Macroeconomic vulnerability of small developing states : will it squeeze into a single index?

Abstract

There have been various attempts to derive a single index of countries' macroeconomic vulnerability to exogenous shocks. It is now generally accepted that small developing states on average are particularly vulnerable, as evidenced by their historical volatility of aggregate output. Openness to trade is a key source of this volatility, but it has also contributed to these states' comparatively strong average economic growth. Exposure to natural disasters and external financial flows are other significant potential sources of macroeconomic vulnerability. There are a number of difficulties associated with drawing these variables into a single index, and there seems to be limited scope for employing such an overall index beyond proving that small developing states are generally more vulnerable. Instead, the focus should be on individual characteristics that define a country's vulnerability to particular types of shock. Such an approach will provide information for policy makers and may indicate where small developing states-or regional and international bodies that represent them-could beneficially engage in the international agenda. This may be in initiatives aimed at reducing shockspredominantly focused on the poverty reduction agenda-or reducing global processes that threaten to exacerbate the already high levels of vulnerability.