WDR 2014 Managing Risk for Development. November 13, 2012. Motivation. Risk as a burden. On the one hand , facing risk is a difficult challenge for households, communities, firms, and countries The possibility of, losing a job… going bankrupt… suffering from disease…
WDR 2014Managing Risk for Development November 13, 2012
Risk as a burden • On the one hand, facing risk is a difficult challenge for households, communities, firms, and countries • The possibility of, • losing a job… • going bankrupt… • suffering from disease… • being affected by natural hazard… can damage lives, assets, and trust
Risk and opportunity • On the other hand, the opportunity for growth and welfare improvement may not come without taking on risks • Risk is inherent in the pursuit of new opportunities, • a country opening its borders… • a firm upgrading to more advanced technologies… • a farmer adopting new crops… • a rural household migrating to the city…
Motivation • Growth and development can be achieved only by confronting risks responsibly and efficiently • Limiting the losses from risks that are ‘imposed’ • Enabling people to take on risk in pursuit of opportunity → Systematic risk management
Focus • The WDR 2014 will focus on the process of risk management • Not on specific risks or particular social programs • The WDR 2014 will focus on risks faced by people and countries in their struggle for development • Considering both idiosyncratic and systemic risks
Value added • Timely • Given the global food, fuel, financial, and fiscal crises, moving from crisis response to managing risk is essential • Risk as intrinsic to development • Risk needs to be managed, not necessarily avoided • Risk management can be an instrument for development • Holistic • Resilient development requires action by all the major social and economic actors and systems • Balanced view of government and other support systems • Positive and negative: The state can enhance but may also hinder people’s efforts
Analytical framework: Roadmap • Definitions • The context: Risk chain • Basic risk management • The constraints: No one can do it alone… • Social/economic support systems • Complementary roles • Household → → → → International community
Basic definitions • Risk: The possibility of loss • Risk management: The process of, • preparing (ex ante RM) • confronting and taking on risks • coping (ex post RM) • The goal of risk management: • Mitigate the losses and improve the benefits that people may experience while conducting their lives and pursuing development opportunities
The risk chain (I) An imposed risk derived from negative shocks/trends
The risk chain (II) A voluntary risk taken on in response to positive shocks/trends
The constraints… • People’s internal conditions: • Lack of resources • Lack of information • Cognitive failure • Behavioral failure • People’s external environment • Missing markets • Missing public goods • Externalities • Exclusion
On their own, people cannot overcome all constraints and manage risk effectively Well-functioning social and economic systems can support people’s risk management Social / Economic support systems
Household • Primary instance of support • Sharing resources to care for the vulnerable: Young, old, ill • Building resilience while taking development decisions
Community • Pooling idiosyncratic risks using informal networks • Collective action - combining efforts and assets to confront common risks, • natural disasters • crime and violence
Enterprise Sector • Absorbing and transforming economic shocks • Helping stabilize people’s income, employment, expenditures • Doing so through, • innovation • competition • resource reallocation
Financial System • Providing with financial risk-management tools and services, • insurance • credit • Avoiding being a source of instability or systemic propagation of shocks
National Economy • Providing macro stability • Ensuring effective state resource mobilization, • for social protection • for public goods & services
Global Community • Providing global expertise and knowledge • Facilitating international policy coordination • Pooling of international resources
Five cross-cutting questions • How to move from ad hoc response to systematic risk management?
Measles immunization rate (% of children aged 12-23 months) Source: World Development Indicators 2012, Table 2.18.
Five cross-cutting questions • How to move from ad hoc response to systematic risk management? • How can risk management unleash opportunity?
Rainfall insurance encourages Indian farmers to increase their investments Source: Cole, Gine, and Vickery 2011.
Five cross-cutting questions • How to move from ad hoc response to systematic risk management? • How can risk management unleash opportunity? • Who is empowered and who is responsible for risk management?
More shelters have reduced the loss of lives as large cyclones hit Bangladesh (1970–2010) Source: Staff calculations based on data from EM-DAT CRED.
Access to finance • Source: FinScope Access to Finance Surveys for Botswana, Ghana, Kenya, Lesotho, Malawi, Mozambique, Namibia, Nigeria, Pakistan, Rwanda, South Africa, Swaziland, Tanzania, Uganda, Zambia, 2006-2011.
Five cross-cutting questions • How to move from ad hoc response to systematic risk management? • How can risk management unleash opportunity? • Who is empowered and who is responsible for risk management? • Should the state “play in the field” or “keep the grass green”?
Better macroeconomic conditions lead to lower growth contraction in the face of global economic crises (sample of low-income countries) Source: Staff calculations based on data from World Development Indicators and International Financial Statistics.
Heavy product market regulations raise macroeconomic volatility Volatility of output gap • Source: Loayza, Oviedo, and Servén, 2010, Figure 3.4. • Source: Bergoeing et al., 2004, Table 3.
Five cross-cutting questions • How to move from ad hoc response to systematic risk management? • How can risk management unleash opportunity? • Who is empowered and who is responsible for risk management? • Should the state “play in the field” or “keep the grass green”? • How to account for information imperfection and deep uncertainty in risk management?
Change in annual rainfall in 2080–2100 compared with 1980–2000 in Africa • Source: Intergovernmental Panel on Climate Change 2007.
THE STATE THE ENTERPRISE SECTOR THE FINANCIAL SYSTEM THE NATIONAL ECONOMY THE HOUSEHOLD INT’L COMMUNITY Support Systems THE COMMUNITY RISKS TO PEOPLE: STYLIZED FACTS Analytical Framework THE ROLE OF SUPPORT SYSTEMS, INCLUDING THE STATE RISK MANAGEMENT: BASICS
In conclusion… • WDR 2014 will aim to provide: • Analysisof risk management • Applicationsfrom complementary perspectives • Implicationsfor development actors • from civil society and governments in developing countries • from donor community to international organizations → Policy-relevant analysis of risk management from a holistic and people-based perspective Policy recommendations on how to build resilience by removing obstacles to effective risk management
Main (preliminary) messages • Effective risk management can open doors to opportunity, especially for poor people • For this purpose, it is essential to move from ad hoc responses to systematic preparation • To be successful, risk management should involve shared responsibility and action by households, private sector, and the state