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