Why do we see boom-and-bust growth in fragile and conflict-affected states?

One of the most pressing challenges in development policy is to bring about rapid, sustained, and inclusive growth in developing countries. Apart from a handful of countries in East Asia, very few developing countries have experienced prolonged periods of rapid economic growth and large declines in poverty. Most developing countries experience boom-and-bust growth, with periods of strong positive growth followed by periods of rapid declines in living standards or economic stagnation.

If boom-and-bust growth is the norm in developing countries, it is especially so for fragile and conflicted affected states (FCAS), which are characterized by both slow or even negative growth and highly volatile growth rates. Given that these countries are some of the poorest in the world, it is even more important that FCAS countries experience the positive economic growth needed to escape the fragility trap.

It’s the politics, stupid!

Why is the achievement of sustained economic growth especially a challenge for FCAS countries? There are four reasons these countries observe slow and volatile economic growth. Firstly, these countries are characterized by a lack of a stable political settlement between elites, where a political settlement can be defined as ‘the balance or distribution of power between contending social groups and social classes’. Deep societal divisions make it difficult for political elites to reach an enduring power-sharing agreement and a collective vision on state-building and long-term economic development.  

Take Somalia, for instance, where power-sharing among the elites is enshrined in fixed proportional representation, known as the 4.5 formula. This power-sharing arrangement allows elites of each clan-family in Somalia to enjoy a monopoly on resources in their respective jurisdictions, and becomes a mechanism for unproductive rent-sharing that diminishes prospects for the kind of productive investments necessary for economic growth. The 4.5 formula may lead to a modicum of political stability, but is not conducive to either state-building or inclusive growth processes.

Secondly, armed violence from both state and non-state actors is ubiquitous in FCAS countries. The violence is both a symptom and cause of poor economic growth. Stagnant economic conditions imply that there is very little resources to share among political actors, leading to frequent tussles among different social groups over who claims the paltry rents on offer. Violence is also a cause of low and volatile economic growth as it discourages private investment. It also requires private firms to hire security services, greatly increasing the costs of doing business.

The domination of rentiers and powerbrokers

Thirdly, FCAS countries have highly lopsided economic structures, where most of the resources are concentrated in sectors characterized by rentiers — companies in natural resource sectors producing for the export market — and powerbrokers — utilities, telecommunications, and infrastructure companies that mostly serve the domestic market in highly protected environments. This has negative consequences for economic growth. Paradoxically, many FCAS countries may be termed ‘resource-rich’, such as DRC Congo, which has large resources of copper and cobalt.

Companies that operate in resource sectors have strong cronyistic alliances with political elites that lead to high levels of corruption and fuel resentment against state institutions, further accentuating fragility and conflict. Political elites eye these natural resources for short-term gains, without any incentive to think long term. There is little interest to use resources to diversify economic structures, as is necessary for sustained economic growth.

At the same time, FCAS countries are often recipients of high levels of aid. Such inflows fuel spending in the non-tradable sectors populated by powerbroker firms, such as those in construction and utilities, and divert productive resources away from more dynamic tradable sectors, such as export-oriented agriculture and manufacturing. While aid-induced spending in non-tradable sectors may lead to spurts of economic growth, it rarely leads to a transformative process that could lead to long-term economic development.

Finally, an endemic feature of FCAS economies is weak rule of law and ineffective state institutions. While ineffective formal institutions and the lack of adherence to rules are true for most low-income countries, this is especially the case with FCAS economies. Such economies are characterized by highly personalized relationships between economic agents and political and bureaucratic elites — or deals, which are fluid and subject to change. It is this unpredictability of deals in a highly unstable political context that is a major reason why FCAS countries witness boom-and-bust economic growth more than other developing countries.

How to ignite growth in fragile states

Given the big challenges in getting growth started in FCAS countries, what can development actors do? It is worth noting that many developing countries that succeed with economic growth have had severe periods of turmoil, including high levels of violence, in their early years. Take China, for example, which witnessed a violent sociopolitical period during the Cultural Revolution. When markets opened up in 1978, no one would have predicted that China would experience such rapid rates of economic growth for over four decades. The reason China succeeded so dramatically was because the Chinese political leadership improvised along the way, slowly building up conditions for further economic development, rather than going for whole-scale reforms. The lesson here is that to ignite economic growth in fragile contexts, what may be required is incrementalism, rather than large-scale systemic changes.

Donors often tend to do the opposite — such as pressing for good governance reforms or advocating for the passage of formal rules and regulations as way to improve the investment climate. Perhaps a more effective approach is to work with the grain, prioritizing pragmatism over ideological purity, and recognising the limits of external actors to bring about economic and political transformation in fragile contexts.

The views expressed in this piece are those of the author(s), and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors.