Economic vulnerability in the developing world with special reference to the Caribbean

Author(s): Crowards, Tom; Coulter, Wendy (1998)

Created 22 Jul, 1998
Categories Working Papers
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The economies of some countries may be inherently more susceptible to external shocks than others, putting their development performance at risk due to forces largely beyond their control. Such economic vulnerability is of particular concern to small island developing states (SIDS) whose small size, relative isolation and apparent high frequency of natural disasters might be expected to increase their vulnerability. This is an important issue in the Caribbean, with the majority of countries being SIDS, where relatively high income levels have led to declining access to concessional development assistance. Meanwhile, increasing globalisation and liberalisation of trade promise expanded economic opportunities, at the same time as having the potential to increase vulnerability. With the loss of preferential trade arrangements, structures supporting the export-oriented economies of the Caribbean are being dismantled. It is the reliance on exports, opening up economies to external shocks, which is an underlying source of economic vulnerability for many SIDS. Concentration of exports on a few goods or services, and the convergence of exports on a limited number of destinations are therefore included as parameters within the overall index of vulnerability. In addition, reliance upon external sources of finance; the degree to which an economy is peripheral or inaccessible; and dependence upon imports to satisfy energy requirements, are also considered. The index of economic vulnerability deriving from these parameters is found to be inversely related to developing countries’ size of population, suggesting that smaller countries tend to be more vulnerable. This is particularly so for small islands, while the Caribbean is found to be exceptionally vulnerable. It is suggested that vulnerability be considered alongside income per capita in any assessment of developing countries’ eligibility for assistance. In this way, information on actual income levels can be complemented by an indication of the potential for external shocks beyond the country to impact upon that income.

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