CDP Blog

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.

Ocean Thermal Energy Conversion (OTEC)

by Al Binger

The oceans cover 70.8 percent of the world and act as solar irradiative energy collector and heat storage on earth, especially in the tropic region. This huge available thermal energy, which is replenished every day by the sun, represents a tremendous pollution-free natural energy resource for human progress and civilization. Ocean Thermal Energy Conversion (OTEC) technology refers to a mechanical system that utilizes the natural temperature gradient that exists in the tropical ocean between the warm surface layer and the deep cold water, to generate electricity and produce other economically valuable by-products from its Deep Ocean Water Applications (DOWA). These DOWA include producing large quantities of drinking water, supporting aquaculture and fish farming, making fertilizer and hydrogen, and cooling or air conditioning, among others. The science and engineering behind OTEC has been studied and experienced for decades in many countries such as Britain, France, Japan, Netherlands and the United States. OTEC electric power generations have been demonstrated and many DOWA sub-systems have been individually designed, tested, advanced and reported with fruitful results. The Scientific and Technical Advisory Panel (STAP) of the Global Environment Facility (GEF) reviewed a proposed OTEC project for the Caribbean states in 2000, concluded that, “OTEC is too promising to be ignored, particularly for the small island states, and that the potential multi-purpose benefits of the technology deserve recognition.”

Generally OTEC is a low temperature, low speed and low pressure energy conversion machine, hence it requires relatively low operation and maintenance costs, and NO fossil fuel consumption. In addition, the oceanic thermal resource in not intermittent, OTEC systems can be operated at full capacity around the clock and consequently make maximum use of its capital investment. The tropical ocean thermal reservoir is the largest natural renewable energy resource in the world. It is large enough to have the potential to serve as the alternate for the much expensive and rapidly exhausting fossil fuel in future. It would be possible that OTEC will supply all of human energy needs in perpetuity, after its advanced development and supporting infrastructure are available. But, so far, there is not yet one successful OTEC field demonstration of an integrated system over the world.

In the previous US national policy review on energy in the 1990s, there were few sentences, mentioned in the US Report of the Energy Research and Development Panel, which commented that based mostly on the 1980s field experimental results, “OTEC’s prospective (at the time) was poor.” This advisory statement has been quoted as guidelines for eliminating all OTEC funding in the U.S., ever since. Until today, there has been no recent systematic evaluation of this potentially important OTEC technology and its DOWA systems. Technical advances as well as global climate and economic developments make it a suitable time to take a fresh look at OTEC systems both as appropriate for tropical island-based multi-product installations and as large scale energy base for liquid hydrogen production floating platforms.

As petroleum consumption continue to outstrip new discoveries and the future forecast is for continuation of this trend, the world needs to seriously look at the vast untapped potential of the tropical ocean and not continue on the path of carbon energy and its negative economic, social and environmental consequences. I wonder? Is anyone out there listening?