effectiveness, and the criteria attempt to capture the key factors that foster growth and poverty reduction. For each criterion, countries are rated from 1 (low) to 6 (high), and an unweighted average score of 3.2 or less is generally seen as the threshold of state fragility. The CPIA is also used by the IMF and other IFIs.

- The Fund for Peace’s Fragile States Index (FSI), which has broader coverage, consisting of five groups of indicators measuring state cohesion, economic conditions, political legitimacy and public service provision, social conditions, and external intervention.

**Regardless of the indicator used, state fragility appears to be widespread and persistent** . The various aggregate indicators tend to agree on which countries are at the bottom and the top of the list, but there is less agreement in the middle of the rankings. Nevertheless, fragile states are home to nearly 1 billion people. They exist in most parts of the globe, including Africa, the Middle East, and parts of Asia and Oceania. Although fragile states exist in both low- and middle-income countries, they are more prevalent among the former: about half of the world population living in extreme poverty resides in fragile states.<sup>6</sup> Fragility is also hard to shake off: once a state becomes fragile, it may take several years to exit fragility, which has led many to talk about a “fragility trap.”

Fragility, economic performance, and financial development

**State fragility is unambiguously associated with a lower level of economic performance** . In fragile states, the formal sector tends to be small relative to the size of the economy and dominated by small and inefficient firms. In many cases, crime and theft are prevalent and private firms have to cover security costs, as well as deal with power outages or water insufficiency. Fiscal capacity is weak and governments have difficulty collecting taxes to finance essential public services, often relying on volatile commodity revenue. At the same time, military and security needs or political pressures from competing groups mean that public expenditure pressures are high, leading to unsustainable fiscal positions. Corruption and rent-seeking also tend to be widespread. Fragile states tend to have weaker and more vulnerable external positions, in many cases relying on commodity exports, remittances, and official development assistance (ODA) as the major sources of foreign exchange. They are also prone to more frequent inflation episodes and higher growth volatility than non-fragile states.<sup>7</sup> As a result, fragile states are poorer in per capita terms than nonfragile states in the same income group.

# **The “fragility trap” hypothesis suggests that state fragility and economic underperformance**

**may be tied in a vicious circle** . Weak capacity and the inability to provide basic public services

> 6 _-_ See IMF (2002), _<u>IMF Strategy for Fragile and Conflict Affected States</u>_ , IMF Policy paper, March 2022, International Monetary Fund; and Chami, R. et al. (2021), _op. cit._

> 7 For a review of the evidence, see Assaf, N., M. Engman, A. Ragoussis, and S. Agrawal (2021), “The Private Sector in Fragile Situations,” in: Chami, R., R. Espinosa, and P. Montiel (eds.), _Macroeconomic Policy in Fragile States_ , Oxford University Press.

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