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…– 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 and Value Added

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

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)

Ex-postRisk Mgt.

Outcomes

Loss

External Environment

Internal Conditions

Crisis/Disaster

Resilience

Confront Risks

A ChangingWorld

Negative Shocks / Trends

ExposureShocks / Trends

Ex-anteRisk Mgt.

An imposed risk derived from negative shocks/trends

The risk chain (II)

Ex-postRisk Mgt.

Exposure Outcomes

Loss

Benefit

External Environment

Ex-anteRisk Mgt.

Internal Conditions

Crisis/Disaster

Resilience

Success

Shocks / Trends

A ChangingWorld

Pursue Opportunity& Confront

Risks

Shocks / Trends

A voluntary risk taken on in response to positive shocks/trends

Basic risk management

Ex ante and ex post risk management

EX ANTE

EX POST

RISK MANAGEMENT

KNOWLEDGEof shocks, exposure, and

potential outcomes

INSURANCE

to transfer resources from good to bad times

PROTECTIONto reduce the probability and

size of losses and increase those of benefits

COPINGto recover from losses and make the most of

benefits

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

Social / Economic support systems

International community

Nation

Community

Household

Financial system

Enterprise sector

• On their own, people cannot overcome all constraints and manage risk effectively

• Well-functioning social and economic systems can support people’s risk management

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

The state as fundamental support

Households• family ties

Communities• collective action

Enterprise sector• jobs and income

Financial system• insurance and credit

National economy• macro stability and resource mobilization

The State

• Social protection• health, old age, and unemployment insurance• assistance and relief

• Public goods• infrastructure• law and order• national defense

• Public policies• macroeconomic mgmt• regulatory framework

People’s Risk Management

The International Community • expertise, coordination, resources

Key Questions

Five cross-cutting questions

1. How to move from ad hoc response to systematic risk management?

Measles immunization rate (% of children aged 12-23 months)

0

10

20

30

40

50

60

70

80

90

100

1980 1985 1990 1995 2000 2005 2010

East Asia & Pacific

Europe & Central Asia

Latin America & Caribbean

Middle East & North Africa

Sub-Saharan Africa

South Asia

Source: World Development Indicators 2012, Table 2.18.

Five cross-cutting questions

1. How to move from ad hoc response to systematic risk management?

2. How can risk management unleash opportunity?

Rainfall insurance encourages Indian farmers to increase their investments

0%

10%

20%

30%

40%

50%

60%

Amount of fertilizer

Amount of seeds

Amount of pesticides

Amount of bullock labor

Amount of hired labor

Amount borrowed for

inputs

% of households that invest more % of households that invest less

Source: Cole, Gine, and Vickery 2011.

Five cross-cutting questions

1. How to move from ad hoc response to systematic risk management?

2. How can risk management unleash opportunity?

3. 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)

12

500

2500

3000

1388.66

42.340

500

1000

1500

2000

2500

3000

3500

1970 1991 2007

Number of Shelters Number of deaths (in the hundreds)

Source: Staff calculations based on data from EM-DAT CRED.

Access to finance

Formally Served28%

Informally Served20%

Financially Excluded

52%

Access to financial risk management tools, selected countries

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

1. How to move from ad hoc response to systematic risk management?

2. How can risk management unleash opportunity?

3. Who is empowered and who is responsible for risk management?

4. 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

0

2

4

6

8

10

12

Inflation (%) Current account deficit

(% GDP)

Fiscal deficit (% of GDP)

Reserve coverage

(months of imports)

Period prior to global crisis in the past

Period prior to 2008 global crisis

-2.0

-1.0

0.0Past global crisis 2008 global crisis

Change in GDP per capita growth after global crisis

Source: Staff calculations based on data from World Development Indicators and International Financial Statistics.

(sample of low-income countries)

Heavy product market regulations raise macroeconomic volatility

ARG

AUSAUTBEL

BFA

BGD

BOL

BRABWA

CAN

CHE

CHLCIV

COG

COLCRI

DNK

DOM

ECU

EGY

ESP

FIN

FRAGBR

GHA

GMBGRC

GTM

HND

HTI

IDN

INDIRL

IRN

ISLISR

ITA JAM

JOR

JPN KEN

KOR

LKA

MAR

MDG

MEX

MWI

MYS

NER

NGA

NIC

NLDNOR

PAKPAN

PER

PHL

PNG

PRT

PRY

SEN

SLVSWE

SYR

TGO

THA

TTO

TUN

TUR

URY

USA

VEN

ZAF

ZMB

ZWE

0.0

2.0

4.0

6

0 .2 .4 .6 .8 1Product Market Regulation Index

Correlation: 0.39***

Product Market Regulation

0102030405060708090

100

0 1 5 10 20 30%

of G

DP

loss

rea

lized

Quarters

Distortion-freeEconomy

Subsidized Economy

Vola

tility

of o

utpu

t gap

Source: Loayza, Oviedo, and Servén, 2010, Figure 3.4. Source: Bergoeing et al., 2004, Table 3.

Five cross-cutting questions

1. How to move from ad hoc response to systematic risk management?

2. How can risk management unleash opportunity?3. Who is empowered and who is responsible for

risk management?4. Should the state “play in the field” or “keep the

grass green”?5. 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

CCSM 3 GFDL–CM2.0

Source: Intergovernmental Panel on Climate Change 2007.

Outline

THE HOUSEHOLD

THE COMMUNITY

THE ENTERPRISE

SECTOR

THE FINANCIAL

SYSTEM

THE NATIONALECONOMY

RISK MANAGEMENT: BASICS

THE ROLE OF SUPPORT SYSTEMS, INCLUDING THE STATE

Support

Syste

ms

Analytica

l

Framew

ork

INT’LCOMMUNITY

RISKS TO PEOPLE: STYLIZED FACTS

THE STATE

Conclusion

In conclusion…• WDR 2014 will aim to provide:

– Analysis of risk management

– Applications from complementary perspectives

– Implications for 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