Do financial flows make a differencein fragile states?
A rising number of people is living in fragile countries whose weak institutions fail to deliver on decent work and poverty reduction. The chapter discusses to what extent external financial flows, such as remittances, foreign direct investment or official development aid, can substitute for weak institutions. Fragility matters: fragile countries receive different amounts of financial flows than their non-fragile peers, and these flows affect them differently. Fragility lowers the effect of financial flows on growth, living standards and inequality. Foreign direct investment (FDI) has a moderate impact on poverty alleviation, albeit concentrated on employment gains in mining and natural resources. Remittances provide some weak relief for the poor, with less pernicious effects on growth and labour supply than in non-fragile countries. ODA does not improve social outcomes but rather exacerbates fragility. Policymakers should focus on improving upon the positive contribution of FDI and remittances on jobs and growth, avoiding the remittances trap.