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Vulnerability in Developing Countries

Wim Naudé, Amelia U. Santos-Paulino and Mark McGillivray

The global economic crisis, which erupted about one year ago with the US sub-prime mortgage crisis and the collapse of the investment bank Lehman Brothers, painfully reminds us on how vulnerable developing countries can be to external shocks.
The recent UNU-WIDER volume 'Vulnerability in Developing Countries', provides  perspective and insight into the nature and policy implications of such vulnerability. It is complemented by a UNU-WIDER edited special issue of the journal Oxford Development Studies, focusing on recent advances in the measurement of vulnerability. This article draws on some of the key approaches in the book and the special issue. An understanding of how developing countries are vulnerable to the shocks of a global economic crisis, and how they can improve their resilience to cope and recover, is essential in informing the policy response.

Defining Vulnerability

‘Vulnerability’ is a multi-dimensional concept that relates to risk. Thus, depending on the risk of concern, various disciplines  attach different definitions to the concept. In Economics, vulnerability is dealt with both at the micro and macro levels.

At the micro-level it most often refers to the vulnerability to poverty, i.e. the probability that a household or individual will fall into or remain in poverty. This definition depends on one’s notion of ‘poverty’ and how to measure it. Therefore, in practice vulnerability to poverty is measured either as Vulnerability as Expected Poverty (VEP), Vulnerability as Low Expected Utility (VEU) and Vulnerability as Uninsured Exposure to Risk (VER), all with reference to the mean and variance of a household’s income or consumption. Yuan and Wan illustrate that vulnerability to poverty measures are sensitive to the choice of poverty line (UNU-WIDER Special Issue of Oxford Development Studies, 37(3): September 2009). They show that it is better to set the vulnerability line at 50 per cent, to use past average income as an estimate of permanent income and to use a higher poverty line (US $2 rather than $1) in order to improve the measurement of household vulnerability to poverty.

Good examples of the micro-level analysis of vulnerability to poverty, in some cases using all three of the measures of vulnerability, are provided in the first part of the book. In chapter 2 Raghav Gaiha and Katsushi Imai construct various vulnerability measures for households in the states of Maharashtra and Andhra Pradesh in India. They combine both measures of ex ante vulnerability (such as VEP and VEU) with ex post measures of vulnerability (such as VER). These measures are also decomposed, and this finds that idiosyncratic risk contributes the most to vulnerability in India (37 per cent) followed by poverty (35 per cent) and covariate (or aggregate) risk (22 per cent).

At the macro-level, vulnerability is studied in the context that certain hazards may adversely affect a country or region’s economy. These may be natural, like an earthquake or man-made such as a financial crisis. Here it is important to identify and measure the potential occurrence of hazards. From an economic perspective a country’s exposure to macro-economic shocks, such as a financial crisis or sudden drop in export demand, generally depends on its reliance on exports and degree of export diversification, and on its openness to financial flows. More specifically, economic vulnerability has been measured in economic literature by a variety of indicators related to a country’s foreign trade and investment profile. Various vulnerability indexes on the country level have been proposed since UN-DESA initiated work on the vulnerability of Small Island Developing States (SIDS) in the early 1990s. These, and others, are critically discussed in the papers by Briguglio and co-authors, and Guillaumont in the  Oxford Development Studies special issue.

Good examples of the macro-level analysis of vulnerability to various hazards are provided in part two of the book. For instance in chapter 8 by Martin Heger, Alex Julca and Oliver Paddison, the focus is on the Caribbean. This region is similar to SIDS in being highly vulnerable to natural hazards, and this chapter complements well the UNU-WIDER special issues of thePacific Economic Bulletin and Journal of International Development dealing with the vulnerable small island states of the Pacific. In this chapter, the authors discuss various ways to mitigate the impact of disasters and in particular argue for a greater emphasis on ex ante mitigation strategies such as diversification of the islands’ production and export structures. In the wake of the current global economic crisis many developing countries, not just SIDS, are searching for more intensive ways to limit dependence on export markets by diversifying their economies and relying more on growth in the domestic market.

Defining Resilience

But how much a country or household is at risk of being negatively affected by an external shock, depends not only on its vulnerability, but also on its resilience. In the case of a country, for example, resilience refers to its ability to cope or recover from a shock. Guillaumont’s paper, in the Oxford Development Studies special issue, makes a distinction between structural economic vulnerability, which is exogenous to a developing country (like the US financial crisis), and state fragility, which is vulnerability due to inappropriate policies, institutions and weak governance. This implies that in order to deal with vulnerability, we  need to address not only the sources of vulnerability in the external environment, but also ‘self-inflicted’ vulnerabilities due to various degrees of state fragility/weak governance. Indeed, in many developing countries self-inflicted vulnerability may be an important factor in undermining resilience. The worst affected may be the category of countries often referred to as ‘fragile states’ (see the UNU-WIDER policy brief on fragile states) where governments often do not have the ability and/or willingness to assist their populations in times of crisis.

The paper by Briguglio and co-authors in the Oxford Development Studies special issue seeks to better conceptualize and measure economic resilience. They observe that many countries which seem highly vulnerable still manage to achieve high and stable economic growth. Briguglio et al call this the ‘Singapore Paradox’, in reference to this small island state’s remarkable development performance in the face of high vulnerability to external shocks. According to the authors the way to understand the Singapore Paradox is to note that such countries have adopted appropriate policies and institutions to help them cope with the effects of what is called ‘inherent’ vulnerability (which is similar in concept to Guillaumont’s notion of ‘structural vulnerability’). In essence, such countries have policies and institutions in place which strengthens their economic resilience.

On the household level, there is a growing body of research that studies household resilience. Both ex ante and ex post coping strategies have been distinguished. Ex ante, households often attempt to diversify their sources of incomes, and ex post a negative event, often rely on various forms of insurance. An important message in the book 'Vulnerability in Developing Countries' is that household capabilities, household assets, and the fragility of their contexts (include state and natural environment fragility) play an important role in vulnerability.

Policy Implications and Concluding Remarks

Understanding the dimensions of vulnerability and resilience at micro and macro-levels leads to a number of policy implications explored in the book and special issues.

First, households tend to adjust their behaviour and attempt to deal with external shocks unilaterally. Often it is effective (and households in developing countries are very inventive), but regularly adverse coping is observed. Chapter 5 in the book, by Bird and Prowse, details the adverse coping strategies (such as dropping out of school, or cutting back on health care) of many Zimbabwean households. In the current economic conditions, following the global economic crises, a real threat is that households’ coping responses will include adverse coping, leaving permanent scars. Therefore, households need to be assisted by community, government as well as international measures. In particular, the impact of shocks often overwhelms individual households. Also, many of the goods needed to strengthen household resilience are public goods. The continued provision of basic goods and services, including education, health services, public infrastructure and protection of property rights, are essential in times of crisis. Here, continued and scaled up foreign aid can make a huge difference in cash-strapped developing countries.

The second policy implication is that since poverty is a multi-dimensional dynamic and forward-looking concept, performance indicators should ideally relate the success of poverty reduction strategies and policies to their impact on risk and resilience.

Third, as the chapters in the book clearly show, the nature of vulnerability varies significantly amongst individual, households and countries. Local knowledge is therefore vital in addressing vulnerability. For instance, as Marlene Attz argues in chapter 9, a ‘gendered’ approach to vulnerability is important. Women often comprise a disproportionate share of the poor, and their traditional role of caregivers, and often more extensive social networks, makes them important agents in the identification and mitigation of risks, and in post-disaster assistance.

Fourth, the proper and useful measurement of vulnerability and resilience will require much better data than is currently available. Often in the most vulnerable countries, Sub-Saharan Africa for instance, data constraints are most serious. Investing in sound, reliable, timely and regular data to capture poverty-vulnerability-resilience will improve resilience.

Finally, the most sensible approach towards dealing with the impact of external shocks or hazards is one that aims to reduce or mitigate risks and assist risk coping, through three broad classes of interventions:

• Strengthen resilience

• Build bulwarks

• And  ensure quality institutions.

The final chapter of the book elaborates these.

Concluding remarks

Progress has been made in recent years in understanding and expanding the notion of vulnerability, and the advances have important implications for the efforts towards reducing poverty.  But, much remains to be done in terms of refining, measuring, and applying the notion of vulnerability to research and policy analysis. Importantly, tackling vulnerability through strengthening household resilience, building appropriate bulwarks against risk, and creating and maintaining quality institutions remains a challenge.

WIDER Angle newsletter, September 2009
ISSN 1238-9544