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Vulnerability in Small Island Economies. The case of the Caribbean Sebastian Auguste (UTDT) and Magdalena Cornejo (UTDT) 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). 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. 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) 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. 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) 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 Gündüz (2014), Méndez Quesada and Solera Ramírez (2004) Our Model M-equation multivariate probit model (M=4 countries), * yim m ' X im im , m 1,..., M * yim 1 if yim 0 and 0 otherwise yim=1 if the bad event is observed (growth collapse) in country m in quarter i. A prediction is given by Data Quarterly GDP data, available only for Barbados, Belize, Jamaica and Trinidad and Tobago. Growth crisis (similar to Dabla-Norris and Gündüz, 2014) happens if: 1. 2. the post-shock two-period average level of real GDP falls below the pre-shock three-period trend, and 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. Frequency of GDP Crisis Country Trinidad and Tobago Jamaica Barbados Belize 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 9 14 11 3 0.43% 0.40% 0.48% 2.58% when y=1 -1.68% -1.53% -3.29% -1.77% when y=0 1.62% 1.48% 2.19% 4.35% Growth crisis events (quarters) Number of crisis Population growth 2000-2010 Avg GDP growth X variables Chosen to capture foreign and domestic sources affecting GDP Variable Description Source Commodity prices Real prices of oil (WTI), banana, sugar in U.S. dollars Pink Sheet – World Bank Natural disasters Number of Caribbean natural disasters EM-DAT Damage Damage of natural disasters, in 000 U.S. dollars EM-DAT U.S. GDP growth U.S. real gross domestic output growth Intl. interest rate 10-Year Treasury constant maturities Exchange rate Exchange rate, national currency per U.S. dollar Visitors Number of tourist visitors Length stay Average length stay of tourist visitors, days TOT Terms of trade Debt/GDP Debt to GDP ratio Central Banks Ext Debt/GDP External debt to GDP ratio Central Banks Govt Exp/GDP Government expenditure to GDP ratio Central Banks Fiscal Deficit/GDP Fiscal deficit to GDP ratio Central Banks Intl. Reserves International reserves IMF / Bank of Jamaica Inflation Annual inflation rate IMF / Bank of Jamaica IMF Federal Reserve IMF / Bank of Jamaica Bank of Jamaica / Central Bank of Barbados Bank of Jamaica IMF / Central Bank of Trinidad and Tobago The results Variable Cumulative Growth (last 2 years) WTI price quarterly growth T&T Jamaica Barbados -0.27*** [-2.96] -0.11*** [-3.24] -0.27*** [-3.10] -0.04* [-1.87] -0.01* [-1.67] WTI price annual growth U.S. Treasury Bill 10-years quarterly growth Belize 1.86* [1.61] Debt / GDP 0.09** [2.37] External Debt / GDP 0.53* [1.84] -0.67*** [-3.16] -0.19** [-2.13] 0.23 [0.25] -0.03 [-1.33] -1.95 [-0.89] -7.86*** [-2.80] -10.78 0.59 86.05% 0.304 0.302 14 29 -7.79 0.63 93.18% 0.183 0.182 11 33 -8.13 0.28 95.83% 0.064 0.063 3 45 Government Expenditure / GDP -1.49*** [-2.57] 0.12** [2.07] U.S. GDP annual growth Caribbean Natural Disasters (=1) Sugar price Constant -0.90* [-1.91] Log likelihood Pseudo R2 Correctly classified Predicted probability Observed probability y=1 y=0 -8.56 0.62 86.36% 0.205 0.204 9 42 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 1.2 2002 Q1 2002 Q2 2002 Q3 2002 Q4 2003 Q1 2003 Q2 2003 Q3 2003 Q4 2004 Q1 2004 Q2 2004 Q3 2004 Q4 2005 Q1 2005 Q2 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 Model predictions. Trinidad and Tobago Growth Crisis Vulnerability Growth Rate (secondary axis) 1 0.2 0 8 6 4 0.8 2 0.6 0 0.4 -2 -4 -6 1.2 2002 Q1 2002 Q2 2002 Q3 2002 Q4 2003 Q1 2003 Q2 2003 Q3 2003 Q4 2004 Q1 2004 Q2 2004 Q3 2004 Q4 2005 Q1 2005 Q2 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 Model predictions. Jamaica Growth Crisis Vulnerability Growth Rate (secondary axis) 1 0.8 0.6 0.4 0.2 0 5 4 3 2 1 0 -1 -2 -3 -4 -5 1.2 2002 Q1 2002 Q2 2002 Q3 2002 Q4 2003 Q1 2003 Q2 2003 Q3 2003 Q4 2004 Q1 2004 Q2 2004 Q3 2004 Q4 2005 Q1 2005 Q2 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 Model predictions. Belize Growth Crisis Vulnerability Growth Rate (secondary axis) 1 0.2 0 20 15 0.8 10 0.6 5 0.4 0 -5 1.2 2002 Q1 2002 Q2 2002 Q3 2002 Q4 2003 Q1 2003 Q2 2003 Q3 2003 Q4 2004 Q1 2004 Q2 2004 Q3 2004 Q4 2005 Q1 2005 Q2 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 Model predictions. Barbados Growth Crisis Vulnerability Growth Rate (secondary axis) 0.6 0 8 6 1 4 0.8 2 0 -2 0.4 -4 0.2 -6 -8 Vulnerability 100% 90% 80% 70% 60% 50% 40% 30% T&T Barbados 20% 10% 0% Jamaica Belize Comparing Results Number of Briguglio and Galea (2003) growth EVIAR collapses EVI Briguglio et al (2008) M Probit Resilience Vulnerabil Predicted Index ity Index Probability Probit Predicted Probability Barbados 11 0.672 0,549 0.741 0.717 0.19 0,183 Belize 3 0.762 0,588 0.478 0.768 0.09 0,064 Jamaica 14 0.820 0,706 0.420 0.922 0.31 0,304 T&T 9 0.651 0,408 0.603 0.533 0.22 0,205 Belize is considered according to Briguglio’s 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 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)