Economic Vulnerability and Resilience: Concepts and Measurements

Abstract

In this paper, economic vulnerability is defined as the exposure of an economy to exogenous shocks, arising out of economic openness, while economic resilience is defined as the policy-induced ability of an economy to withstand or recover from the effects of such shocks. The paper briefly reviews the work already carried out on economic vulnerability and extends the research towards the development of a conceptual and methodological framework for the definition and measurement of economic resilience. Towards this end, the paper proposes an index of economic resilience gauging the adequacy of policy in four broad areas, namely macroeconomic stability, microeconomic market efficiency, good governance and social development. The analysis of economic resilience explains how small economies can attain a relatively high level of gross domestic product per capita if they adopt appropriate policy stances. In other words, the relatively good economic performance of a number of small states is not because, but in spite of, their small size and inherent economic vulnerability. The results of this study can be used as a tool towards the formulation of policies aimed at overcoming the adverse consequences of economic vulnerability.