Over the last decade, the notion of fragility has become central in the development policy debate. It was initially deployed by international organisations to draw attention to “fragile states” and is now used to refer to fragile or conflict-affected geographical regions and the challenges they face. Cyprien Fabre, Head of the OECD’s Conflict, Crises and Fragility Unit, defines fragility as “the imbalance between risks and the capacity to deal with these risks – when there is an imbalance, there is fragility”. This combination of exposure to risk and inadequate state capacity, systems and communities to deal with it is apparent across six dimensions: economic, environmental, political, security, social and human. Adopting a multi-dimensional, multi-criteria approach to fragility should enable development players to analyse risk factors and their consequences, and to devise appropriate solutions.

According to World Bank figures, 10% of the world’s population – and 40% of people living in extreme poverty – currently lives in a fragile country, a figure that is forecast to rise to over 66% by 2030. Over 75% of the 800 million people without access to electricity live in these countries. Acting with great determination in such regions is therefore essential if we are to achieve sustainable development objectives on a global scale.

While fragility is presented as a multidimensional imbalance between risks and capacities, it is important to emphasise that factors of fragility are interdependent and mutually reinforcing. Recent studies conducted by the International Monetary Fund (IMF) stress that the impacts of climate change are already being felt more acutely in fragile countries, notably in many Pacific island states and across the Sahel.6 These effects are apparent in temperatures that endanger human health, reduced agricultural productivity, rising sea levels and extreme weather events. These countries have a poor capacity for dealing with these risks, for example by maintaining satisfactory agricultural production in the event of extreme heat or providing appropriate health services for those affected. Climate risks will therefore only exacerbate conflicts over access to resources. The interaction between conflict situations and climate issues are therefore leading the international community to develop an approach based around the climate-fragility-conflict link.

Fragile countries are often those most exposed to macro-economic shocks and may suffer from the consequences of distant conflicts on world markets. For example, the war in Ukraine has pushed up food prices (in December 2023, food and cereal prices were still around 12%-13% higher than in December 2020), making certain basic food products difficult to access for the poorest populations in certain African and Middle Eastern countries. Lastly, the refugees crisis has a particular impact on countries adjacent to conflict zones, which are themselves often poor and fragile. According to the United Nations High Commissioner for Refugees (UNHCR), 110 million people were displaced in 2023 (including 62.5 million within countries in conflict). Low- and middle-income countries took in 75% of refugees and other people in need of international protection, and 20% of this number went to the least developed countries. Against this backdrop, the issue of private investment in fragile countries is becoming an increasingly important part of the international debate on peace, stability and development, whether this be at the Paris Peace Forum, the World Economic Forum or in the debating chamber of the United Nations.

A PRIVATE SECTOR WITH SPECIFIC FEATURES

Even more than in other places, the private sector in fragile countries cannot be considered as a monolith: it is fundamentally diverse and heterogeneous. However, we do note that it is predominantly informal, accounting for 70% of employment in these countries (compared with a global average of less than 50%). The bulk of formal businesses – those that are incorporated with administrative bodies and use a recognised accounting system – are SMEs (over 90%), for whom a fragile business environment poses unprecedented challenges. In addition to security constraints, public services have little capacity to provide essential services, and access to financial services, credit and infrastructure is highly complicated. This unfavourable environment comes at a heavy cost. For example, a recent study by the International Trade Center reveals that it costs on average 15 times more to set up a formal business in the fragile countries studied than in high-income countries. Lastly, there are fewer large national and international companies than in developing countries. They are more resilient but face specific problems in terms of environmental and social risk management, compliance and reputation, linked to their complex environment.

The resilience of the private sector and employment in these specific contexts represents a major challenge, especially if we include demographic factors in areas with a very high proportion of young people. In such conditions, the lack of economic prospects and access to employment can quickly become a source of increased instability. The development of the private sector and decent jobs are fundamental to “securing the peace dividend” and breaking the cycle of instability, as the World Development Report highlighted in 2011.

DFIS’ GROWING COMMITMENT TO THE PRIVATE SECTOR IN FRAGILE COUNTRIES

In recognition of the challenges faced by the private sector in these geographies, more and more development finance institutions and impact finance players are dedicating specific resources to fragile countries, with the aim of boosting economic growth by setting up financial instruments adapted to the contexts (risk-taking, loan maturities, technical support, etc.). It is hoped that the impact of these strategies will strengthen local infrastructure, create economic opportunities for populations and therefore reduce social tension and the risk of conflict. To achieve this, DFIs prioritize those projects that create sustainable and decent jobs, mitigate and adapt to climate change and reduce inequalities.

The International Finance Corporation (IFC) was the first to commit to this approach back in 2008 with the Conflict Affected States in Africa (CASA) programme and it has now made fragile countries a central part in its strategy. European DFIs were closely involved in the first Oxford Fragility Forum organised in 2019 in partnership with the IFC. That year, Proparco devised its first strategy dedicated to fragile countries, focusing on off-grid energy, financial inclusion and the agribusiness sector in Africa. Partnerships are emerging to structure cooperation between DFIs, such as the ARIA platform developed by British International Investment (BII) and the Dutch Entrepreneurial Development Bank (FMO), which seeks to develop a joint approach to prospecting in six fragile African countries.

Operational dialogue between humanitarian agencies and DFIs is also growing in importance. The IFC has a long-standing partnership with the UNHCR, while Proparco launched a joint initiative with the International Committee of the Red Cross (ICRC) in 2023. However, private sector financing in these fragile contexts presents many challenges for DFIs.

Proparco’s experience in these regions mirrors that of other development finance institutions, illustrating the very real difficulties in coming up with a satisfactory business model in these situations that is both operational and efficient in terms of economic, social and environmental objectives, especially in those 20 countries that are both fragile and least developed. Fragile country portfolios are characterised by smaller-than-average unit investment outlay, longer disbursement times and a much higher level of risk. Investing in fragile countries also exposes DFIs to potentially greater reputational risks than in stable and peaceful countries and it is also more difficult to enforce the environmental and social standards to which they are committed. These findings clearly illustrate the fact that while DFI intervention in fragile countries is strategically relevant, it involves multiple challenges that must be met by mobilising specific resources and forging partnerships.

PROMOTING PEACE AND SUSTAINABLE DEVELOPMENT

DFIs in fragile countries must ultimately integrate the notion of “conflict sensitivity” in a concrete and operational manner. In countries affected by conflict, the argument for investment impact cannot be based solely on the assumption that creating decent jobs necessarily guarantees positive outcomes for peace. Similarly, highlighting positive environmental or social impacts is not enough to ensure that the investment does not generate distortions that could actually fuel the conflict. These risks exist across all sectors for those DFIs working in these regions, but they are easier to foresee in projects with a large “land footprint”, such as agri-business, forestry or other natural resources, which may be disputed between several groups and fuel marginalisation, exclusion and corruption.

DFIs must therefore start out with a good understanding of these local contexts in order to design appropriate investments and manage their risks, rather than adopting top-down approaches based on solutions implemented elsewhere. It is unfortunately a common mistake to analyse these fragile country contexts based on the notion of a lack or an “absence of” something – an absence of the state, public services, governance, stability, a formal private sector, etc. – whereas it would be more appropriate to analyse them in terms of “overload”. In other words, highly complex contexts, creating conflicts of legitimacy and generating many forms of instability. New initiatives between DFIs and innovative partnerships with specialised organisations are emerging to tackle this issue and they feed into the constantly changing debate over the private sector’s contribution to peace and sustainable development objectives in fragile countries.