World Development Report 2014: Managing Risk for Development
To learn about the reports' objectives, analytical framework, structure and more, download the Concept Note (.pdf)
The path of economic development is paved with risks and opportunities. On the one hand, facing risk is a difficult challenge; on the other, the opportunity for growth and welfare improvement may never materialize without confronting and even taking risks. This is true for individuals, families, enterprises, and nations.
The World Development Report (WDR) 2014, due out in the fall of 2013, will examine how improving risk management can lead to larger gains in development and poverty reduction. It will argue that improving risk management is crucial to reduce the negative impacts of shocks and hazards, but also to enable people to pursue new opportunities for growth and prosperity. Risk management is also a shared responsibility that requires the active participation of different economic and social systems, as well as the State.
How Can We Move from Ad Hoc Response to Systematic Risk Management?
An old proverb cautions that 'an ounce of prevention is worth a pound of cure.' There is a lot of truth to this: interventions to prevent infectious disease and infant malnutrition have repeatedly been estimated to have very high returns. Growing numbers of children are immunized against infectious diseases. Yet many developing countries are not moving very aggressively toward systematic prevention and preparation. The least developed countries are after all where immunization rates tend to be the lowest.
How can the constraints to systematic risk management be countered?
Can households and communities be induced to prevent and prepare for common risks? How can innovation and enterprise sector flexibility be best balanced with worker protections? Can financial institutions see profitable market opportunities in offering banking and insurance to the poor?
Can incentives for political leaders be tilted more toward broad prevention? Should protection be made universal, for example by mandating certain protective measures or outlawing risky products and behaviors? Or should choice be preserved while expanding access to risk management instruments so that agents can purchase insurance or invest in protective measures based on their needs and preferences?
Read more from the Concept Note and share your thoughts.
For poor households, risk is often decoupled from opportunity precisely because their exposure to risk and their limited capacity to cope prevent them from pursuing opportunities, both in the short and the long term. Moreover, high exposure to risk of income loss can push people to forgo investment in future opportunities. For example, in Cote d‘Ivoire, parents had to pull their children out of school following a drought, compromising the children‘s potential for income generation as adults.
However, there are several channels through which better risk management can improve access to opportunity. In Bangladesh, farmers who received a small incentive to migrate during the lean season were more likely not only to migrate but to increase their earnings and help to sustain consumption of their families in the village.18 Remittances from migrants to their families contribute in part to greater investment in education of the children, as shown in figure 10.
Who Is Empowered and Who Is Responsible for Risk Management?
To manage risks triggered by large, covariate (e.g. natural hazard), simultaneous, or sequential shocks (a drought followed by a food price shock and food insecurity), people need support from other systems.
How, then, should the responsibility for risk management be shared? Shared responsibility requires coordination between those affected by risks and those empowered to manage them.
People are increasingly in need of support from other socioeconomic systems, including the state, because of the increasing proportion of systemic risk in the totality of risks they face. Systemic risk could be increasing over time (figure 11), for instance, because of greater interconnectedness (financial globalization), clustering (urbanization), and growing overall risk exposure (wealth and population growth).24 If that is the case, systemic risk may need to be managed at more aggregate levels (such as the state or the international community).
Negative externalities need to be internalized and the positive ones rewarded through appropriately designed public policy.
Should the State “Play in the Field” or “Keep the Grass Green”?
The state is a key player in supporting people‘s risk management as well as that of their different support systems. In doing so, the state may either provide an enabling environment for efficient decision making or intervene directly. Overall, the state can ?keep the grass green? for the people and its support systems by, among other things, ensuring macroeconomic stability, the free flow of information, and sound regulatory frameworks.
But should the state also intervene directly? If so, in what circumstances? People tend to cut their health expenditures, for example, during crises and when they become unemployed. That was the case in the Republic of Korea during the 1997–98 Asian financial crises, until the government increased spending on health and welfare in 1998 (by 20 percent in social welfare and by 5 percent in public health and insurance). It also facilitated affordable care through its health infrastructure. The number of patients attending public health centers for treatment increased by almost 40 percent in during the crisis.
Direct state intervention can become a source of risk. If intervention is poorly designed, it can lead to moral hazard problems and excessive risk taking.
How Can Risk Management Strategies Account for Information Imperfection and Deep Uncertainty?
Knowledge is one of the pillars of risk management, but most decisions have to be made with imperfect information. Some decisions involve ?deep uncertainty,? that is, cases in which even experts cannot agree on the models that relate key forces that shape the future, the probability distributions of key variables and parameters, or the value of alternative outcomes (because, for example, they hold different views on the value of an ecosystem).36 How, for instance, should water infrastructure in Burkina Faso be managed when, in the presence of climate change, one model projects a 20 percent increase in precipitation and another a 20 percent decrease in precipitation (figure 13)?
New decision-making methodologies—often based on scenario analysis and vulnerability identification—have been developed to cope. But how can these new developments be translated into operational tools that can be applied by all actors, from households and firms to governments and international organizations? A growing set of case studies and the analysis of advisory bodies are helping determine what works and what does not.
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