WDR 2014 Managing Risk for Development

1. WDR 2014Managing Risk for Development November 13, 2012

2. Motivation

3. 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

4. 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…

5. 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

6. Focus and Value Added

7. 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

8. 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

9. Analytical Framework

10. 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

11. 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

12. The risk chain (I) An imposed risk derived from negative shocks/trends

13. The risk chain (II) A voluntary risk taken on in response to positive shocks/trends

14. Basic risk management

15. 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

16. 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

17. Household • Primary instance of support • Sharing resources to care for the vulnerable: Young, old, ill • Building resilience while taking development decisions

18. Community • Pooling idiosyncratic risks using informal networks • Collective action - combining efforts and assets to confront common risks, • natural disasters • crime and violence

19. Enterprise Sector • Absorbing and transforming economic shocks • Helping stabilize people’s income, employment, expenditures • Doing so through, • innovation • competition • resource reallocation

20. Financial System • Providing with financial risk-management tools and services, • insurance • credit • Avoiding being a source of instability or systemic propagation of shocks

21. National Economy • Providing macro stability • Ensuring effective state resource mobilization, • for social protection • for public goods & services

22. Global Community • Providing global expertise and knowledge • Facilitating international policy coordination • Pooling of international resources

23. The state as fundamental support

24. Key Questions

25. Five cross-cutting questions • How to move from ad hoc response to systematic risk management?

26. Measles immunization rate (% of children aged 12-23 months) Source: World Development Indicators 2012, Table 2.18.

27. Five cross-cutting questions • How to move from ad hoc response to systematic risk management? • How can risk management unleash opportunity?

28. Rainfall insurance encourages Indian farmers to increase their investments Source: Cole, Gine, and Vickery 2011.

29. 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?

30. 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.

31. 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.

32. 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”?

33. 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.

34. 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.

35. 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?

36. Change in annual rainfall in 2080–2100 compared with 1980–2000 in Africa • Source: Intergovernmental Panel on Climate Change 2007.

37. Outline

38. 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

39. Conclusion

40. 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

41. 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