Using Indices to Capture Vulnerability for Development Finance in SIDS

Abstract

This rapid review examines evidence on indices to capture vulnerability for development finance in Small Island Developing States (SIDS). A key issue when it comes to aid allocation to Small Island Developing States (SIDS) is whether current measures of development – such as income per capita - are truly able to reflect the unique set of challenges that these countries face. Inability to accurately measure development in SIDS can lead to substantial risk. On the one hand, aid allocation that solely relies on income levels may result in an unsustainable reduction in external support to SIDS, leaving them to face high levels of economic, environmental, and social vulnerability. On the other hand, an inadequate measure of vulnerability can lead to no clear pathway to the reduction in aid, making it very improbable for SIDS to become self-reliant, no matter how far they develop or climb the income ladder. This aim of this paper is twofold. The first is to look at whether vulnerability indices can help determine the levels of external support SIDS need. The second is to consider how this can help in determining when support can be reduced or terminated. This is achieved by considering the different indices that international organisations and multilateral development banks use to capture the vulnerability of SIDS, how they use these indices to determine thresholds for aid allocation, and the advantages and disadvantages of applying each.