Vulnerability And Resilience London 28jul10

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CONCEPTUALIZING, MEASURING AND PROFILING ECONOMIC VULNERABILITY AND RESILIENCE Lino Briguglio, University of Malta

Commonwealth Secretariat LondonWednesday 28 July, 2010

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LayoutThe presentation is organised as follows: Introduction Juxtaposing economic vulnerability and

resilience Results of the resilience index and country

categorisation Policy implications of the juxtaposition exercise Country profiling of economic vulnerability and

resilience Concluding considerations

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INTRODUCTION

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Introduction

The economic characteristics of small states are well documented, and include limited ability to exploit economies of scale; lack of natural resource endowments and dependence on exports and imports.

Other characteristics relate to limitations of diversification possibilities; dependence on a narrow range of products; limitations on the extent to which domestic competition policy can be applied.

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In the case of small island states, a major problem relates to high international transport costs and uncertainties of industrial supplies due to insularity and remoteness.

In spite of this, many small island states would seem to be performing relatively well.

This paper will explore this seeming contradiction. The role of good economic governance is seen to be of major importance for resilience building.

Introduction (cont)

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JUXTAPOSING ECONOMIC VULNERABILITY AND ECONOMIC RESILIENCE

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► Economic vulnerability refers to inherent proneness of an economy to exogenous shocks

► Manifestations of vulnerability include high degree of fluctuations in GDP and in export earnings

► There are inherent features associated with small states, which lead to economic vulnerability.

► Such vulnerability arises from the fact that the economies of small states are, to a large extent, shaped by forces outside their control.

Meaning of Economic Vulnerability

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Studies on economic vulnerability so far have focused on measuring the phenomenon by proxying exposure to shocks or assessing variability in per capita incomes.

The economic vulnerability concept is related to exposure to shocks, and is sometimes measured by: Openness to international trade Export concentration Dependence on strategic imports.

Many studies conclude that small states tend to be more economically vulnerable than other group of countries

Studies on Economic Vulnerability

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Economic smallness is associated with a relatively high reliance on international trade: high reliance on imports due to limited natural resource

endowments and limited diversification possibilities; high reliance on exports due to the limited size of the market and to meet import expenditure.

What causes Economic Vulnerability?

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Economic vulnerability is also associated with: high export concentration (i.e. reliance on a few items of exports of goods and services) and high industrial concentration (i.e. reliance on a few items of manufactured products).

In addition, many small states are: prone to natural disasters, especially islands that are

exposed to sea-borne hazards, with lead to heavy economic losses; and

prone to sea-level rise as a result of global warming, thereby facing the prospects of heavy economic losses due to their very high dependence on coastal activities.

What causes Economic Vulnerability? (cont)

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► In spite of their economic vulnerability, many small states manage to generate a relatively high GDP per capita, when compared to other developing countries

► This has been called the ‘Singapore Paradox’ ► One can explain this paradox by juxtaposing economic

vulnerability with economic resilience.

Success In Spite of and Not because of Economic Vulnerability

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Economic resilience refers to the extent to which an economy

can withstand or bounce back from the negative effects of

external shocks.

Economic resilience (resilire) refers to: ► the ability of an economy to recover quickly following

adverse shocks: shock counteraction► The ability of an economy to withstand shocks: shock

absorption

Meaning of Economic Resilience

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► Resilience can be measured by an index which refers to what a country is doing to mitigate its inherent vulnerability, such as sound economic governance

► The combination of the vulnerability and resilience indices would indicate the overall risk of being harmed by external shocks

Economic Resilience Index

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A framework for the measurement of economic resilience

was developed by Briguglio et al. (2006) who constructed

a resilience index based on the following factors: ► macroeconomic stability; ► microeconomic market efficiency; ► good governance; and ► social development.

What helps to Build Economic Resilience?

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Methodological frameworkBy distinguishing between inherent economic vulnerability and nurtured economic resilience, it is possible to create a methodological framework for assessing the risk of being affected by external shocks, as shown in the following figure.

The figure shows that risk has two elements:► the first is associated with the inherent vulnerability - conditions of the country that expose it shocks, and► the second is associated with good economic governance ► the risk of being adversely affected by the shock is therefore the combination of the two elements.

Juxtaposing Vulnerability and Resilience

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Juxtaposing Vulnerability and Resilience (cont)

Risk of being harmed by external shocks

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On the basis of this methodology, one can propose 4 scenarios into which countries may be placed according to their vulnerability and resilience characteristics. These scenarios are termed “best-case”, “worst-case”, “self-made”, and “prodigal-son”. ► Countries classified as “self-made” are those that take steps to mitigate their inherent vulnerability by building their economic resilience, thereby reducing the risks associated with exposure to shocks.► Countries falling within the “prodigal-son” scenario are those with a relatively low degree of inherent economic vulnerability but which adopt policies that expose them to the adverse effects of exogenous shocks.

FOUR COUNTRY SCENARIOS

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► The “best-case” scenario applies to countries that are not inherently highly vulnerable and which at the same time adopt resilience-building policies.

► Conversely, the “worst-case” scenario refers to countries that are inherently highly vulnerable but make matters worse by adopting policies that exacerbate the negative effects of their vulnerability.

FOUR COUNTRY SCENARIOS (cont)

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► These four scenarios or cases are depicted in the following figure, where the axes measure inherent economic vulnerability and nurtured resilience, respectively.In this scheme the best situation in economic terms falls in quadrant IV.

► The vulnerable small island states that have adopted resilience-building policies are likely to fall in quadrant II.

FOUR COUNTRY SCENARIOS (cont)

20Resilience Index

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FOUR COUNTRY SCENARIOS (cont)

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RESULTS OF THE RESILIENCE INDEX AND COUNTRY CATEGORISATION

22Resilience

Results produced by Briguglio et al (2006)

Results of the V&R Juxtaposition

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Vulnerability

Resilience

The overall tendencies that emerged from the study:► countries which fall in the “best-case” quadrant are mostly

the large developed countries;► countries which fall in the “self-made” quadrant include a

number of small states with a high vulnerability score;► countries which fall in the “prodigal-son” quadrant include

mostly large third world countries; and► countries which fall in the “worst-case” quadrant include a

few vulnerable small countries with weak economic governance.

Results of the V&R Juxtaposition (cont)

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This approach could be used to:► support decision-making, setting targets and establishing

standards► distinguish between inherent features and policy induced

changes► disseminate information and drawing attention to the

issue of vulnerability and resilience► focus the discussion on the essential elements, given the

quantitative estimation requires precise definitions► promote the idea of integrated action

Results of the V&R Juxtaposition (cont)

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COUNTRY PROFILING

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► Studies on economic vulnerability and resilience focus on a cross-sectional approach, aimed at benchmarking countries within a global context.

► For the purposes of policy formulation and implementation, benchmarking within an international context is often merely a starting point which needs to be followed by more in-depth investigation of issues within the specific context of the country and its circumstances.

Country Profiling

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► A project towards this end was developed by the Commonwealth Secretariat in collaboration with the University of Malta.

► This project led to the methodological framework juxtaposition of vulnerability and resilience described above. In addition, it led a conceptual approach, as proposed by Briguglio et al. (2008), which is aimed at building a template of variables to be considered in the derivation of a vulnerability/resilience profile for an individual country.

Country Profiling (cont)

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The derivation of the economic vulnerability/resilience profile is based on three facets, as follows:► An assessment of the symptoms of economic

vulnerability. ► An assessment of the causes of economic vulnerability. ► An assessment of the adequacy of the policy framework in

generating economic resilience.

Each of these assessment facets can be carried out throughquantitative variables. In cases where quantitative variables are not available or insufficiently representative of the important issues under consideration, qualitative data can be used, which could then be expressed through a mapping scale of a number possibilities.  

Country Profiling (cont)

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► The conceptual framework outlined above has been applied in practice to three small states, namely Seychelles, St Lucia and Vanuatu.

► In all three cases, the approach adopted consisted of four main phases as follows:1. The identification of agencies that need to be consulted2. The setting of 4 panels on specific items3. The organisation of a national consultation conference4. Paper on vulnerability and resilience profile of the country5. Follow up projects

► The national consultation conference which was organised for the purpose, was supported by the Commonwealth Secretariat and organised by the government of the respective small states, with the present author and his colleagues from the University of Malta as consultants.

Country Profiling (cont)

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► The consultation conferences organised in the Seychelles, St Lucia and Vanuatu, were were each spread over two days, with the participation of about 70 public officials and representatives of civil society.

► In all the three conferences, the presentations and the ensuing discussions were very informative and elicited qualitative data which is often not easily accessible from public domain sources.

► The profiling exercises that were carried out have been useful mainly because they have enabled the countries concerned to carry out a self-examination so as to identify gaps in their policy framework

Country Profiling (cont)

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CONCLUDING CONSIDERATIONS

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Main Implications► The main implication of this study is that vulnerability has

negative connotations on economic development due to the effects of negative external shocks.

► On the other hand, resilience building has a positive influence on economic development as it helps a country to withstand or absorb these shocks.

► Also, economic resilience building leads to good economic governance.

► Many small states succeed economically in spite of the small size constraints, due to good economic governance.

Concluding Considerations

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Usefulness for policy ► The juxtaposition of economic vulnerability and resilience

permits an assessment of the reasons behind the economic success or failure of small vulnerable countries.

► A number of policy implications were suggested, mostly intended to enhance resilience building by:- reducing instability, - improving the workings of the market, - enhancing political governance, and - promoting social development.

Concluding Considerations (cont)

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Usefulness for country profiling► For the purposes of policy formulation and implementation,

it is useful to undertake in-depth investigation of issues within the specific context of the country and its circumstances

► The profiling exercises carried out by the Commonwealth Secretariat in collaboration with the University of Malta have been useful in this regard as this has enabled the countries concerned to carry out a self-examination in order to identify gaps in their policy framework

► Small island states that would like to undertake such a profiling exercise are welcome to approach the Commonwealth Secretariat in this regard.

Concluding Considerations (cont)

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THANK YOU FOR YOUR ATTENTION