Annex 1. Definition and Characteristics of Fragile States

A fragile state is a state whose government is unable to provide its population with basic services and security. Whatever the initial cause(s), institutional failures tend to snowball and impact different areas of activity, undermining the state’s credibility, legitimacy, and stability. This, in turn, affects economic activity. Fragility in one country can also spread to other countries, through emigration, civil unrest, or war.

Despite the variety of its manifestations, a clear-cut definition of fragility is helpful in studying these countries. Such criteria cannot be grounded in hard science. In particular, there are different ways of assessing security issues, and the choice of criteria and of a threshold for assessing institutional capacity is somewhat arbitrary. The World Bank’s Country Policy and Institutional Assessment (CPIA) is used, as it measures the extent to which a country’s policy and institutional framework supports sustainable growth and poverty reduction, and consequently the effective use of development assistance. The CPIA was developed and first employed in the mid-1970s. Over the years, the World Bank has periodically updated it to reflect the lessons of experience and the evolution of thinking about development. Whatever the definition of the fragility boundary, some countries cross back and forth before reaching safer territory.

This problem can be attenuated, but not fully eliminated, by adopting the IMF approach,1 according to which a country is fragile in a given year if:

  • it is a low-income country with little adminis-trative capacity, in the sense that the three-year average CPIA (for the most recent years available) is below 3.2, or

  • international peacekeeping or peacebuilding forces have been operating in the country, whatever its income level, during the previous three years.

In 2017, there were 42 fragile states, among which sub-Saharan Africa and the Pacific islands were overrepresented (respectively 24 and 8 countries). Among low- and middle-income countries, one in three was fragile. No high-income country was fragile. More than 530 million people (7.3 percent of the world population) lived in fragile states in 2017, but they accounted for only 1.7 percent of global GDP, although a significant proportion of them (18 out of 42) were resource-rich countries (Annex Table 1.1). The number of fragile states declined by only one between 2008 and 2017, but fragility decreased in Europe and Asia and increased in the Middle East, while Latin America remained untouched by fragility. More than 40 percent of fragile states had security problems, and new conflicts were the immediate cause of one-third of fragility cases.

Annex Table 1.1.

Fragile States, 2008 and 2017

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Source: Authors, based on World Bank’s Country Policy and Institutional Assessment index.Notes: *denotes countries where peacekeeping or peacebuilding forces were present in 2013, 2014, or 2015 or countries where a conflict prevented computation of the World Bank Country Policy and Institutional Assessment (CPIA) index.°denotes countries where peacekeeping or peacebuilding forces were present in 2006, 2007, or 2008 or countries where a conflict prevented computation of the CPIA index. Countries in italics derive 20 percent or more of their net exports from natural resources.

Statistical data on Somalia are not available.

South Sudan became independent from Sudan in 2011.

Kosovo became independent in 2008.

These are countries that were fragile in 2008 but were no longer fragile in 2017.

What Characterizes Fragile States?

As noted above, a state may be fragile for different reasons. Some young countries are still building their institutions (for example, Eritrea, Kosovo, South Sudan, Timor-Leste). Others have been affected by war (for example, Afghanistan, Iraq, Mali, Syria), natural disasters (for example, Haiti), or epidemics (for example, Liberia, Sierra Leone). Others have slipped into fragility as a result of economic shocks, such as declines in natural resource prices (for example, Cameroon, Democratic Republic of the Congo, Papua New Guinea), or because of protracted weak policies (for example, Madagascar, Maldives, Myanmar).

How Different Are Fragile States?

Fragility is associated with weak institutions, unstable political regimes, low state legitimacy, and war, any of which may be amplified by natural disasters or epidemics. These features often constrain the shaping of tax policy more than economic factors do.2

Fragile states share some characteristics with low-income countries, but they differ in certain key factors. Unlike the 82 nonfragile lower- or middle-income states in 2017, fragile states exhibited several characteristics (Annex Table 1.2):

  • GDP per capita is about one-third lower than that of nonfragile states, with a high prevalence of informality.3

  • The growth of GDP per capita is also lower, on average, and even negative in some countries.

  • The current account balance is often more negative, but not always.

  • Fragile states depend much more on official development aid.

Annex Table 1.2.

Fragile and Nonfragile States: Selected Indicators

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Source: IMF.Note: The list of FSs and NFSs is for 2017. Figures represent simple 2013–15 averages in each category, with median in parentheses. FS 5 fragile state; NFS 5 nonfragile state; PPP 5 purchasing power parity.

Fragile states do not look much different from non-fragile states in terms of inflation or budget balance.4 However, some economic weaknesses may not be apparent from simple indicators. For example, GDP is boosted where peacekeeping forces spark economic activity, but fades out once security is restored. The current account deficit is often more than covered by official development assistance, while private capital flows out of the country. Net private investment is generally low or negative during fragility periods, and drawing foreign direct investment back is a challenge. All these imbalances must be addressed to overcome fragility and restore economic growth and independence.5

How Long Do Countries Remain Fragile?

It takes a long time to overcome fragility. According to several studies, 15 to 30 years may be needed to rebuild the institutional capacity of a country after a sharp deterioration, and not all fragile states succeed within that time frame.6 Once it reaches the lowest level of fragility (hereafter the “crisis”), a fragile state typically makes rapid progress for about five years, during which time the World Bank’s CPIA indicators, tax revenue, and the security situation improve steadily (a period called hereafter the “emergency phase”). Progress then slows, and it takes another 10 years or more to graduate from fragility status (a period hereafter called the “consolidation phase”).

About 30 percent of the states that were fragile in 2008 have succeeded in their efforts to exit fragility, in the sense that they were no longer (technically) so by 2017. None of these countries had security problems immediately before 2008, but half had some in the previous decade. This indicates that security is a prerequisite for consolidation, and that once security is reestablished (as it was in 2017 in Chad, Eritrea, and Timor-Leste) several additional consolidation years are needed to conquer fragility.

Before 2008, besides security, formerly fragile states exhibited higher GDP per capita, more GDP per capita growth, less dependence on official development assistance, and lower government debt than states that remained fragile (Annex Table 1.3). Formerly fragile states’ governments were also able to increase their gross debt during the decade, which may indicate restoration of investor confidence.

Annex Table 1.3.

Economic Trends in Formerly and Permanently Fragile States

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Source: IMF staff calculations.Note: Figures are simple averages for each category, with medians in parentheses. FFS 5 formerly fragile state; PFS 5 permanently fragile state; PPP 5 purchasing power parity.

Annex 2. Comparative Statistics on Fragile and Nonfragile States

Annex Table 2.1.

Revenue Structure

(Simple averages for 2013–15 based on 2017 list of fragile states1; median in parenthesis)

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Source: IMF, World Revenue Longitudinal Database.Note: FS 5 fragile state; NFS 5 nonfragile state.

The figures for the various taxes may not add up because not all series are available every year for all countries.

The average in percent of tax revenue is for countries that derive 20 percent or more of their net exports from nonrenewable natural resources.

Annex Table 2.2.

Revenue Trends in Formerly and Permanently Fragile States

(Simple average of each category of country,1 median in parentheses)

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Source: IMF, World Revenue Longitudinal Database.Note: FFS 5 formerly fragile state; PFS 5 permanently fragile state.

The figures for the various taxes may not add up to the total tax revenue because not all series are available every year for all countries.

The average in percent of total tax revenue is for countries that derive 20 percent or more of their net exports from nonrenewable natural resources.

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1

Mario Mansour is the Coordinator of the IMF Middle East Regional Technical Assistance Center. Jean-Luc Schneider is with France’s Ministry of Economy and Finance, Directorate General of the Treasury.

3

Annex 1 provides a brief analysis of the economic differences between fragile and non-fragile states, which complements the taxation discussion in this note.

4

See Crivelli and Gupta (2014); and Brun, Chambas, and Man-sour (2015). Governments may collect nontax revenue from natural resources through sharing in the equity of the extractive firms or receiving licensing fees.

6

States that exited fragility during the study period are referred to as formerly fragile states, and those that remained fragile are referred to as permanently fragile states. It is important to note that this characterization says nothing about the probability of a formerly fragile state sliding back into fragility or a permanently fragile state exiting fragility in the years following the study period.

12

In Haiti, the IMF recommended setting the VAT liability threshold at 450 times the GDP per capita.

15

In developing economies, taxes generally applicable to the resource sector are often found in mining sector licenses or production-sharing agreements in oil and gas, with long tax stability clauses. Changing these agreements involves a very complex process of renegotiation, with highly uncertain outcomes.

18

In 2015, the volume of calls in Guinea fell by 15 percent following the introduction of tax representing about 15 percent of call prices.

19

Experience suggests that this may take a long time, as vested interests tend to be well organized to lobby for keeping such provisions.

20

Countries that have slipped into fragility without a crisis may experience low-intensity versions of this problem if VAT credits accumulate while the tax administration’s capacity to audit them deteriorates. This creates a liability for the government, often left of budget, and a loophole in the tax system.

22

For a more detailed discussion of core medium-term revenue strategy elements, see IMF and others (2016).

23

More broadly, governments are advised to link tax policy and administration to the budget’s expenditure side through clear statements. These statements should be backed by spending allocation and execution, illustrating the general benefits taxpayers may enjoy.

26

Regional agreements usually cover the taxation of trade between participating countries, thereby providing guidelines for tariff policy more generally. In addition, the WAEMU has directives constraining the rates, exemptions, and excisable products for consumption taxes (VAT and excise), as well as for corporate income tax. See Mansour and Rota-Graziosi (2013).

27

Niger, for example, has benefited from its WAEMU membership, which accelerated the adoption of a VAT in the 1990s. Focusing on administrative improvements, without having to change the law, allowed the country to more than double VAT revenue in the past decade.

28

For further discussion, refer to International Tax Dialogue (2006).

32

As the threshold is lowered, some of the distributional benefits mentioned earlier are likely to become negligible or disappear, and may need to be replaced by other mechanisms to cushion the impact on the poor.

2

See IMF (2017a, b).

4

Government gross debt has become lower in fragile than in nonfragile states recently, in contrast to the situation 10 years ago, mainly as a consequence of the Heavily Indebted Poor Countries debt relief initiative.