Macro vulnerability in low income countries and aid responses
Macro vulnerability of the poor countries, an increasing concern of the international community, is analyzed as the risk that their development be hampered by the shocks they face, natural or external. Structural vulnerability mainly results from the size of the shocks and the exposure to the shocks, while general vulnerability also depends on resilience, mainly determined by policy. We first explain how, through instability, vulnerability affects growth and development, arguing four main points. The ex post effects are at least as important as the ex ante or risk effects. Instability affects productivity growth rather more than the level of investment. Primary or exogeneous instabilities lower growth through intermediate and policy related instabilities. Instability also increases the level of poverty (and child mortality), beyond its effects through the rate of growth. Second we examine how, for operational purposes, a synthetic measure of structural vulnerability can be obtained in an Economic Vulnerability Index (EVI), as that developed at the UN. The components of such a structural vulnerability indicator should be related both to the size of the natural and external shocks and to the exposure to these shocks. They should be averaged so that to reflect the interaction between shocks and exposure. The last part considers the implications for aid policy of the macro vulnerability of poor countries. It relies on the view that aid dampens consequences of vulnerability (i.e. vulnerability increases aid effectiveness) and that the aid volatility issue must be reexamined with this regard. Three aid responses are considered. Vulnerability (EVI) can be used as a criterion for aid allocation. Aid can be also designed as an insurance, if it can be disbursed quickly and effectively. Finally, but difficultly, aid can be oriented to contribute to the long-term reduction of vulnerability
Experiences with Traditional Compensatory Finance Schemes and Lessons from Flex
This paper describes some policy instruments set up by the IMF and the European Union in order to provide financial assistance to developing countries whose economies are affected by exogenous shocks from exports side. After briefly reviewing the IMF’s CFF and the EU’s STABEX, the paper presents the operational rules of FLEX and comments on how it functioned from 2000 to 2007. The analysis shows that the FLEX facility suffered from there being inadequate finance allocated to ACPs and from delays in the financing procedure. While these constraints greatly limited the impact of FLEX in the application years 2000-2006, the 2008 FLEX revision eased them and, now, FLEX can guarantee financial support more rapidly than in the past and may more satisfactorily cover the financial requirements of ACPs coping with export earnings instability.
The Use of Qualitative Information in Macro-Economic Policy Analysis
The majority of macro-economic policy models takes for granted that conflicts among objectives can be assessed by means of a tradeoff analysis. Such tradeoffs imply that sacrifices and benefits of various impacts of decisions can be measured on a cardinal scale, so that a conventional macro-economic utility or welfare analysis can be applied.