Working Paper
Assessing the Economic Vulnerability of Small Island Developing States and the Least Developed Countries

Macro vulnerability of the small island developing states (SIDS) as well as of least developed countries (LDCs) has been an increasing concern for the international community. This concern has led to the creation of the economic vulnerability index (EVI) in order to assess comparatively the degree of structural economic vulnerability of countries. Structural vulnerability results mainly from natural or external shocks faced by countries, and their exposure to these shocks. General vulnerability, on the other hand, depends on the resilience of the country which is determined mainly by policy. We first explain how vulnerability affects growth and development, particularly in small developing countries, by considering the consequences of the size of shocks, the exposure to shocks and the consequences of resilience. The channels of transmission are also explored in an attempt to explain how instability slows down poverty reduction not only directly but also through lower growth. We also examine how the EVI, as a synthetic measure of structural vulnerability, has been designed and how it can be used to compare SIDS and LDCs. Both groups are more vulnerable than other developing countries, but in a different way. Lastly, the paper considers some of complementary implications on policy of the availability of the EVI with regard to the LDCs and the SIDS. It argues that EVI is a relevant tool not only for the identification of LDCs, but also for geographical allocation of aid allocation so as to favour vulnerable countries, including both LDCs and SIDS, even though not all SIDS qualify as LDCs. In both exercises, however, the EVI cannot be the only criterion.