Economic vulnerability, resilience and capital formation

Abstract

This chapter explores the links between mainstream economic growth theories and economic vulnerability. The author shows that vulnerability, defined as the inherent exposure to exogenous shocks, has important effects on per capita output levels and economic growth. The model discussed in this chapter assumes a pattern of shocks which is symmetrically distributed between adverse and favourable ones. However, the production and utility functions with diminishing marginal returns, as postulated in standard economic theory, allows downside shocks to have relatively stronger effects than positive ones. The author argues that economic vulnerability can lead to higher per capita output but lower consumption levels as economies invest in resilience building to overcome the negative effects of exogenous shocks. The author further argues that these findings constitute a possible approach towards the resolution of the so called "Singapore paradox".