Developing country vulnerability in light of the global financial crisis: Shock therapy?

Abstract

This paper adopts a vulnerability perspective to look into some of the key developmental issues that have been raised in discussions following the global financial and economic crisis of 2008–2009. We contend that country vulnerability, defined as probability of shocks × (exposure − resilience), matters for future growth and poverty reduction. However, different ways of dealing with vulnerability all have specific advantages as well as downsides. First, coping with the aftermath of shocks can be painful and is inherently backward-looking. Second, prevention by reducing exposure is typically a long-term process. Third, increasing resilience through self-insurance often carries high opportunity costs. And fourth, market insurance and hedging may be politically sensitive and is largely unavailable to countries that need it most. Hence we argue for a multi-layered ‘therapy’, combining different approaches with attention to the short and long term, mindful of country specifics and with roles to play for both developing countries themselves and international actors. A tentative exploration of how vulnerability has been dealt with before and during the crisis suggests that, in some areas, important progress has been made. Nevertheless, and particularly for low-income countries, there is still a long way to go.