Measuring vulnerability : a methodological review and a refinement based on partner country and price volatility issues

Abstract

Indexes of vulnerability are intended to measure the proneness of countries to exogenous shocks lying outside their control, or to the increased susceptibility of such countries to the adverse effects of these shocks. The main attempts to measure vulnerability found in the literature focus mainly on openness to international trade and capital flows, export concentration and dependence on strategic imports. This paper presents a conceptual refinement to these ideas by assessing the importance of the stability of partner countries and of price volatility as important determinants in the way in which such variables impact on vulnerability. Subject to the usual measurement problems, the index proposed here generally confirms that small states, particularly if insular, tend to face heightened degrees of vulnerability.