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Policy Brief on the Financial Crisis - The Global Financial Crisis and Fragile States in Africa

12-Oct-2009

Fragile states typically have weak governance institutions, undermining their capacity to provide basic services. Many fragile states have been embroiled in years of violent conflicts, or face the threat of such conflicts. Others are emerging from such conflicts(1). Net food and fuel importers like Burundi, Liberia, Sierra Leone and Zimbabwe, have had to cope with the food and fuel price hikes that preceded the global financial crisis. Thus, fragile states were typically in precarious circumstances even prior to the global financial crisis. This constitutes a distinguishing feature of fragile states: they have relatively little room to maneuver in response to domestic or external shocks. They have a narrow revenue base and weak fiscal positions, resulting in aid dependence. Their economies are undiversified, with a low level of industrialization, increasing their vulnerability to external shocks.

Like most low-income African countries, the first round effects of the global financial crisis on fragile states were relatively modest, due to their weak integration into the global financial system. The financial systems in these countries are typically rudimentary. Strangely, there have been no known cases of banks or other financial institutions collapsing as a result of the crisis. However, accruing evidence points to much stronger subsequent adverse effects on fiscal and external balances, exchange rates, and the real economy. The objective of this concept note is to articulate these issues and generate questions for panel discussion.

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