Fragile Countries and the Current Economic Crisis
Background paper to the ERD2009
Franklin Allen – ERD Team Member, Wharton School, University of Pennsylvania
Giorgia Giovannetti – ERD Team Leader, Dipartimento di Economia, Università di Firenze, and European University Institute, San Domenico di Fiesole
Paper prepared for the Conference on “Moving Towards the European Report on Development 2009”, organised by the European Report of Development in Florence, Italy, 21-23 June, 2009
This paper analyses the channels through which the economic and financial crisis of 2008-2009 is transmitted to fragile countries in Sub-Saharan Africa. Trade stands out as the main direct channel, even though intra-Africa remittances play a relevant role, given that most migrants in Sub-Saharan Africa fragile countries cannot afford the cost of migrating to Europe or to the United States and stay close, remaining in the continent. Whether reduced aid flows also act as a crisis transmission channel remains an open question, even though preliminary estimates suggest that, at least in the medium run, OECD countries are likely to lower aid, with potentially very damaging effects on fragile countries. The paper also shows that fragile countries are characterised by very low resilience and capacity to cope with shocks. It concludes, by highlighting how Sub-Saharan Africa fragile countries’ policymakers’ room for manoeuver is limited in periods of crisis because of low fiscal space and limited institutional capacity. It advocates that the right response to the crisis would be to mobilise domestic resources, although this will require functional institutions able to offset the potential trade-offs between adverse short-term shocks and a long-term perspective.