they need to know is not whether the narrative is correct in some objective, technical sense, but rather whether it is the narrative that other firms believe. _If others believe it, then it is rational to accept it._ When firms look at a fragile state, there is already a dominant narrative that provides a reasonably good explanation of the recent past: the country is a ‘basket case’. This means that there is some enduring characteristic of the country, which is not further specified other than in vague terms such as ‘corruption’ or ‘violence’, that causes repeated failure. This explanation is repeatedly reinforced by the extensive marketing of images of catastrophe on which the business models of the development NGOs are dependent. The ‘basket case’ narrative is the polar opposite to that of ‘Asian tigers’, and each is self-fulfilling. In Asia, investor confidence resulted in high growth rates, which confirmed the confidence. In fragile states, a lack of investor confidence results in stagnation which confirms the lack of confidence.

Now we turn to the complex problem faced by DFIs. In order to find firms to invest in, DFIs need entrepreneurs and investors for whom the simple narrative of ‘basket case’ is false, but they need to do this in the context of themselves not knowing what they need to do in order to be sure of overcoming first-movers disadvantage. The solutions to these intertwined problems are to embark upon a phase of discovery as to what instruments work best in which context, while adopting a range of measures to reset investor narratives.

# **_Launching a phase of discovery_**

Faced with the mandate to generate job growth in fragile states, a task for which the knowledge base is currently inadequate, the responsible action is evidently to ignite a process of rapid social learning. Governments usually resist admitting that they do not know what to do, and are afraid of learning through experimentation because it inevitably brings some failures and exposes them to criticisms from civil society. It is essential that the leaders of DFIs educate their stakeholders about the true nature of the task, and explain that the only way that governments can protect themselves is to grant DFIs sufficient operational independence that they can take risks and make mistakes, and give them resources not linked to immediate investment deliverables, to enable experimentation and upstream work to develop investment opportunities. An important role of a DFI with independence to deliver a mandate is that of taking responsibility for and incurring the costs of this process of social learning. Absorbing pertinent knowledge can help, but DFIs learn primarily from their own experience in experimenting with different approaches.

Academic knowledge is of some use: the four pertinent fields are the political economy of fragility; the economics of spatial agglomeration; the industrial economics of low-income countries; and the macroeconomic analysis of radical uncertainty. In all four there have been useful recent advances. _Escaping the Fragility Trap_<sup>26</sup> emphasizes the importance of ‘scaffolding’: supporting measures that can work in the context of getting started, even though they are not found in contexts where many firms are already thriving. Venables<sup>27</sup> shows why market forces tend to perpetuate spatial failure: low wages are usually not enough to compensate for the lack of a cluster of firms, and the

> 26 LSE-Oxford Commission on State Fragility, Growth, and Development, 2018. 27 Venables, 2018.

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