Managing change and cultivating opportunity: the case for a capability index measuring countries' ability to manage change

Countries are constantly confronted with financial crises, natural disasters or long-term widespread processes that affect their fundamental structure over time. It is important to understand the capability of a country to manage these different types of change. This paper examines the various types of capability that may determine a country’s ability to manage change to its own advantage.

The paper categorizes the factors that determine a country’s underlying capability to manage change into three broad groups:

• Economic capabilities – relating to economic policies and frameworks
• Governance and institutional capabilities – relating to the capacity of government, and the institutional arrangements that have been established
• Social capabilities – relating to the characteristics of a society, such as literacy, social support networks and equity.

The paper argues that the ‘underlying capability’ of a country to manage change depends on certain fundamental characteristics which are important regardless of the nature of the change. It provides examples of capability to manage change from Tanzania, Singapore, Costa Rica, and Mauritius. It considers the extent to which existing data and indicators may be used to measure the capabilities. It explains that the key part of the international agenda following the financial crisis has been to develop better systems for managing change or shocks, and to ‘build back better’ in a way that:

• makes economies less vulnerable to volatility
• enables them to take advantage of new opportunities
• helps them respond to and also proactively stimulate structural change

The analysis shows that existing indices do not capture various dimensions of capability such as:

• R&D policies, institutional arrangements and risk management capabilities
• Effectiveness of state-business relations and entrepreneurship
• Policies that may contribute to economic diversification
• Social safety nets for households and for affected firms.

The paper concludes that there is a need to develop a new ‘Capability Index’, which would measure the underlying capabilities to:

• Enable developing countries to benchmark their progress over time
• Alert development agencies and donors which countries are better prepared to cope with change to enable them target, prioritize, and design their assistance accordingly
• Assist governments and donors to spot and mitigate potential areas for improvement
• Provide input into policy and regulatory development
• Inform investors looking for growth opportunities and minimize risks, facilitating private sector development
• Enable further academic analysis to strengthen the global understanding of the determinants of capability in different situations.