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Fragile Five - Meaning, Criteria, Countries and India’s Journey | UPSC Notes

Last Updated on Aug 05, 2024
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“Fragile Five” is a concept used by a financial analyst at Morgan Stanley in August 2013 to describe emerging market nations that have grown overly reliant on risky foreign investment to fund their growth aspirations. It comprises Indonesia, Brazil, Turkey, India, and South Africa. 

The Fragile Five is one of the most important topics for the UPSC IAS Examination. It falls under the International Relations section of the General Studies Paper 2 syllabus for UPSC Mains examination.

In this article, we will discuss Fragile Five, how these five countries were determined, India’s journey in Fragile Five, and the Current Fragile Five countries.

Also, check out the article on BRICS here.

Download the PDF on Fragile Five for UPSC exam Notes!

Fragile Five: The Background
  • Several nations were affected by the Global financial crisis of 2008.
  • As the more developed markets, including the U.S., began to recover from the crisis, investors redirected their funds from emerging nations back into the U.S. dollar.
  • Brazil, India, Indonesia, South Africa, and Turkey were the primary countries that faced sudden outflows of capital.
  • The South African Rand, Indian Rupee, Indonesian Rupiah, Turkish Lira, and Brazilian Real all experienced a decline, making it challenging for these countries to finance their current account deficits and repay foreign debt.
  • Due to the lack of fresh financing, numerous growth projects could not be funded, further exacerbating their economic situation.
  • These countries became more vulnerable to economic slowdowns due to this funding deficiency.
  • Throughout 2015, most of these markets experienced consistent declines.
  • Morgan Stanley coined the term "Fragile Five" to address this group of countries" in 2013.
  • Initially, the Fragile Five consisted of India, Brazil, Turkey, South Africa, and Indonesia.

Also, check out the article on East Asia Summit here.

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What Are the Fragile Five?

A group of nations called the "Fragile Five" relies heavily on foreign capital for economic growth. This term was coined in 2013 by a financial analyst at Morgan Stanley. The composition of the Fragile Five has changed over time, but they all share common characteristics. These countries are highly dependent on the performance of the American economy for their economic stability. Due to the lack of new investments, these economies have faced challenges funding various growth initiatives, resulting in a slowdown.

Also, check out the Group of Seventy Seven (G77) here.

Current Fragile Five According to Morgan Stanley

Morgan Stanley identifies the following as the current Fragile Five:

  • Indonesia
  • Colombia
  • Mexico
  • South Africa
  • Turkey

The list has changed as a result of numerous things.

  • A shift in political power is one of the main causes since it significantly impacts the economy. India did well on the stock markets after leaving the Fragile Five.
  • Investors can take advantage of various online and offline services to boost the returns on their international investments.
  • India won’t have to re-enter the list if it maintains economic stability and implements effective policies.

Study What is Ashgabat Agreement is here.

How the Fragile Five are Determined?

In 2013, in response to the global economic recovery, Morgan Stanley chose their first group of the “Fragile Five.” The company used the following six criteria:

  • Currently Balanced Account
  • Inflation
  • The proportion of external debt to foreign exchange reserves
  • Government bonds held in foreign countries
  • Debt in dollars
  • Actual rate difference

In 2018, the regulations governing American trade and tariffs started to shift. As a result, the Fragile Five nations could need to make adjustments going forward.

  • Due to the tariffs, some nations on Morgan Stanley’s first list now have a stronger position.
  • For instance, Indonesia benefited greatly from this move. Indonesia is presently in a position to develop as a refuge for investors throughout the intensification of the trade war.

Also, check out India and WTO here.

India’s Journey from Fragile Five to Favoured Investment

Destination

  • India was removed from the Fragile Five list in 2017. It was because of a more stable currency, declining inflation, and a managed budget deficit. These factors made India a more attractive investment destination.
  • One of the main reasons for India's improved economic performance was a change in political power. 
  • The new government implemented several reforms that helped to improve the economy, such as reducing the twin deficit (the fiscal deficit and the current account deficit) and increasing foreign exchange reserves.
  • Foreign investment in India also increased significantly, which helped to stabilize the country's external sector. This was due to several factors, including improved macroeconomic fundamentals and the government's reform-related initiatives.
  • As a result of these factors, India's FDI Confidence Index has been rising exponentially. India is now ranked first in foreign capital inflows (including foreign direct investment and portfolio investments).
  • In recent years, India's stocks and currencies have also outperformed those of other major economies. This is a positive sign for the country's economy and suggests it is on the right track.
  • If India can maintain its economic stability and implement effective policies, it will unlikely need to re-enter the Fragile Five list.

Also, check out the Major Trade Agreements of the World Trade Organization (WTO) here.

How the Countries Have Broken Free from Fragile Five?
  • In 2015, India distinguished itself from the other Fragile Five countries by demonstrating a more stable currency, a declining inflation rate, and effective control over its fiscal deficit. 
  • These positive factors made India a highly attractive investment destination. Consequently, in 2017, India was removed from the Fragile Five list. 
  • Throughout that year, India's stocks and currencies outperformed even those of the largest economies worldwide. 
  • With changes in its political structure, India continues to ascend as an economic powerhouse and is unlikely to revert to Fragile Five status.
  • In 2018, the United States began to change its trade rules and impose tariffs on goods from other countries. 
  • This had a significant impact on the Fragile Five, a group of emerging market economies considered more vulnerable to economic shocks.
  • Some of the countries on the Fragile Five list benefited from the tariffs. For example, Indonesia's exports to the United States increased after the imposed tariffs.
    • This is because Indonesia is a major exporter of commodities, such as oil and gas, not subject to tariffs.
  • As a result of the tariffs, Indonesia is now in a position to become a haven for investment during the trade war escalation. 
    • This is because Indonesia is a relatively stable economy with a strong growth outlook.

Concluding Remarks

The phrase “Fragile Five” is one of the abbreviations that have gained popularity over time, such as Jim O’Neill’s BRICS and MINTS acronyms. It stands for developing market economies that have become overly dependent on shaky foreign investment for their economic expansion. It is a rival to the term “BRICS,” which highlighted the long-term growth potential of Brazil, India, South Africa, Russia, and China.

We hope that all your doubts regarding Fragile Five will be cleared after going through this article. You can download the Testbook App now to check out various other topics relevant to the UPSC IAS Exam.

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Fragile Five FAQs

India distinguished itself from the other Fragile Five nations in 2015 by having a more stable currency, declining inflation, and a managed budget deficit. As a result, India was dropped from the list in 2017. India is not a fragile country.

"Fragile Five” is a concept used by a financial analyst at Morgan Stanley for the first time in August 2013 to describe emerging market nations that have grown overly reliant on risky foreign investment to fund their growth aspirations.

Fragile Five are determined by six criteria. These are currently Balanced Accounts, inflation, the proportion of external debt to foreign exchange reserves, government bonds held in foreign countries, debt in dollars, and actual rate difference.

A fragile state is a group of nations which primarily depend on foreign capital for economics. They rely heavily on foreign investments for growth.

A group of economies known as the "Fragile Five" primarily depends on foreign capital for economic expansion. The members of the Fragile Five have changed over time, yet they all share some characteristics.
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