world development report

Risk and Opportunity

Managing Risk for Development
Beneficiaries:
- The civil society
- Makers of public administration
- The managers of the private sector
Seminar held on July 15 in
a presentation and reading the report of the World Bank in 2014
Cyclone warning in Bangladesh.
With good preparation, simple but
effective interventions can save lives and
avert damages.
Amir Jina/UN ISDR
Risk and Opportunity
Managing Risk for Development
world development report


The possibility

of loss.

It can be

imposed from

outside or

taken on

voluntarily in

the pursuit of

opportunities.
The possibility of
gain. It can be
regarded as the
upside of risk.
Risk & opportunity : definition
Risk Opportunity
Risk that is
common to most
members of an
entire system.
Risk that is
specific to some
members of a
system.
Risk
Systemic risk Idiosyncratic risk
4.0
0.3
3.0
0.2
2.0
700 0.7
0.5 500
20 16
19912000
50
0
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Food price volatility (right axis)
2000
19912000
19811990

20012010
19811990

20012010




a. Large recessions
a
b. Incidence of natural disasters
b

2.5
1.5
0.1
1.0
0.5
0 0
OCED EAP ECA LAC MENA SAR SSA OCED EAP ECA LAC
MENA SAR SSA
c. Incidence of epidemics
c
d. Maternal mortality
0.8
19811990
800
1990
0.6
20012010
600
2010
0.4 400
0.3 100
e. Homicides f. Food prices and global sea level rise
25 70 20
19811990 60
Change in global mean sea level

A risky world: Risks vary over time and across regions
In the past few decades, the patterns of risk that people have faced have
diverged. The incidence of natural disasters, food price shocks, and risks from
climate change have increased substantially. By contrast, fewer risks have
materialized in other areasincluding maternal health, where the mortality rate
has declined in all regions.
For some risks, progress has varied across regions. Developed countries have
experienced more large recessions and health epidemics over the past three
decades, although the incidence of shocks is generally lower than in developing
countries. By contrast, developing countries experienced fewer economic recessions
in the 2000s than in the 1980s and 1990s, but they faced an increasing incidence of
shocks in other areas, notably in epidemics in Sub-Saharan Africa, and homicide in
Latin America
100
finding one? a good education? civil war?
25th
%

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a. How many times in the past 12 months have you:
Been without food? Felt unsafe from crime? Been without medicine Gone without income?
60 or health treatment?
50
40
30
20
10
0
b. To what degree are you worried about:
Losing your job or not Not giving your children War, a terrorist attack, or
90
75th
percentile
80
70
Median
60
Households in developing countries feel susceptible to risk and
are concerned by it
Households in developing countries face many shocks
Shocks
One or more
Two or more
16.4
8.7
48.9
39.2
61.6
23.4
34.4
11.9
72.1
36.1
40.0
12.7
66.8
40.4
20.7
1.4
34.4
1.9
29.7
5.6
56.2
15.6
Natural disasters (drought, flood)
Price shocks
c

Employment shocks
Health shocks (death, illness)
Personal and property crime Family
and legal disputes
10.6
0.2
6.4
6.9
1.8

42.2
3.0
4.3
14.0
6.6

57.3


30.2
0.9
1.9
5.6
4.4
9.3
23.2
5.8
0.0
36.0
4.9
3.1
33.8
1.9
0.9
10.4
21.1
7.7
10.1
8.5
1.7
47.2
42.0
3.4
18.0
8.4
4.3
2.6

6.4
9.1
3.2
0.7
21.5

1.5
8.9
3.1
0.3
19.9
1.7
1.9
11.8
6.6

52.1
3.2
0.7
14.9
8.7

Afghanistan
a
India
b
Lao PDR Malawi Peru Uganda
Urban Rural Rural Urban Rural Urban Rural Urban Rural Urban Rural
Percentage of respondents reporting type of shock

Risk
cks
management
Outcomes

Internal conditions
Outcomes
63
Sho Outcomes
management


External environment
Risk
Internal conditions

The risk chain: The nature and extent of outcomes depend on shocks,
exposure, internal conditions, and risk management
Wath is risk management?

Defintion : The process that involves confronting risks, preparing for them (ex ante
risk management), and coping with their effects (ex post risk management).
The goal of risk management is to mitigate
the losses and improve the benefits that
people experience when they face risk and
opportunity.
Why is risk management relevant for development?
Risk management can both increase economic returns and reduce the propensity
for crises: there need not be a trade-off between resilience and growth :

Risk management saves lives

Risk management averts damages and prevents development setbacks

Risk management unleashes opportunity
60
for family at origin
Seeds
Food Nonfood Caloric 2008 2009 50 30 10 10 30 50
% of households % of households
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F i g u r e 1 . 2 Risk management tools can help people pursue opportunity
a. Rainfall insurance in India b. Seasonal migration in Bangladesh
Effect of rainfall insurance on the amount of:
Migration rate Change in consumption

Fertilizer
50

40
30
Hired
labor 20
Borrowing 10 for inputs
0
expenditure expenditure intake
that invest less that invest more Incentivized group Non-incentivized group
Risk management unleashes opportunity
58
vulnerable to
(<$10 a day)
40
%

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in poverty

B o x 1. 2 While poverty has declined, many people around the world remain vulnerable to poverty
In a significant achievement, poverty in developing countries has While all regions have reduced the shares of the population steadily declined over the past two
decades. The share of people that live in or are vulnerable to poverty, progress has varied across living below $2.50 a day has dropped from 72 percent in 1990 to 50
regions. In Europe and Central Asia, where poverty was already rel- percent by 2010. Nonetheless, a substantial proportion of people atively low, substantial progress
has been made in reducing vulner- remain vulnerable to poverty, with 89 percent of people in develop- ability to poverty. In East Asia and the Pacific, the rate of
poverty ing countries living on less than $10 a day in 2010, compared with 94 was cut in half from 1990 to 2010, from 88 percent 40 percent, but percent in 1990.
a
While
chronic poverty has declined significantly, 92 percent of the population continues to live in poverty or be vul- the large share of people in developing countries that live
very close nerable to it. Similarly, in the South Asia and Sub-Saharan Africa to poverty highlights the potential for substantial increases in tran- regions, 98
percent of the population lived on less that $10 a day as sient povertywhich can have long-run consequences for peoples of 2010.
health and livelihoodswhen people are hit by negative shocks.
Share of population in developing countries living in or vulnerable to poverty
100
1990 2010
80
60 Population
Population poverty
(<$2.50 a day)
20
0
All East Asia Europe Latin Middle South Sub- developing and
and America East and Asia Saharan countries Paci c Central and the
North Africa
Asia Caribbean Africa
Risk management unleashes opportunity
What does risk management entail?
Managing risk under uncertainty

Understanding the environment in which risks and opportunities arise

Risk management requires preparation and coping

Coping
To understand shocks, internal and
make the most of benefits
outcomes, thus reducing uncertainty

Insurance
To transfer resources across people
and over time, from good to bad states of nature
Knowledge
external conditions, and potential
To recover from losses and

Protection
To reduce the probability and
size of losses and increase those of benefits
Preparation Coping
Source: WDR 2014 team.
The interlinked components of risk management
gies accordingly. To assess whether residents heeded warnings
tance following the 2010 earthquake in Haiti, the Ushahidi crowd-
flu outbreak in 2009, researchers have tracked population move-
messages to volunteers who tracked and mapped areas affected

Leveraging new information and communication technologies for risk management
New technologies that help to capture, assess, and communicate mobile phones. Farmers receiving information saw increases in data more quickly and with
greater reach have become more their income of 10 to 30 percent.
widely accessible over the past five years. Mobile phones, aerial Respond to risk more quickly. To assist recovery following a 2008 and satellite imagery, social
networks, and online platforms for col- earthquake in Rwanda, citizens in unaffected parts of the country lective and distributed work can improve risk
management by used mobile phones to transfer mobile money to people in the enabling people to:
affected area.
Be better informed of risks. To help pinpoint people in need of assis-
Evaluate the effectiveness of risk management and adjust their strate-
sourcing platform enabled citizens to report incidents via text
from the Mexican government to remain at home during the H1N1
by the disaster (map).
ments using data from mobile phone towers.
Better evaluate evolving risks. To identify areas hardest hit by Hurri- New technologies can make new types of information available, cane Sandy in the United
States in 2012, more than 3,000 online improve its timeliness, provide more flexible ways of handling infor- volunteers helped inform official responders by conducting
rapid mation, and cut costs significantly. New technologies may also bring damage assessments using fresh aerial imagery of houses in new challenges,
however, including concerns about privacy, difficul- affected areas. ties in judging the validity of
information on the Internet, and a risk of
Better manage risks in pursuit of opportunity. To improve their information being used for violent or oppressive ends. The challenge response to changes in
agricultural prices and demand, farmers for policy makers is to leverage the benefits of new technologies in Ghana can receive specific market information
through their while respecting privacy and protecting sensitive information.
Disaster mapping in Haiti
a

Knowledge

Preparation for risk varies within and across regions and continents
Index of risk preparation across countries
Least prepared quintile Most prepared quintile Missing data
Source: Foa 2013 for the WDR 2014. Map number: IBRD 40097.


With good preparation , only minimal coping may be needed to recover

quicklyleaving more resources available for investment in risk

management and reducing vulnerability to future shocks.
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insurance

insurance

insurance


The relationship between the probability and severity of risk can be Self-insurance (savings) helps primarily to cover small losses. characterized as downward
sloping: small losses tend to be frequent, Market insurance is better for risks that are less frequent but have while large losses are rare. Such a monotonically
decreasing proba- larger losses, while community and state support may be needed bility density function is represented in the figures below. for risks
that are so large that market insurance is not provided.
Protection can decrease the likelihood of very severe losses, Increased protection can complement insurance by increasing the thereby increasing the
probability of routine losses relative to availability of market insuranceboth by reducing the cost of insur- extraordinary losses (pivot from the solid to the dashed line
in panel ing for bad outcomes and increasing the supply of insurance for a). While self-protection is important for some risks with potentially some risks that were
not previously covered (pivot to dotted line large losses, public protection (either by the community or state) and expansion of market insurance in panel b), in turn
reducing the may be particularly important for reducing the probability of sys- burden on self-insurance and the need for community and state temic risks with
severe consequences (additional pivot to dotted support.
line in panel b).
a. Protection increases the likelihood of normal times b. Protection can increase the availability of insurance
Private protection Public protection Private and public protection
Self- Market Public
Routine Severity of loss Extraordinary Routine Severity of loss Extraordinary
Source: WDR 2014 team based on Ehrlich and Becker 1972; Gill and Ilahi 2000.
Protection and insurance can provide complementary means of
managing risk
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One feature that is likely to be characteristic of resilient households is most relevant for household welfare. Developed countries were the the smoothness of their
consumption and income growth over time. most resilient in this period, with lower volatility in both household A household with good preparation and diversified assets
will have consumption and income growth than in developing countries. In less income volatility and will be able to smooth consumption when addition,
consumption growth was relatively more stable than faced with shocks. By contrast, a household that is not resilient is income growth in developed countries. By
contrast, most develop- more likely to have large drops (or increases) in consumption and ing countries have struggled with both unstable consumption and income.
income.
b

Panel a illustrates the volatility of consumption and income The stability of consumption growth has changed over time growth per capita from 200011
around the world.
a
Countries closer (panel b). Countries that are located to the right of the 45 line had to the axis origin had more stable income and consumption
growth. more stable per capita consumption growth during the 2000s than Moreover, in countries that are located to the right of the 45 line, in the 1990s.
Although volatility of consumption remains high over- per capita consumption growth was more stable than income all, several developing countries across all
regions have become growthan important characteristic, given that consumption is more resilient in the past decade.
a. Volatility of income and consumption growth b. Volatility of consumption growth is higher in developing
countries has stabilized over time
32.0
45
32.0
45

16.0 16.0
8.0 8.0
4.0 4.0
2.0 2.0
1.0 1.0
0.5 0.5
0.5 1.0 2.0 4.0 8.0 16.0 32.0 0.5 1.0 2.0 4.0 8.0 16.0 32.0
SD of GDP per capita growth, 200011 SD of HH consumption per capita growth, 1990s
OECD East Asia and Pacific Europe and Central Asia Latin America and the Caribbean
Middle East and North Africa South Asia Sub-Saharan Africa
Developing countries have increased their resilience over time
Risk management is cost-effective yet not always feasible
Identifying risks is not enough:
the obstacles to risk management
must
also be identified, prioritized, and
addressed through private and
public action
Whether on the road or confronting
economic, natural, or health risks, local
conditions can pose obstacles to
proactive risk management.
Kullez
Assessment Assessment Assessment
of access to Assessment of incentives Policy design

risk are

much or too little risk taking?

makers ill
behavior
management?
resources
limited?

be implemented?

market

government

regulations
plans)
Create market
(e.g., risk-
premium)

Build capacity
vertical and
Correct bad
redistribution
p
i
rograms)

distribution
Launch
and
campaign
Introduce norms
(e.g., land use
communication
norms and
(e.g., building

and services
and drainage
support for
and vulnerable
international

iterative decision
and flexible solutions
Consider worst-case
systems

D i a G r a M 2 . 3 A set of screens for assessing obstacles to risk management, and formulating policy responses
Assessment
of risks
information
of behavior of resources
How much Are bad incentives leading to too
Are decision Are Are What policies should
we facing?
informed? biases and access to
Because of Because of
impairing risk resources too
failures? failure?
Introduce Build institutions Improve data Launch Provide Adopt
norms and collection and education and public goods multistakeholder
(e.g., land use
Improve
campaign (e.g., dikes making
horizontal
education Introduce
systems)
Choose robust
instruments
coordination
communication regulations Build markets
based
incentives
norms)
Provide public scenarios

insurance
Introduce
and regulations low-income
Invest in monitoring

instruments
plans) households
Regularly revise
(e.g., buy out
Provide
policies

Risk management is cost-effective yet not always feasible :Obstacles to risk

constraints

and moral hazard

Coordination failures

and behavioral

political economy

D i a G r a M 2 .1 Individuals, firms, and countries face many obstacles in managing risks
Obstacles to risk management
Individual Social obstacles beyond the Obstacles to public and obstacles
control of individuals collective action
Financial Missing public goods Lack of public resources constraints
or services and competing needs
Information Missing markets
Cognitive failure
Externalities
Distributional effects and
biases
Social norms
Deep uncertainty
Source: WDR 2014 team.
Individuals, firms, and countries face many obstacles in managing risks
10
Median
B
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s

Early Improved Vaccines Nutritional
systems sanitation
Measures to reduce damage from:
earthquakes floods tropical storms

F i g u r e 1 . 3 The benefits of risk management often outweigh the costs
31 29
14
12
Break even
point
8
6
4
75th percentile
2
25th percentile
0
warning water and interventions
Source: Wethli 2013 for the WDR 2014.
The benefits of risk management often outweigh the costs
THANK YOU
MERCI