Institutions, trade, and social cohesion in fragile states: Implications for policy conditionality and aid allocation

This paper examines the effects of political institutions, openness to trade, and social cohesion on development in fragile states. The empirical results indicate that beyond a certain level, openness to trade may actually be harmful to income, particularly in countries with high export concentration. Starting from low levels of political institutional quality, small improvements in polity can have adverse effects. On the other hand, social cohesion has a positive effect once a threshold level is reached. The results associated with the influence of political institutions and openness to trade seem to suggest the possibility of a ‘catch-22’, at least in the short run. If a fragile state tries to improve its political institutions or its openness to trade it may wind up with lower per-capita income. These findings have important policy implications with regard to IDA's policy conditionality and aid allocation.