Using the economic vulnerability index (EVI) as a criterion for aid allocation
Chairman of the Foundation for studies and research on international development (FERDI)
The Economic Vulnerability Index (EVI) captures a country’s exposure and vulnerability to exogenous shocks due to its structural characteristics. It was originally designed as one of the three criteria used to identify the least developed countries, the other two being income per capita and a human capital index. EVI can also be used in other areas of development cooperation, in particular for the design of aid policies as an additional relevant criterion of aid allocation and selectivity.
Shocks contribute to increased volatility of output growth, which lowers the average rate of growth and slows down poverty reduction. Yet, none of the usual criteria of aid allocation - the level of poverty and the quality of governance in the potential recipient countries - includes structural vulnerability.
There are at least two main reasons to include economic vulnerability as an additional tool in ODA allocation. First, as evidenced by research works, aid effectiveness increases when structural vulnerability is high, because aid dampens the negative consequences of shocks. Using structural vulnerability as an ex ante aid allocation criterion would lead to an immediate dampening of any given shock. This does not necessarily take place with the other policies - however useful they are - that use aid as insurance and aim at compensating for shocks only after their occurrence.
The second main reason is given by equity considerations. If we admit that a goal of aid is to compensate for handicaps in order to promote the equality of opportunities, there is need to have a measure of structural vulnerability, a handicap to growth, as a criterion for aid allocation.
Cape Verde - transition from LDC category
Cape Verde graduated in December 2007. The continued successful integration of Cape Verde in the world economy depends on government policies and support from its development partners. Graduation will involve challenges, in particular, in reconciling the possible reduction in grants and concessional financing support with the country's dependency on aid.
Cape Verde is the first LDC to graduate under the new smooth transition strategy resolution adopted by the UN General Assembly for countries graduating from the list of least developed countries. The resolution urges all development partners to support the implementation of the transition strategy and to avoid any abrupt reductions in either official development assistance or technical assistance provided to the graduated country. In line with the General Assembly resolution, Cape Verde prepared a transition strategy in consultation with its development partners under the so-called Groupe d’Appui à la Transition (GAT) comprising the vision and commitment of the Government and its partners for the smooth transition of the country from the LDC category.
So far, a number of development partners have signaled that their special partnerships with Cape Verde will not be affected by its graduation:
- Cape Verde has been granted a period of transition allowing to benefit from the LDC specific GSP Everything But Arms initiative from the European Union for 3 years.
- Portugal and Cape Verde signed a cooperation agreement covering the next four years, worth 70 million euros.
or, started a new collaboration:
- Trade-related technical assistance through the Integrated Framework (IMF, ITC, UNCTAD, UNDP, World Bank and the WTO) launched in September 2007.
Others appear to interpret the graduation of the country as the beginning of a new era:
- The Dutch Government seems to have decided to adjust its development cooperation relationship with the country: reduced development cooperation and a new emphasis on political, economic and cultural cooperation.
- UNCDF no longer funds projects in Cape Verde.
For the near future, the overall picture seems to be that some donors may scale down their assistance, but that most may maintain, and a few even increase, their cooperation. On its part, Cape Verde is preparing for possible declines in ODA by strengthening revenue mobilization, promoting private sector development, and attracting capital flows.
The CDP will continue to monitor the development progress of Cape Verde and report its findings to ECOSOC in 2009.
What benefits do LDCs get
The international support measures associated with LDC status are related to trade preferences and the volume of ODA including development financing, technical cooperation and other forms of assistance. LDCs that are WTO members can also benefit from special and differential treatment regarding WTO-related obligations.
In order to arrive at a better understanding of the support extended to LDCs, the CDP Secretariat is currently working on an analysis of the existing support measures available to this category of countries. The results will be made available in the forthcoming publication "Handbook on the Least Developed Country Category - Inclusion, Graduation and Benefits". The CDP Secretariat has also launched a multi-year project on improving the capacity of LDCs to make use of the support measures derived from LDC status and for the phasing out of such measures after graduating from the LDC category. Furthermore, main LDC donors will be approached for feedback on the benefits provided.
We would like to initiate a discussion among development partners, policy makers in LDCs and researchers on the issue of support measures and welcome inputs and ideas.
