Sebastian Auguste (UTDT) and Magdalena Cornejo (UTDT)
Vulnerability in Small Island Economies. The case of the
Caribbean
Slide 2
Objective To develop a vulnerability index for the Caribbean
that: Captures the specificities of each country. Includes exposure
and resilience. Changes over time Suitable to the statistics
available for the region Can be used for policy making (indicating
when the economy is more vulnerable to shocks so the Government can
react).
Slide 3
Some definitions Vulnerability: Guillaumont (2010), economic
vulnerability is the risk of a (usually poor) country seeing its
development hampered by a natural disaster or external shocks.
Vulnerability vs Volatility: Vulnerability: the probability of
having a very bad event, related to the concept of Value at Risk
(VaR) in finance Volatility: risk of being away from the expected
value, concept of standard deviation or coefficient of variation in
finance.
Slide 4
According to Briguglio Vulnerability can be seen as the result
of three components: the size and frequency of the exogenous
shocks, either observed (ex post vulnerability) or anticipated (ex
ante vulnerability); (e.g. whether there are tropical storms or
not) exposure to shocks; (e.g. whether the tropical storm can hit
the country) the capacity to react to shocks, or resilience (e.g.
whether the tropical storms that hit the country generates losses
or not)
Slide 5
3 ways to build indexes 1. Ad Hoc Indices Briguglio (1992,
1995, 1997, 2002), United Nations (1994), Briguglio and Galea
(2003); Briguglio et al.(2009), Atkins, Mazzi and Easter (2000),
Liou and Ding (2004), Easter (1998), Turvey (2007), Crowards
(2000), St. Bernard (2007). Advantages: easy to construct, easy to
compare countries as the same index is build for all the countries
Limitations: it captures the size and frequency of the schock, but
not exposure or resilience.
Slide 6
2. Two tier approach Variables to be included are selected
based on econometric analysis, that links an output variable (e.g.
GDP, poverty, etc.) with potential factors. Only those factors that
are significant are latter included in the index. Examples. Atkins
et al., 2000; Guillaumont and Chauvet, 2001; Peretz et al.,
2001)
Slide 7
3. Probit (Regression based index) A simple way to do a
regression based index is using a Probit model (defining a variable
that takes 1 when there is crisis, 0 no crisis). Once the probit
model is estimated, the same model can be used to predict future
crisis. More related to the literature on Early Warning Systems
(EWS) Advantage: Only shocks that are capable of affecting the
economy are significant It captures the three concepts of
vulnerability endogenously (the variable is the shock, its
coefficient is the resilience) It is non linear (so the different
shocks have interactions) It focus only on the bad events (linear
regression is looking at the volatility of a variable) Examples.
Easterly and Kraay (2000), IMF (2011) and Dabla-Norris and Gndz
(2014), Mndez Quesada and Solera Ramrez (2004)
Slide 8
Our Model M-equation multivariate probit model (M=4 countries),
y im=1 if the bad event is observed (growth collapse) in country m
in quarter i. A prediction is given by
Slide 9
Data Quarterly GDP data, available only for Barbados, Belize,
Jamaica and Trinidad and Tobago. Growth crisis (similar to
Dabla-Norris and Gndz, 2014) happens if: 1. the post-shock
two-period average level of real GDP falls below the pre-shock
three-period trend, and 2. the real GDP annual growth rate is below
the long-run population growth at time t (i.e. per capita GDP
growth is negative). Note: that by taking annual growth with our
quarterly data, we eliminate the problems of adjusting to
seasonability.
Slide 10
Frequency of GDP Crisis CountryTrinidad and
TobagoJamaicaBarbadosBelize Growth crisis events (quarters) 2008Q4,
2009Q1, 2010Q1, 2010Q2, 2010Q4, 2011Q1, 2011Q3, 2011Q4, 2012Q1
2001Q4, 2007Q4, 2008Q1, 2008Q2, 2008Q3, 2008Q4, 2009Q1, 2009Q2,
2009Q3, 2009Q4, 2010Q1, 2010Q2, 2011Q3, 2012Q1 2001Q2, 2001Q3,
2001Q4, 2002Q1, 2008Q4, 2009Q1, 2009Q2, 2009Q3, 2009Q4, 2010Q1,
2012Q2 2007Q3, 2009Q2, 2011Q2 Number of crisis91411 3 Population
growth 2000-2010 0.43%0.40%0.48%2.58% Avg GDP growth when y=1
-1.68%-1.53%-3.29%-1.77% when y=0 1.62% 1.48% 2.19%4.35%
Slide 11
X variables VariableDescriptionSource Commodity prices Real
prices of oil (WTI), banana, sugar in U.S. dollarsPink Sheet World
Bank Natural disasters Number of Caribbean natural disastersEM-DAT
Damage Damage of natural disasters, in 000 U.S. dollarsEM-DAT U.S.
GDP growthU.S. real gross domestic output growthIMF Intl. interest
rate10-Year Treasury constant maturitiesFederal Reserve Exchange
rateExchange rate, national currency per U.S. dollarIMF / Bank of
Jamaica VisitorsNumber of tourist visitors Bank of Jamaica /
Central Bank of Barbados Length stayAverage length stay of tourist
visitors, daysBank of Jamaica TOTTerms of trade IMF / Central Bank
of Trinidad and Tobago Debt/GDPDebt to GDP ratioCentral Banks Ext
Debt/GDPExternal debt to GDP ratioCentral Banks Govt
Exp/GDPGovernment expenditure to GDP ratioCentral Banks Fiscal
Deficit/GDPFiscal deficit to GDP ratioCentral Banks Intl.
ReservesInternational reservesIMF / Bank of Jamaica InflationAnnual
inflation rateIMF / Bank of Jamaica Chosen to capture foreign and
domestic sources affecting GDP
T&T. The two sources of growth crisis are foreign shocks:
WTI price and US interest rates. Jamaica. Two main sources: Natural
disasters or a fall in US GDP. Barbados: change in government
expenditure and US GDP Belize: WTI, US GDP and External Debt
Remark: Only in Barbados and Belize a domestic variable can affect
growth, both related to fiscal policy. Remember both countries have
a hard peg with US dollar, so coping with shocks is basically done
through fiscal policy. In both cases more expenditure or more debt
is related with more vulnerability. For Jamaica and T&T, that
have floating exchange rate, fiscal policy variables are not
significant, and the floating exchange rate seems to be the
stabilizer. Finally, in terms of the predicted power of each case
analyzed, Belize shows the best performance, follows by Barbados,
Trinidad and Tobago and Jamaica
Slide 14
Model predictions. Trinidad and Tobago
Slide 15
Model predictions. Jamaica
Slide 16
Model predictions. Belize
Slide 17
Model predictions. Barbados
Slide 18
Vulnerability
Slide 19
Comparing Results Number of Briguglio and Galea (2003)
Briguglio et al (2008)M ProbitProbit growth collapses EVIAREVI
Resilience Index Vulnerabil ity Index Predicted Probability
Barbados110.6720,5490.7410.7170.190,183
Belize30.7620,5880.4780.7680.090,064
Jamaica140.8200,7060.4200.9220.310,304
T&T90.6510,4080.6030.5330.220,205 Belize is considered
according to Briguglios works the second most vulnerable, but it
shows the lowest frequency of collapses. In our model it is the
less vulnerable. Only for Jamaica the relative ranking
coincides
Slide 20
Conclusions We elaborate a regression based vulnerability
index, based on recent works that use probit model, more in the
spirit of how vulnerability is measured in microeconomics. It has
the advantage of been suitable for the Caribbean with serious data
limitations, providing a time variant index, that can be used to
know when the economy in entering in red area Including resilience
endogenously Our difference with previous works in this area are:
Use of panel data with quarterly information Use of an M-Probit
model Include time series aspects (state variables)
