The weak democratic framework guaranteeing the protection of freedoms makes the expropriation of foreign investments by local political elites more likely.
By 2030, the World Bank predicts that two-thirds of people living in extreme poverty around the world will live in fragile and/or conflict-affected states. The global Covid-19 pandemic has only exacerbated this fragility and its consequences have been numerous: the increase in poverty, particularly among children, the deterioration of the education system and social protection, climate change and population, the dramatic rise in violent conflicts, as well as the largest crisis of forced displacement ever recorded.
Situations of fragility affect several countries in the Middle East and North Africa (MENA) region where four in ten people live in fragile states shaken by economic, geopolitical and societal crises. Two states in this region, namely Yemen and Syria, are even among the three states deemed to be the most fragile in the world, while others such as Djibouti, Egypt, Lebanon, Libya, Iran or Iraq, are on high alert regarding their level of fragility according to the latest ranking based on the 2021 Fragile States Index (Fragile States Index) published by the American think tank Fund for Peace.
The empirical study that we conducted with seventeen countries of the MENA region during the period 2002-2018, recently published in the Canadian Journal of Administrative Sciences, confirms the fact that fragility discourages investors. Contextual elements characteristic of the region also contribute to reinforcing this negative effect that fragility can have on the attractiveness of foreign investment.
A multidimensional fragility
There is no precise definition associated with the concept of“fragile states” also called defaulters. The latter was born in a context that is both security, marked by the terrorist attacks of September 11, 2001, and economic, with the development policies advocated by intergovernmental organizations with regard to politically unstable countries and countries in a situation of extreme poverty.
In terms of security, the most fragile states are countries in a situation of violent conflict or civil war in which the state is no longer able to ensure control of its territory and provide basic services to its population. On the economic level, the fragility of States refers to economies caught in a “poverty trap”. Taken together, the security dimension and the economic dimension of fragility give rise to one of the best-known categories of fragile states, namely the "low-income country in difficulty" (low-income countries under stress, LICUS) introduced by the World Bank in 2002, and which today refers to countries in situations of fragility, conflict and violence (fragility, conflict and violence (FCV) settings).
Beyond this highly institutional approach, state fragility is now defined by the Organization for Economic Co-operation and Development (OECD) in a multidimensional framework as “the conjunction of an exposure to risks and an insufficient capacity of the State, of a system or of a community to manage, absorb or mitigate these risks. Fragility can have damaging consequences such as violence, the breakdown of institutions, displacement of people, humanitarian crises or other emergencies”.
We can thus identify five main dimensions of fragility:
- the economic dimension: vulnerability of the State to the risks induced by macroeconomic shocks
- political: risks arising from political decisions related to corruption or instability of the political regime
- security: vulnerability of the State to the risk of terrorism and organized crime
- societal: risks induced by social inequalities
- environmental: the state's vulnerability to environmental, climatic and health risks.
State fragility is often measured by composite indices, such as fragile states index (Fragile States Index, ISPs), global governance indicators (World Governance Indicators, WGI) of the World Bank or state fragility index (State Fragility Index, IFC) of Center for Systemic Peace, even if these indicators do not always cover the different dimensions of fragility that we have just mentioned.
"Resource Curse"
The countries of the MENA region, already affected by the consequences of the terrorist attacks of September 11, 2001, have seen their institutional instability deteriorate further following the events of " Arab Spring ", ten years later. The change of political regime in some countries of the region, the escalation of violent conflicts in others coupled with the decline in oil price, have contributed to diminishing investor confidence and, consequently, have greatly reduced the attractiveness of these locations.
In such a context, companies tend to choose a location that provides them with a stable environment allowing them to exploit the advantages offered by the host country, increase their efficiency and reduce their production costs.
However, certain contextual elements suggest that fragility and political instability do not necessarily discourage all investments, in particular those concerning raw materials. Indeed, the presence of natural resources in these countries would tend to reduce the negative impact of fragility on foreign direct investment (FDI).
However, the results of our study, cited above, reveal the opposite. The presence of raw materials, in particular oil and natural gas reserves in the Persian Gulf countries, seems rather experienced as a constraint linked to the “resource curse” that certain MENA countries may have experienced when the exceptional rents drawn from the production and export of oil have provoked conflicts and contributed to harming the diversification of economic activities and the development of other sectors of activity.
Similarly, we have been able to observe that the low level of democratic governance in these countries contributes to reinforcing this negative impact in a region still largely dominated by autocratic regimes. This is because the absence of democratic institutions guaranteeing the protection of civil and political freedoms makes the expropriation of foreign investment by local political elites more likely.
In conclusion, business leaders should consider state fragility more among the factors that contribute to their choice of location, especially in the MENA region. At the same time, governments should pay particular attention to putting in place the policies and reforms necessary to establish political, social and economic stability in order to reassure and attract foreign investors.
They should do so all the more in a period when the security risk will be significant in the years to come, as evidenced by Robert Greenway, director of the Abraham Accords Peace Institute, who points out that "The Middle East will go through the period the toughest in its history.
Dora Triki, Associate Professor in International Management, ESCE International Business School; Alfredo Valentino, Associate Professor, ESCE International Business Schooland Anna Dimitrova, Associate Professor in International Affairs, ESSCA School of Management
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