Working Paper 307 - The Macroeconomics of State Fragility in Africa

Are poor macroeconomic outcomes primarily the result of economic policies, or of deeper underlying state fragility problems in sub-Saharan Africa? We attempt to answer this question by using carefully specified dynamic panel regression techniques to show how state fragility conditions help to explain the differences in the macroeconomic performance of sub-Saharan African economies, and to identify the most plausible mechanisms of transmission. We find that countries with greater fragility suffer higher macroeconomic volatility and crisis; they also experience weaker growth. When we disaggregate state fragility into its various components, we find that it is the security and social components that have the strongest causal impact on macroeconomic outcomes, while the political component is, at best, weak. Therefore, we conclude: it is state fragility conditions, and not necessarily macroeconomic policies, that are of first-order importance in explaining the differences in macroeconomic performance for African countries. The knock-on effects are mostly mediated through the fiscal channel, the aid channel, and the finance channel. Accordingly, we recommend that interventions in fragile states should best focus on exploiting the potential for using fiscal policy, aid, and finance as instruments to improve macroeconomic outcomes. JEL classification: E02, O43, D72