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.
International cooperation and middle income countries
by José Antonio Alonso
Professor of Applied Economics
Director, Instituto Complutense de Estudios Internacionales, Complutense University of Madrid
In the last few years, the international community has taken important steps in defining its commitment to the fight against poverty in a more precise way. These changes were accompanied by a greater emphasis on the need to target aid resources, in a much more focused way at social sectors and countries with the most acute levels of poverty. For this reason more attention has been demanded for the poorest regions, like sub-Saharan Africa, reducing (or eliminating) aid which previously went to countries with greater income levels. Therefore, there are already various donors (among those some from the European Union) who have decided to end their cooperation and to close their representation in various middle income countries (MIC). That process can be observed in the case of Latin American countries (both South American and Central American) which have seen a reduction in both the resources and the number of donors available to back aid initiatives in the last few years.
Nevertheless, close to 95 countries (or territories) belong to the middle income group: in other words, about 60 percent of those which belong to the developing world. Besides that, about half (47.7%) the world population lives in MIC (including the decisive weighting of China) and contributes about 36% of world GDP (in purchasing power parity).
Therefore even accepting the need to pay greater attention to the poorest countries, there are still good reasons for the international community to continue to support the development efforts of the MIC. In particular, it is necessary to maintain aid to the MIC:
- because more than 41% of the poor population of the world, with less than 2 dollars a day, lives in these countries: so if we want to eradicate poverty we necessarily have to obtain effective development results in these countries;
- because middle income countries are highly vulnerable to external shocks or internal crises: in such a way that international support may be necessary to consolidate and ensure achievements;
- because the contribution of this group to the provision of international public goods – especially environmental goods – is decisive: which justifies the support of international community for those countries efforts to promote this type of goods which benefit everyone;
- because of the weighting of some of those countries in their region, their success in development terms can have a positive effect on the progress of third countries, providing stability in the international system;
- and, finally, because it is necessary to create a system of cooperation which is incentive-compatible with the aims of development: if only deficient results – and not successes – are rewarded alone by international aid, we are introducing a problem of perverse incentives and moral hazard into the cooperation system.
In short, the idea would be to avoid a system that creates a radical border between recipient and non recipient countries. Instead of that, we should promote an international cooperation system able to follow up the development efforts of these countries until they are firmly consolidated, by adjusting the aid to the specific needs in each recipient development phase. To make this kind of system coherent, it is necessary to involve all those countries (not only today’s donors) in sustaining international aid so they are able to advance in their levels of development. In contrast with an excessively dual vision of the system, which neatly separates the functions of donor and recipient countries, we should promote the progressive involvement of middle income countries in active aid tasks as they progress in their experience of development. That involves their increasingly active participation in a South-South cooperation, which should be supported by donors through various forms of triangular cooperation and regional cooperation.
