Whose Global Pulse: Diagnosing Sickness or Health?

Wim NaudéUNU-WIDER

Global Pulse Workshop, Tarrytown, USA, 8-10 September 2010.

20 Years Ago...

• Nelson Mandela stepped as a free man from prison

• The Berlin Wall had just fallen• It was the end of the Cold War• The Human Development Index was adopted

by the UN• Britain ceased to be an Island;and• The Three Tenors sang for the first time...

Since then human-made and natural disasters struck

• Financial crises• 13 Oct 1989: Friday the 13th mini-crash Wall St.• 16 Sept 1992: Black Wednesday UK (withdrawal of pound from the ERM)• 1992: Nordic Banking Crisis• December 1994: The Mexican crisis of 1994-1995 (el error de diciembre)• 1995 Argentinian Crisis• July 1997: Asian Financial Crisis• 17 August 1998: Russian Financial Crisis• The Brazilian crisis of 1998-1999• The Argentinian crisis of 1999-2002• 10 March 2000: Dot-com bubble burst• 27 February 2007: The Chinese Correction plunge• 15 September 2008: Subprime Mortgage Crisis• 2009 : Global Economic Crisis (global recession)• February 2010: Greek sovereign debt crisis

....to name but a few of the more than 120 financial crises endured since the 1970s

Since then man-made and natural disasters struck

• Natural disasters:

Source of data: CRED

Since then man-made and natural disasters struck

• Food and energy price shocks

Source: FAO Source: UNCTAD Commodity Price Bulletin

The exhorbitant cost of recent disasters

Impacts of the Food, Fuel and Financial Crises on Selected Global Development Indicators(Source: Adapted from Heady et al., 2009:14)(Note: a Taken from Friedman and Schady, 2009; b Based on the ILO (2009a) worst case scenario forecast)

The exhorbitant cost of the financial crisis

UNU-WIDER thinking about human wellbeing

Measuring Human Development and Wellbeing

• Why: – Track progress (or decline)– Inform policy, inform responses

• How– UN SNA (national economy)– Quality of life : (i) objective (ii) subjective indicators– Multidimensional Poverty Indexes, Deprivation Indexes,

transient vs chronic poverty measurement, etc. • Examples– HDI, MPI, MDGs, Happy Planet Index, Global Peace Index,

Global Prosperity Index, Gallup World Poll, Competitiveness Index, etc etc.

Shortcomings• Future dimension– The world has become ‘risk sensitive’– Impact of and possibilities for further disasters

• Human-made disasters• Natural disasters

• Hence growth, GDP, HDI, MPI and MDGs are subject to risk and uncertainty

• How can this risk be measured, so as to track whether we are more or less at risk and inform policy ? – so to reduce risk, mitigate risk or assist risk coping

Vulnerability Initiatives• Vulnerability is the risk of some negative event

taking place.• It refers to a specific source of risk (hazard):

poverty, natural hazards, environmental degradation, conflict, climate change, etc.

• Measurements– Macro-level indexes (UN-DESA /Guilliamont, Briguglio

etc)– Vulnerability to natural disasters (see e.g. UN-EHS)– Micro-focus: household vulnerability to poverty (risk

to fall into or remain in income poverty)

What is ’Vulnerability to poverty’?

• Micro-level : = the risk of households falling in or remaining in poverty due to either idiosyncratic hazards or covariate/aggregate hazards.

• Macro-level : = the risk that a ‘system’ (such as a country) will be adversely affected by a shock or ‘perturbation’ - which include natural hazards, macro-economic shocks, or political conflict shocks – resulting in rising poverty.

Measurement of Vulnerability -II• Examples: Vulnerability to poverty can be measured

either as – (a) uninsured exposure to risk, – (b) expected poverty or – (c) lower expected utility, as a result of shocks which

affects income or consumption. • Some Examples on macro-level:– Commonwealth Vulnerability Index (CVI) – Inter-American Bank’s Prevalent Vulnerability Index

(PVI) – Environmental Vulnerability Index (EVI) developed by

UNEP and South Pacific Applied Geoscience Commission (SOCAP.

Examples: Typical components of a macro-economic vulnerability index

• Size of (local) economy • Structure of the local economy • International trade capacity • Peripherality • Development level of a place • Income volatility• Demography and health• Governance• Environment and geography, and • Financial system

Examples: ‘Intervention index’ for South Africa

Source: Naudé, W.A. , McGillivray, M. and Rossouw, S. (2009). ‘Measuring the Vulnerability of Sub-National Regions’, Oxford Development Studies, Sept. 37 (3): 249-276.

Shortcomings of Vulnerability Measures

• Largely based on existing national macro-data or household and labor surveys

• Problems with data availability and comparisons over time.

• Data frequency, lags.• Cannot predict a hazard from occurring.• Number of risks and VIs multiplying – a catastrophizing

industry)• Says little about responses or reactions• Black Swan problem (e.g. Oil spill in Gulf of Mexico)

Resilience (coping)• Is it better to measure resilience?• Resilience refers to the ability to withstand shocks, to recover and

bounce back.– Ex ante households often attempt to diversify their sources of

incomes, – ex post they rely on various forms of ‘insurance’ (insurance,

migration, networks, wealth)– Household capabilities, household assets, and the fragility of their

contexts (including state and natural environment fragility) play an important role in resilience

• It is not the inverse of vulnerability (sometimes reducing vulnerability does not mean improved resilience and vice versa – see e.g. trade)

• Resilience may also refer to a more long-term, stable ability than vulnerability

So how to measure resilience?• Institutional quality

– Governance (accountability, effectiveness, freedom, control of corruption)– Entrepreneurial economy response (ease of doing business)– Macro-economic stability and management– Shared society– Infrastructure, public assets– Aid effectiveness

• Household / Individual capabilities– Education and skills, incl . Entrepreneurial orientation (diversification,

innovation)– Health– Networks– Assets– Insurance– Migration

• Starting on a national level is a begin, but sub-national geographically referenced data is ultimately needed

Vulnerability to Poverty and Resilience focusing on the household

Household risk

Household coping

PovertyEx ante, ex post

Idiosyncraticrisk

Covariate risk

Ex ante coping

Ex post coping

Assets Context Fragility

Assets Context Fragility

Source: Naudé, Wim, Santos-Paulino, Amelia and Mark McGillivray, eds. 2009. Vulnerability in Developing Countries. Tokyo: UNU Press

Responding to Vulnerability, a Generic Approach

Household capabilities

Assets & Insurance

Fragile Context

Risk reductionRisk mitigation

Risk coping

Strenghten ResilienceIncomes

EducationHealth

MigrationEmpower women

Build BulwarksSavings and micro-credit

RemittancesInsurance schemes

NetworksEmergency responses

Aid effectiveness

Quality InstitutionsGovernance

Environmental sustainabilityInfrastructure

Macro-economic managementDisaster management

Focus Area Aim Policies & Measures

MeasurementMonitoring

Source: Naudé, Wim, Santos-Paulino, Amelia and Mark McGillivray, eds. 2009. Vulnerability in Developing Countries. Tokyo: UNU Press

Example: Vulnerability and resilience in Africa during the financial crisis -1

Risk and Extent of Adverse Impact of

Financial and Economic Crisis

Vulnerability to external economic

shocks

Resilience (Coping Ability)

Inherent (Structural) determinants:•Banking sector

exposure•Export dependence•Export concentration

Nurtured determinants•Macro-economic

management•Good governance

•Ease of doing business•Social cohesion

’Fragile’ and ’failed’ states

High Low

Example: Vulnerability and resilience in Africa during the financial crisis -2

Source : Naudé, W.A. (2010). Africa And The Global Economic Crisis: A Risk Assessment And Action Guide. RSCAS Working Paper no 2010/27, European University Institute, Florence.

Questions• Frequency of measurement?• Correlations with income? (NMR – ‘intervention

index’)• Confidence in predictive ability? • Only relative measures: what level of resilience is

enough and for what type of hazards?– Complacency (e.g. financial crisis)– Threshold levels: circuit breakers and signals

• Dangers of labels?• Moral hazards in resilience measures?

Thank you!