Summary: Financial systems can contribute to economic development by providing people with useful tools for risk management, but when they fail to manage the risks they retain, they can create severe financial crises with devastating social and economic effects. The financial crisis that hit the world economy in 2008-2009 has transformed the lives of many individuals and families, even in advanced countries, where millions of people fell, or are at risk of falling, into poverty and exclusion. For most regions and income groups in developing countries, progress to meet the Millennium Development Goals by 2015 has slowed and income distribution has worsened for a number of countries. Countries hardest hit by the crisis lost more than a decade of economic time. As the efforts to strengthen the financial systems and improve the resilience of the global financial system continue around the world, the challenge for policy makers is to incorporate the lessons from the failures to take into consideration the complex linkages between financial, fiscal, real, and social risks and ensure effective risk management at all levels of society. The recent experience underscores the importance of: systematic, proactive, and integrated risk management by individuals, societies, and governments to prepare for adverse consequences of financial shocks; mainstreaming proactive risk management into development agendas; establishing contingency planning mechanisms to avoid unintended economic and social consequences of crisis management policies and building a better capacity to analyze complex linkages and feedback loops between financial, sovereign, real and social risks; maintaining fiscal room; and creating well-designed social protection policies that target the vulnerable, while ensuring fiscal sustainability.
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