Risk and Opportunity
Managing Risk for Development
The
World Bank has finally declared that the international community must focus on
risk management./world
development report
Five key insights
on the process of risk management :
1. Taking on risks is necessary to pursue opportunities
for development. The risk
of inaction may well be the
worst option of all.
2. To confront risk
successfully, it is essential to shift from
unplanned and ad hoc
responses when crises occur to
proactive, systematic, and integrated risk management.
3. Identifying risks is not
enough: the trade-offs and
obstacles to risk
management must also be identified,
prioritized, and addressed
through private and public
action.
4. For risks beyond the
means of individuals to handle
alone, risk management requires shared action and
responsibility at different levels of society, from the
household to the
international community.
5. Governments have a critical role in managing systemic
risks, providing an
enabling environment for shared
action and responsibility,
and channeling direct support
to vulnerable people.
Likewise, better insurance and protection
can make coping less difficult
and costly.
The
benefits of preparing for risk outweigh the
costs
Crises and losses from
mismanaged risks are costly, but so are
the measures required to
better prepare for risks. So, does preparation pay off? Evidence suggests that
the benefits can outweigh the costs—sometimes overwhelmingly so. For example,
mineral supplements designed
to reduce malnutrition and related
health risks may yield
benefits at least 15 times greater
than the costs.
Risk management also requires
evaluating different risks and
the relative need of preparing
for each. Given limited resources,
setting priorities and making
choices is both unavoidable and
necessary. For instance, a
small country prone to torrential rains
and also exposed to
international financial shocks must decide
how much to spend on flood
prevention and how much to save
to cushion against financial
volatility.
Not only trade-offs must be
considered, but also synergies.
“Win-win” situations can both
diminish risk (the possibility
of loss) and increase
potential benefits. Prime examples
are investments in nutrition
and preventive health; improvements
in the business environment;
and disciplined monetary
and fiscal policies. Such
synergies are widespread and
should be emphasized—which is
not to say they are costless
or easy to implement.
People
and societies struggle to manage risk
If risk management can have
positive impacts and is cost effective,
then why aren’t people and
societies better at manag-
ing risk? The specific answer
varies from case to case, but is
always related to the
obstacles and constraints facing individuals
and societies, including lack
of resources and information,
cognitive and behavioral
failures, missing markets and public
goods, and social and economic
externalities
The interlinked
components of risk management
Knowledge
To understand shocks,internal
and external conditions, and
potential outcomes, thus
reducing uncertainty.
Coping
To recover from losses and
make the most of benefits
Insurance
To transfer resources
across people and over
time, from good to bad
states of nature
Protection
To reduce the probability
and size of losses and increase those of benefits
Preparation Coping.
This realization leads to an
important message. Identifying risks is not enough: the obstacles to risk
management must also be identified, prioritized, and addressed through private
and public action.
An
holistic approach to managing risk
Individuals’ own efforts are
essential for managing risk, but
their success will be limited
without a supportive environment. Most individuals are inherently ill-equipped
to confront
large shocks (such as the head
of a household falling ill),
systemic shocks (such as a
natural hazard or a financial crisis),
or multiple shocks (such as a
drought followed by a food
price shock). In such cases,
risk management requires shared
action and responsibility at
different levels of society, from the
household to the international
community. These social and
economic systems can support
people’s risk management in
different yet complementary
ways.
• The household
is the primary
instance of support, pooling
resources, protecting its
members—especially the vulnerable—
and allowing them to invest in
their future.
• Communities
provide
informal networks of insurance and
protection, helping people
deal with idiosyncratic risks and
pooling resources to confront
common risks.
• Enterprises
can help absorb
shocks and exploit the opportunity
side of risk, contributing to
more stable employment,
growing income, and greater
innovation and productivity.
• The financial
system can
offer useful risk management tools
such as savings, insurance,
and credit, while managing its
own risks responsibly.
• The state
has the scale
to manage systemic risks at the national
and regional levels, to
provide an enabling environment
for the other systems to
function, and to provide direct
support to vulnerable people.
These roles can be achieved
through social protection
(insurance and assistance), public
goods (national defense,
infrastructure, law and order), and
public policy (regulation,
macroeconomic management).
• The international
community can
offer expertise, facilitate
policy coordination, and pool
resources when risks exceed national
capacity or cross national and
generational boundaries.
These systems interact, often
complementing and sometimes
substituting for each other’s
risk management functions.
For instance, enterprises rely
on macroeconomic stability, public
services, and financial
products to remain dynamic and continue
to provide income and
employment to people. The financial
system can provide tools of
insurance, saving, and credit
only if enough households and
enterprises are able to partici
pate in the system and the
economy features a certain degree of
stability and predictability.
Markets, in general, can provide risk
management tools and resources
at a growing scale only if the
necessary public services,
such as the rule of law and a sound
regulatory framework, are in
place.
Mainstreaming
risk management into
development
programs
The World
Development Report 2014 offers dozens of specific
policy recommendations to
improve risk management at various
levels of society. Its
overarching advice, however, is
that these recommendations
should be implemented in a proactive,
systematic, and integrated way
to optimize their effectiveness.
For this purpose, it advocates
that countries establish
a national risk board, which
can help mainstream risk management
into the development agenda.
This could be a new
agency or come from reform of
existing bodies: what is most
important is a change in
approach—one that moves toward a
coordinated and systematic
assessment of risks at the national
and even international levels.
Implementing this recommendation
may require a substantial
change in the way governments
develop and implement their
general plans, considering
change and uncertainty as
fundamental characteristics of
modern economies.
Five
principles of public action for better risk
management
Analysis throughout the WDR
2014 suggests that
the public
action essential to supporting
people’s risk management can
usefully be guided by some key
principles.
A few facts about
risk and risk management from around the world
Despite
some progress, many people remain vulnerable:
• More than 20 percent of
people in developing countries live on less
than $1.25 a day, and
nearly 75 percent on less than $4.00.
• 70 percent of people in
developing countries do not use formal
financial tools.
• Over 70 percent of the
labor force in South Asia and Sub-Saharan
within firms.
• People living in fragile
and conflict-affected countries made up 15 percent of the world population, and
one-third of people living in extreme poverty in 2010.
When
risk is mismanaged, crises ensue:
• More people die from
drought in Africa than from any other natural hazard,
whereas virtually no one has died from drought in
developed countries in the
past four decades.
• The mortality rate from
illness and injury for children under age
five is almost 20 times
higher in low-income countries than in high income countries.
• 147 banking crises struck
116 countries from 1970 to 2011: the average
cumulative loss of output
during the first three years of crises
in emerging markets was 26
percent.
• During 2011–12, the
famine in Somalia
despite 11 months of
repeated warnings; opportunities for early
intervention were missed by
the donor community to avoid political and security risks.
Effective
risk management can improve resilience to negative shocks and the ability to
take advantage of positive shocks:
• Between 1990 and 2010,
the share of people in developing countries with access to improved sanitation
increased from 36 to 56 percent, while the immunization rate for measles
doubled. Infant and maternal mortality fell by more than 40 percent.
• Farmers in Ghana and India
rainfall insurance have
increased their investments in fertilizer,
seeds, and other inputs.
• Whereas a decade ago most
developing countries suffered from
a pro-cyclical bias, now
more than one-third of them conduct
recession-reducing
countercyclical macroeconomic policies.
Do not generate uncertainty or unnecessary
risks
The state should strive to
lessen uncertainty and reduce risks—
or, at minimum, not worsen
them. Why or how would a government do that? First, it may perpetuate social
norms that
discriminate against certain
groups, such as women or ethnic
groups, making them more
vulnerable. Second, it may favor
the group that supports it
politically against the legitimate interests
of others. Third, a government
that is internally fragmented
and disorganized may adopt
ambivalent policies or
implement policies
ineffectively. Finally, the government may
be guided by ideology, wishful
thinking, or simple desperation
when confronting difficult
problems, instead of relying on
measures based on good
evidence and analysis.
Provide the right incentives for people and
institutions
to do
their own planning and preparation, while avoiding
imposing
risks or losses on others
The right incentives are
critical to avoid cases in which some
benefit at the expense of
others. Bailouts should be avoided,
but if they occur, they should
be designed to prevent providing
the wrong incentives. Turkey
banking crisis (and especially
the unwavering stance of the
country’s bank regulatory
agencies) offers a prime example.
Social protection can be
criticized for not encouraging selfreliance
and posing an unsustainable
burden on the state.
These problems can be avoided
by a design that takes people’s
incentives directly into
account. Well-designed safety nets—
such as conditional cash
transfers or workfare programs in
household practices in
education, health, and entrepreneurship,
while remaining fiscally
sustainable. Two changes in
people’s mindset related to
individual and social responsibility
are critical for effective
risk management: moving from dependency to self-reliance, and from isolation to
cooperation.
Providing the right incentives
can contribute in both regards.
Keep a long-run perspective for risk
management
by
building institutional mechanisms that transcend
political
cycles
Institutional mechanisms are
needed that induce the state
to keep a long-run perspective
that outlasts volatile shifts in
public opinion or political
alliances. For instance, the state’s
provision of health services
must be funded on a continuous
and sustainable basis to
succeed. Thailand and Turkey
successful examples with their
recent shift to universal health
insurance programs. The
financial system must strike the
right balance between
inclusion and stability. In Malaysia
central bank, the finance
ministry, and the private sector are
preparing a long-run strategy
for the financial sector. Countercyclical monetary and fiscal policies also
require a long-run perspective. To this effect, Chile ,
Colombia , and Norway
been targeting a long-run
budget balance.
Promote flexibility within a clear and
predictable
institutional
framework
Flexibility in adjusting to
new circumstances is essential to
promoting resilience and
seizing opportunities.
Selected policy
recommendations from the WDR 2014
For
the household:
• Public health insurance,
run in partnership with the private sector,
with emphasis on preventive
care and treatment of contagious
diseases and accidents
• Public education, run in
partnership with the private sector, with
focus on flexible skills,
adaptable to changing labor markets
• Targeted safety nets for
the poor, for instance, conditional cash
transfers with payments
directly to women
• Enforceable laws against
domestic abuse and gender discrimination
For
the community:
• Public infrastructure for
the mitigation of disaster risks, built in consultation with surrounding
communities
• Transportation and
communication infrastructure, especially to
integrate and consolidate
isolated communities
• Police protection against
common and organized crime, especially targeted to communities under threat
• Enforceable laws against
racial or ethnic discrimination
For
the enterprise sector:
• Secure and respected
private property rights
• Streamlined and
predictable regulations for taxation, labor markets, and entry and exit of
firms
• Enforceable regulations
for workplace safety, consumer protection, and environmental preservation
• Consider the possibility
of delinking social insurance (that is, health insurance and old-age pension)
from work status
For
the financial system:
• Sound financial
infrastructure (payment systems, credit information) to facilitate financial
inclusion and depth
• Enforceable regulations
that foster both consumer protection and
competition among financial
institutions
• Macroprudential
regulation, for the financial system as a whole, to lessen financial crises and
avoid bailouts
• A national financial
strategy that addresses trade-offs between
financial inclusion, depth,
and stability
For
the macroeconomy:
• Transparent and credible
monetary policy, oriented to price stability and conducted by an autonomous
central bank
• For the majority of
countries, a flexible exchange rate regime, in a context of transparent and
credible monetary policy
• Countercyclical and
sustainable fiscal policy, aided by an independent fiscal council
• Provision for contingent
liabilities, such as natural disasters, financial crises, and pensions of an
aging population
For
the international community:
• Engagement in bilateral,
regional, and global agreements to share
risks across countries,
enhance national capacity, and confront
common risks, favoring proactive
and coordinated interventions
• For elusive global risks,
such as climate change, formation of a
“coalition of the willing”
with like-minded country governments,
creating incentives for
other countries to join in.
economic trends, and
innovation by enterprises in the face of
technological and demand
shocks. A challenge for the state is
to promote flexibility while
preserving a sensible, transparent,
and predictable institutional
structure. For enterprises,
the Danish model of
“flexicurity” offers such balance, combining
labor market flexibility
alongside a strong social safety
net and reemployment policies.
For the macroeconomy, inflation
targeting regimes with
floating exchange rates offer
a good model of flexible yet
institutionally sound monetary
policy.
Protect the vulnerable, while encouraging
self-reliance
and
preserving fiscal sustainability
For households that remain
highly vulnerable to shocks, the
state can provide safety nets.
These are possible even in lowincome countries, provided the support is clearly
targeted to
vulnerable populations and is
designed to encourage work effort.
of households from food
insecurity while investing in community
assets. The international
community can also provide
resources and expertise to
vulnerable populations. Although
much criticized, foreign aid
has been successful when provided
in coordination with
accountable local institutions, as
occurred in Indonesia
management, by promoting
sustained growth, can lessen vulnerability and help eliminate extreme poverty.
SKU 32799
No comments:
Post a Comment