Small states and the vulnerability resilience framework : withstanding exposure to adverse external shocks

Abstract

The vulnerability and resilience (V&R) framework tests the hypothesis that highly economically vulnerable countries, in terms of their exposure to adverse external shocks, can still be successful economically if they are governed well, and conversely, countries that are relatively sheltered from such shocks can perform badly, if their governance is weak. The model is based on two indices, the first measuring economic vulnerability and relates to exposure of countries to adverse external shocks and the second relating to resilience, which in this study is associated with policy induced measures, thus with governance. In this framework, governance is given a wide definition, covering economic, political, social and environmental dimensions. The mentioned hypothesis was tested empirically with up to date data a re-estimation of the original model. This paper presents additional methodological explanations on how the model of the V&R framework was developed, and discusses new results. Our study finds that small states are disproportionally burdened, relative to other states, especially when trying to build resilience to adverse external shocks. The paper concludes by discussing the issue of concessional finance for small states so as to enable them to strengthen their institutional frameworks, aiming to inform the policy donor community.