfD framework as
negotiations are taken forward.
Elements paper narrative
In the Elements paper there has been a clear attempt to recognise FCAS as requiring special
consideration. It notes that ‘additional international public and private finance flows are needed in
…conflict-affected countries’ and that shocks, including conflict ‘cost billions of dollars to address
and threaten to undo all we have achieved on development ’. It does also recognise the continuing
importance of ODA to FCAS.
But in other ways it underplays the significance of FCAS in the overall financing narrative (as the new
norm) and particularly that of peace and stability. For example, while peace and stability are
prerequisites for finance and investment, it is not listed amongst the factors of an enabling
environment3.
Making this link is the first step. Building on this would be moving beyond acknowledging ‘special
needs’ of FCAS to acknowledging a need for an adapted way of working or ‘conflict sensitive
financing’. This means not just avoiding harm but also making a positive contribution to peace
through addressing the underlying drivers of conflict. Indeed, policies to mobilise finance including
national finance strategies need, where related to FCAS, to integrate peacebuilding as resources are
intimately intertwined with both conflict and stability. Thirdly, drawing a link with overall
effectiveness, given most of the World’s poor will increasingly be concentrated in fragile states, is
essential. This tailoring pairs well with the second of the Paper’s four overall policy ideas, ‘matching
the financing flow with appropriate needs and uses’. 4
A conflict-sensitive approach: is based on a strong understanding of the local context and drivers of conflict
and adapting the way that finance is mobilised and delivered. This is not just avoiding harm but also making a
positive contribution to peace through addressing the drivers of conflict and strengthening the drivers of peace.
2
‘UN Committee of Experts Report’ PP 18 Page 4
Elements paper page 1
4
Elements Paper Policy ideas Annex page (i)
3
3
1.1 Recommendation: In recognising the special circumstances of FCAS highlight the need to adapt
the way finance is mobilised and delivered by applying a conflict-sensitive approach that both avoids
unintended consequences and reinforcing factors for peace
1.1.1 Include a dedicated section in the outcomes document on FCAS given patterns of
poverty and the impact fragility and conflict has on mobilising finance
1.2 Recommendation: Recognise the need to address the drivers of conflict not just technical capacity
constraints to promote finance mobilisation
1.3 Recommendation: Recognise the promotion of peace as a dimension of the effectiveness,
sustainability and quality of finance
1.4 Recommendation: Include peaceful societies amongst the list of environmental enablers for
finance and acknowledge the need to look at creative financing modalities where other enablers
remain underdeveloped
1.5 Recommendation: Cite the Peacebuilding and State building Goals linked to the New Deal as
frameworks to promote effective development finance in FCAS
Some sections of the paper only reference LDCs despite the issues having particular resonance for
fragile states. This suggests FCAS are being conflated with LDCs, masking the reality that around
half of all FCAS are actually MICs5. There is still further diversity amongst this grouping. Conflict can
also effect otherwise stable middle income countries, generally at a sub-national level (e.g. Thailand,
Philippines, Indonesia) as well as Middle Income Fragile States (MIFS) (e.g. Pakistan, Nigeria, PNG,
Libya). Criminal orientated violence such as that experienced by Mexico and other Latin American
states also requires attention. Overlooking this reality is problematic as otherwise stable MICs and
MIFS, require different forms of financing and support than Low Income Fragile States. For example,
ODA is likely to be increasingly less relevant to MIFS. Dependence on ODA though will not diminish
across the board for this group. Those fragile states that have attained MIFS status have often done
so on the back of a narrow set of finance streams, particularly extractives resources (e.g. Papua New
Guinea, Nigeria), and have lacked either the will or capacity to translate such growth into addressing
the significant levels of poverty, inequality and insecurity that persist within their borders.
1.6 Recommendation: Distinguish between LDCs and FCAS and between Middle Income Fragile
States (MIFS) and Low income fragile states when considering needs and modalities
While the Paper considers and links sustainable development to financing and investment it does not
give specific attention to direct funding for peacebuilding. In the longer term this is necessary to
sustain an environment conducive to investment, ensure the effectiveness and sustainability of
finance and avoid ‘shocks’ such as relapses into conflict that radically reverse finance flows and
growth trajectories. Financing dedicated peacebuilding alongside other national priorities is
therefore one means to promote financial resilience or sustainability. It also boosts investor
confidence that their investments will be able to avoid conflict or ride out periods of decreased
stability.
5
OCED, ‘Fragile States 2013: Resource and Trends in a shifting world’ page 11
4
Currently and increasingly, peacebuilding funding is being directed at the point of crisis. This is too
late in the context of safeguarding economic investments and maintaining a climate for new
investment. Failing to address drivers of conflict ‘up-stream’ whether political, social or economic
also costs lives and erodes social cohesion, human and economic capital for generations.
This issue was specifically identified by the OECD as a key gap in the financing agenda in its 2014
Development Cooperation Report: mobilising Resources for Sustainable development . It states that
peace and security are ‘key, if underappreciated prerequisites for sustainable development’ 6. It also
highlights that the Peacebuilding and Statebuilding Goals agreed by 41 members of the New Deal for
Engagement in Fragile state have not been fully matched with funding yet.
1.7 Recommendation: Give specific reference to the need to fund peacebuilding initiatives to enable
investor confidence, avoid future shocks, promote sustainable investments and effectiveness.
In summary, this translates into the following macro policy imperatives, including:

The need to acknowledge working in FCAS environments will represent the mainstay of
financing efforts to address extreme poverty for the foreseeable future;

The need to tailor and adapt financing modalities to Fragile and conflict-affected Situations
(recognising things take longer and are more complex and more risky), including as between
MIFS and Low Income FCAS;

The need to deliver finance in a conflict-sensitive manner across all forms of finance to avoid
creating or exacerbating fragility and conflict;

The need to try to ensure that finance and fiscal policy setting actively contributes to peace
and stability; and

The need to recognise that peace and stability will be crucial to effectiveness.
Domestic public finance
The Paper recognises that ‘administrative capacity to raise public revenue remains weak particularly
in conflict-affected countries’7. Indeed, domestic revenue represented only 14 per cent of GDP of
fragile states in 20118. There is a clear need to improve the way domestic finance is mobilised
keeping in mind the challenges that some FCAS, particularly low income states, face in this respect.
The way in which finance is managed at the national and subnational level is also important and can
have a profound impact on peace and security. Instability, in turn reduces incentives for domestic
savings and investment with populations focused on their immediate rather than long term future.
In the Paper’s discussion on domestic financing it highlights that ‘effective use of resources must go
hand in hand with their mobilisation’. As discussed earlier conflict-sensitive finance is essential to
effectiveness.
6
OECD 2014 Development Cooperation Report: mobilising resources for sustainable development chapter 19 page 220
Elements paper page 3
8
OECD 2014 Development Cooperation Report: mobilising resources for sustainable development chapter 20 page 233
7
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It goes on to state that ‘fiscal policies need to be consistent with macroeconomic stability, equitable
growth, social transformation and sustainability’ noting that, ‘revenue/expenditure decisions are often
not in line with sustainable development criteria’ and can sometimes have ‘negative consequences for
inequality’9. As a policy idea the paper encourages the adoption of national sustainable development
financing strategies or frameworks and the mainstreaming of sustainable development criteria in
revenues and expenditures10. Fiscal policy and expenditure practices also need to be consistent with
peacebuilding needs in FCAS contexts where development, economic and security are closely
intertwined. The way that resources are disbursed can have a significant influence over local,
regional and national stability. The right fiscal settings can also help revive or build the social
contract between people and their state. In this respect national financing strategies suggested in
both the Elements and Experts papers represent an opportunity to ensure that finance investments
are peace conducive, conflict-sensitive and adapted to the local context.
2.1 Recommendation: Integrate peacebuilding along with sustainable development in National
Finance Strategies to promote a peace conducive finance framework
The paper notes that ‘Good governance’11 is important to sustainable development and reducing
fragility and conflict. Governance, however, is just one of the many ingredients necessary to address
fragility and mobilise finance. Indeed, technical solutions to governance problems, whether that is
corruption, fiscal management or the rule of law will not automatically correlate to more peaceful
and stable states. Instead it is important to address, through appropriate policies and supporting
finance, the underlying drivers of conflict. This refers to the broader spectrum of social and political
challenges as well as institutions beyond those of the state which contribute to or help break cycles of
conflict that undermine prospects for sustainable development finance. In this respect it is important
that policy ideas extend beyond, fighting corruption and promoting transparency 12.
It should also be acknowledged that achieving improvements in things like governance can take
decades in fragile and conflict-affected contexts i.e. beyond the envisaged fifteen year timeframe of
both the SDGs and financing processes. Many states that experience conflict often also relapse
setting back economic development and undermining financial investments. Measured expectations
will be important.
2.2 Recommendation: Look beyond formal governance systems in FCAS to address underlying drivers
of conflict in seeking to create an enabling environment for finance
2.2.1 Highlight the particular impact corruption has on FCAS noting that both technical and
political economy solutions to tackle it are necessary
There are nevertheless some areas where strong government institutions are essential in promoting
peace and stability as an enabler for finance. There is an opportunity to ensure finance and
investment regimes seek to avoid creating conflict with adequate environmental and social
safeguards. This can range from regulation around extractive industries to the formation of special
economic zones. Particular attention will need to be paid to the way the massive upswing in
infrastructure investment is delivered given infrastructure’s role as a trigger of conflict in both fragile
9
Elements paper page 4
Elements paper Policy ideas page (i)
11
Elements paper page 4
12
Elements paper Policy ideas Annex page (ii)
10
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states and more stable developing states. It is also possible to create incentives for investors to invest
in a conflict-sensitive manner and reward actors who do so.
2.3 Recommendation: When creating an enabling environment for finance ensure that appropriate
social and environmental safeguards are in place with capacity to uphold them
2.4 Recommendation: Create incentives for private sector actors to not only avoid the risk their
actions will exacerbate conflict, but also actively to contribute to peace
As with the Experts’ report the elements paper highlights the need to improve tax collection and
administration. Generating sufficient revenue through taxation is a perennial problem for FCAS
where systems are weak and often much of the economy is informal. The OECD identifies in its 2014
Development Cooperation Report, the need to improve tax collection in fragile states as one of its key
recommendations. In certain cases, this can play an important role in catalysing and/or strengthening
accountable state-society relations. It has been a particular challenge for resource rich states which
governments, donors and international initiatives are increasingly trying to address. The OECD
suggests that the level of taxes that a state can raise depends on all three dimensions of fragility –
authority (notably territorial), capacity and legitimacy – all generally at deficit in fragile contexts13.
This suggests the need for a more sophisticated approach to taxation in FCAS that goes beyond
technical fixes.
One of the Paper’s policy ideas is support to broaden the tax base, including formalising the informal
sector14. Improving tax systems must however, be accompanied by improvements in service delivery
and government accountability. States lacking a state-citizen contract, effectively taxing citizens
without providing any recognisable benefits or services, can actually undermine state legitimacy and
promote instability. Therefore, sequencing of tax reform is essential in FCAS. In other words there is
no one-size-fits-all solution to tax reform. Illicit transfers are a particular challenge for FCAS. In
some cases they are worth more than inflows of ODA. There are many examples of illicit financial
flows feeding into and enabling conflict and violence. Illicit financial flows have funded rebel groups,
terrorists, organised criminals and governments in places such as Nigeria, Cambodia and Myanmar,
Liberia and Mexico. The Paper’s policy idea to enhance mechanisms to address tax evasion is
welcome but consideration should be given to what more might be done (see Systemic issues section
of this note).
2.5 Recommendation: Tailor and sequence tax reform in FCAS relative to the local social and political
context
As with the Experts report, the Elements Paper identifies finance from natural assets as a critical
means through which to mobilise resources. The paper suggests that the ‘public share of earnings
from resource extraction in resource-rich countries is often inadequate, inequitable and volatile’15. In
its policy ideas it also emphasises the need to ‘ensure the public share of economic rents in resourcerich countries is equitable and stable’16. This is doubly the case in FCAS - one-in-four fragile states
on the DAC list possess significant natural resources17. Added to this is the challenge of translating
13
OCED, ‘Fragile States 2013: Resource and Trends in a shifting world’ page 47
Elements Paper Policy ideas Annex page (i)
15
Elements paper page 4
16
Elements paper Policy ideas Annex page (i)
17
OCED, ‘Fragile States 2013: Resource and Trends in a shifting world’ page 12
14
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such rents into sustainable development while managing the potential for local conflict appropriately.
There are countless conflicts that relate to, were triggered by or are sustained through the
exploitation of natural resources. The World Bank 18 noted in research on the subject that an
otherwise typical country that has primary commodity exports around 25 percent of GDP has a 33
percent risk of conflict, but when such exports are only 10 percent of GDP, the risk drops to 11
percent. At the same time extractive revenues, when harnessed properly and in a way that manages
the potential local drivers of conflict (such as displacement of populations, inequitable sharing of
resources, etc.) can be highly beneficial to a countries path out of fragility and conflict. In this respect
the paper could more strongly highlight the particular challenges of FCAS in managing natural
resources.
The paper presents some strong and constructive Policy ideas related to natural resources, including,
strengthen government capacities to successfully participate in the extractives sector and promoting
the establishment of commodity stabilization funds and encouraging countries to implement the
Extractive Industries Transparency Initiative. It is important though, when establishing new systems
and fostering an enabling environment for investment that appropriate safeguards and policies are in
place that not only prevent instability but that help states maximise the rents received. Consideration
should also be given, within this approach to strengthening civil society oversight of the extractive
sectors. Further clarity around what strengthening government capacity actually means is also
necessary.
2.6 Recommendation: Ensure that assistance for FCAS goes beyond capturing additional natural
resource rents to support that helps translate this finance into sustainable peace and development
outcomes
2.7 Recommendation: Ensure robust natural resources safeguard measures are put in place in
developing an investment enabling environment including through enhancing civil society oversight of
the sector
The Elements Paper considers budgeting but devotes less attention than the Experts report 19 to
budget processes and execution that take an inclusive approach to resourcing. This is however very
important in FCAS, particularly where groups or regions experience economic and social exclusion
and where an absence of infrastructure and services contributes to grievances that fuel conflict and
in turn create barriers and disincentives for growth and development. For example, the relative
marginalisation of the south of Sudan from oil-wealth, infrastructure development, social services
and economic growth was a significant contributor to what was Africa’s longest civil war.
2.8 Recommendation: Promote inclusive budget and resource planning
18
19
World Bank, Natural Resources and Violent Conflict: Actions and options 2003 page 3
‘UN Committee of Experts Report’ PP 70 Page 20
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Domestic and international private finance
Given private sector finance and investment will increasingly dwarf public international finance,
especially in Middle Income Fragile States, an FCAS approach is even more important for private
domestic and international finance.
The three of the basic policy imperatives so far reflected remain relevant:



The need to deliver finance in a conflict-sensitive manner to avoid creating or exacerbating
conflict;
The need to tailor and adapt financing modalities to FCAS contexts; and
The need to take advantage of opportunities for finance and fiscal policy to actively promote
peace and stability.
The greatest disincentive for both domestic and international investors remains the presence of
insecurity and conflict which generates higher risk to capital, human resources and promote political
uncertainty and cost increases.
Fragile states struggle to attract FDI, with three-quarters of FDI to fragile states going to just seven
countries, all resource rich20. Overall, trade deficits outweigh new FDI inflows two to one 21. Conflict
focuses individuals and communities on short terms needs rather than on longer term considerations
which correlate to savings and investment. This is problematic as development at the very local level,
and therefore in large sum overall development, is driven by households, communities and local
business. With respect to business, in 2013 the UN Global Compact noted that ‘ peaceful and stable
conditions…are necessary for the private sector to deliver economic and related social benefits
integral to broad sustainable development’22.
Therefore, in the first instance efforts must be put into addressing peace and instability as a
precursor to improved investor confidence. Future financing must be encouraged and housed in a
regulatory framework that avoids triggering new conflict or restarting old with adequate
environmental and social safeguards. This can range from regulation around extractive industries to
the formation of special economic zones. Particular attention will need to be paid to the way an
upswing in infrastructure investment23 is delivered given infrastructure’s role as a trigger of conflict
whether in fragile states or not.24
3.1 Recommendation: Reaffirm peace and stability as a prerequisite to attracting private sector
investment
3.2 Recommendation: Pay particular attention to conflict-sensitive financing approaches in the scale
up on infrastructure investments
20
OCED, ‘Fragile States 2013: Resource and Trends in a shifting world’ page 12
OCED, ‘Fragile States 2013: Resource and Trends in a shifting world’ page 45
22
UN Global Compact, Building the Post 2015 Business engagement architecture, 2013 page 17
23
Elements Paper Policy ideas page (iv)
24
‘UN Committee of Experts Report’ PP 33 Page 8 ‘Infrastructure investment required will be in the order of $5-7 trillion’
21
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Other strategies also reinforce stability. The Paper gives attention in its Policy ideas 25 to shaping
private sector behaviour and contributions to sustainable development. This of course should be
extended to reinforcing peace and stability. Development-enhancing linkages between multinational
enterprises and local production activities are important and also contribute to local stability. The
Paper suggests providing incentives for companies to invest in sustainable development and this
should be of course extended to the contribution they can make to peace and stability in FCAS
contexts. It is important to recognise the positive contribution that the private sector can make to
promoting peace. Ideas around implementing the UN’s Guiding Principles on Business and Human
Rights and core labour standards are also move in the right direction.
3.3 Recommendation: Provide incentives for companies to invest in sustainable development AND
actively contribute to peace and stability
3.4 Recommendation: Encourage private sector leadership in conflict-sensitive finance that focuses
on avoiding conflict and contributing to peace, through continued development of good business
practice and the development of global and national standards
3.4.1 Recommendation: Encourage the integration of peacebuilding alongside sustainable
development in company strategies
Reducing risks for private investment is considered in the policy ideas 26 but risks related to instability
and conflict is not amongst them despite it being both a high risk and significant disincentive to
business investment. In this respect addressing the underlying drivers of conflict and capitalising on
drivers of peace is essential to promoting and emailing environment conducive to investment.
3.5 Recommendation: Consider conflict and violence amongst the key risks to business investment
and development finance
Building on the Secretary General’s December Post 2015 synthesis report, the Paper’s suggestion
around revisiting safeguards for multilateral development banks 27 to ensure investments are aligned
with sustainable development is welcome. This should be extended to how investments avoid conflict
and support peace in the context of not only FCAS but developing countries more broadly. Reform is
welcome where these enhance current provisions and increase protections. This is particularly
pertinent for blending (e.g. IFC type arrangements). It notes that ‘blended finance and public private
partnerships offer potential in many areas, but there are challenges in fair and effective
implementation, and countries often lack capacity’.28 The policy idea related to strengthening the
World Bank’s Multilateral Investment Guarantee Agency (MIGA) to enhance its risk mitigation
mechanisms for sustainable development investments is welcome but this should be extended to IFC,
IDA and IBRD funded investments as well. This should reinforce and complement the Bank’s reform
efforts relating to its engagement with FCAS.
25
Elements Paper Policy ideas Annex page (iv)
Elements Paper Policy ideas Annex page (iii)
27
Elements Paper page 5
28
Elements Paper page 6
26
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3.5 Recommendation: Reaffirm the need to review and strengthen World Bank Group safeguard
mechanisms as well as those of regional international financial institutions
3.7 Recommendation: Emphasise the importance of leveraging bi-lateral and multilateral blended
finance for peace positive outcomes
Many of the issues that apply to multilateral blended finance also apply to PPPs 29. In this respect the
Paper’s recommendations are welcome in so far as they encourage greater transparency,
accountability, equity, fairness and sustainability but there needs to be increased clarity around the
application of safeguards in such situations.
One of the key policy ideas falling under this banner of private sector investment is supporting
remittances including lower transaction costs. This has particular relevance for FCAS where
remittances represent one of the few sources of external finance. The DAC in its 2014 Development
Report ‘Mobilising resources for sustainable development’30 singles out remittances as an important
source of development for FCAS. It highlights that remittances provide relatively more stable sources
of income than most other external flows.31
3.8 Recommendation: Reaffirm a commitment to reduce the transaction costs of remittances
Finally the paper, in its policy ideas32, encourages efforts to achieve financial inclusion. It suggests
strengthen financial inclusion strategies at the national level. As suggested previously with fiscal
policy, it is important, when dealing with FCAS to ensure that this integrates a peacebuilding
approach. Moreover, it should not just be geared towards gender inclusivity but also ethnic and
religious minorities where these represents fault lines in a society.
3.9 Recommendation: ensure that financial inclusion relates to both gender but also ethnic, religious
and other minorities
International public finance
As with the other forms of finance it is essential that international public finance is appropriately
adapted to fragile and conflict contexts. This means ensuring that a conflict-sensitive approach to
investments is applied that avoids harm while seeking to actively contribute to peace. There is a
significant level of guidance and literature related to international public finance which gives
guidance as to how to do this effectively such as, the OECD DAC Principles for Good International
Engagement in Fragile States and Situations and the more recent State Building and Peace Building
Goals.
29
Elements Paper Policy ideas Annex page (v)
2014 Development Report ‘Mobilising resources for sustainable development’ Chapter 20 Backing recovery in fragile states
31
OCED, ‘Fragile States 2013: Resource and Trends in a shifting world’ page 12
32
Elements Paper Policy ideas Annex page (iii)
30
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Many donor agencies are working to integrate such approaches into their operational models. This is
in part inspired by the reality that the focus of aid programs was increasingly concentrated in FCAS
but also based on the understanding that it is key to effectiveness and sustainability.
4.1 Recommendation: Donors should recommit to ensuring that their assistance is conflict-sensitive
in not only avoiding creating conflict but also actively seeking to build peace
The paper notes that ODA will remain essential for countries emerging from conflict33. In its policy
ideas, though, reference is only made to increasing ODA allocation to LDCs and other vulnerable
countries’34. As suggested previously it is important to be specific given FCAS straddle both LDCs and
MICs. Middle income status is an increasingly poor indicator of poverty reduction, equitable growth
and security and stability. As such, in deciding eligibility for grants and concessional loans there
needs to be a differentiation between stable Middle Income Countries, Middle Income Fragile States
and Low Income Countries.
In this respect, the Paper calls for a review of graduation criteria and the limits on access to finance
for lower middle income countries35. It further calls for ‘enhancing access to concessional and nonconcessional international public finance’, with ‘non-IDA-eligible MICs remaining eligible to receive
grants in special situations or to address special priority challenges ’36. MIFS clearly fall into this
category and this should be specifically acknowledged. MIFS may have income at a national level but
through lack of will or capacity this is not being translated into poverty alleviation, peace and stability.
4.2 Recommendations: Endorse the revision of finance eligibility criteria, including broaden the
indicators used to assess eligibility to issues including numbers of poor and the presence of conflict.
Low income fragile states remain highly dependent on ODA, representing their biggest financial
inflow. This reality is however set against an expected drop in aid to such states between 2012 and
201537. It is part a consequence of the financial crisis and austerity measures but also a reflection of
a trend towards funding immediate crises rather than longer term investments which represent a
more preventative approach. OECD donor investment in Public Financial Management and domestic
revenue raising is also currently declining in FCAS – a trajectory that needs to be stabilised.
4.3 Recommendation: Recognise that low income fragile states remain highly dependent on ODA the
international community should renew its commitment to properly financing low income FCAS
4.3.1 Recognise that ODA can play a role as an enabler for other forms of finance
The Policy ideas also call on states to increase the effectiveness of aid 38 and development
cooperation. This is where specific reference should be made to conflict-sensitive approaches given
the increasing concentration of those living in poverty in FCAS. Furthermore, international
architecture related to operating in FCAS should be referenced, including the Peacebuilding and
Statebuilding Goals as a means of enhancing development effectiveness.
33
Elements Paper page 6
Elements Paper Policy ideas Annex page (v)
35
Elements Paper Policy ideas Annex page (vi)
36
Elements Paper Policy ideas Annex page (vi)
37
OCED, ‘Ensuring fragile states are not left behind’ 2013 Factsheet
38
Elements Paper Policy ideas Annex page (vi)
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4.4 Recommendation: Recognise the importance of a conflict-sensitive approach to effectiveness in a
poverty landscape increasingly dominated by FCAS. Identify the New Deal and Peacebuilding and
State building Goals as means lens through which to approach more effective aid to FCAS
South-south cooperation39 presents an opportunity for improved development effectiveness. This
takes the shape of collaboration between FCAS (for example the g7+) as well as between FCAS and
those countries which have successfully escaped conflict. In this way such cooperation goes beyond
the sharing of resources to make a contribution to effectiveness more broadly.
The Paper notes that climate change resources are increasingly directed towards MICs rather than
LICs. While climate change is a threat to all states and their sustainable development it has
particular consequences for FCAS creating extra pressure on already limited resources increasing
the chances of conflict. In this respect FCAS should be differentiated from LDCs.
Trade
As with finance broadly, trade can be an important contributor to peace. Conversely, conflict impairs
international, interregional and internal trade through unsafe frontiers and transport routes and the
degradation of infrastructure as well as through generating increased investment risk.
The Paper highlights that Trade ‘requires a national policy framework that enables domestic firms
and workers to capture equitable shares of the gains from trade, while ensuring environmentally
sound and socially beneficial production’40. In the context of trade the same considerations for
encouraging FDI and private sector domestic and international investment should apply in the context
of FCAS. Special consideration should also be given to the liberalisation of subsidies and tariffs. The
sudden removal of subsidies, e.g. on fuel, has led to instability and violence in FCAS (e.g. Yemen) as
well as created social tensions in more stable countries when not dealt with sensitively. Such efforts
should be sequenced with the growth and competitiveness of domestic sectors and balanced against
improving safety nets for the poorest. Trade shocks, particularly in commodities, is a particular
challenge for FCAS reliant on extractives income. The Paper’s suggestion of increasingly
implementing national stabilisation funds is sensible in this respect.
5.1 Recommendation: Sequence trade reform carefully in FCAS to take account of the social and
political context
Systemic issues
The realm of ‘Systemic issues’ tends to focus on the international financial system and institutions
but does acknowledge climate change, disasters and other environmental challenges as posing
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additional systemic risks to sustainable development and poverty eradication 41. Fragility and Conflict
need to be represented equally. Systemic issues lie in local capacity to manage conflict peacefully
and the international community’s capacity to deal with challenges upstream before situations
degenerate into crisis.
6.1 Recommendation: Recognise the need for the international architecture responsible for
development, peace and security to increasingly prioritise upstream interventions that support peace
and promote environments conducive to investment
The creation of new financial institutions, such as the BRICs bank and China Infrastructure Bank offer
opportunities but they will nevertheless face same challenges and carry the same responsibilities in
FCAS contexts. There is however an opportunity to integrate good practice early on to avoid the
challenges that traditional institutions such as the UN, World Bank Group and regional development
banks face. This should be encouraged.
6.2 Recommendation: Recognise that new and emerging financiers bring with them new and
sometimes innovative means of finance mobilisation and delivery and that they should be encouraged
to enter the dialogue around conflict-sensitive financing
Probably one of the more innovative policy ideas in the Paper is using a broader metric of well-being
than GDP as a sustainable development indictor. This makes absolute sense in the context of the
earlier discussion around Middle Income Fragile States as well as more stable states where national
GDP masks subnational conflict and poverty. Such a reconceptualization should include indicators
related to fragility and conflict, peace and stability.
6.3 Recommendation: Affirm the need to revisit GDP as a measure of poverty reduction. Integrate
fragility and conflict in a more diverse set of indicators
It is also important that wealthier countries look more seriously at assessing their domestic policies
for potential risks to fragile states, ranging from arms sales, financial regulation and moneylaundering, anti-bribery and anti-corruption legislation, tax havens, extractive industries and
narcotics policies.
6.4 Recommendation: OECD nations should assess and act upon domestic policies that undermine
resources mobilisation in FCAS
Monitoring, data and follow-up42
Better data is needed on non-ODA finance in FCAS. FDI data is based on global estimates from the
World Bank and in many cases cannot be disaggregated by sector. ODA is based on estimates from
the OECD-DAC membership and not rising powers, while only 15 of 50 countries on the fragile states
list report on domestic revenues. It is unclear how much finance is lost through illicit financial flows.
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Details and statistics on data and monitoring provided by the Centre for International Cooperation
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Once the post-2015 targets take shape under the SDGs there will be a need to measure the finance
which is set against them including for proposed SDG 16 on peaceful societies.
The Paper highlights the challenge of drawing statistical links between private investment and
sustainable development43. The same could be said of private investment and peace and security – a
factor critical to both finance and development.
6.1 Recommendation: improve relevant institutional collection systems while supporting national
governments to more effectively fill data gaps related to FCAS.
Conclusion
Recognising that over the next 10-15 years extreme poverty will become concentrated in conflictaffected situations44, whether in low income countries or middle income countries, identification of
conflict as an influential contextual factor is as essential as recognising climate change and
environmental degradation.
Does the current FfD agenda reflect this? Not yet, but it can. As it stands, both the general narrative
and individual building blocks underplay the significance of Fragile and conflict-affected States to the
future of development financing. Fragility and conflict’s relationship to the effectiveness agenda, as
well as the contribution peace and security makes to the enabling environment for finance, needs to
be highlighted. The agenda needs to identify and apply a different approach to mobilising and
delivering finance in FCAS while ensuring appropriate institutional safeguards are in place to
facilitate and support effective finance and promote peace and stability. Consideration needs to be
given to integrating peace considerations into national fiscal strategies while looking for opportunities
for individual investments to enhance peace. The private sector is demonstrating a growing
commitment to conflict-sensitive finance evidenced by such initiatives as the global compact and the
Voluntary Principles. This can be further reinforced with incentives. In FCAS contexts resourcing
peacebuilding efforts will make an important contribution to building and sustaining the conditions for
finance mobilisation. Ultimately, recognising these considerations and applying the approaches to
fragility and conflict outlined should be regarded as the key deliverables for FCAS out of the FfD
process.
January 2015
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www.international-alert.org
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OCED, ‘Ensuring fragile states are not left behind’ 2013 Factsheet
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