Risk and Vulnerability:The Forward Looking Role of Social Protection in a

Globalizing World

ROBERT HOLZMANN

The views expressed in this presentation are those of the author and do not necessarily reflect the views or policies of the Asian Development Bank does not guarantee the accuracy of the data presented.

THE ASIA AND PACIFIC FORUM ON POVERTYPOLICY AND INSTITUTIONAL REFORMS FOR POVERTY REDUCTION

This presentation is delivered at the Asia and Pacific Forum on Poverty: Reforming Policies and Institutions for Poverty Reduction, to be held at the Asian Development Bank, Manila, 5-9 February 2001.

Background

Lessons from East Asia crisis World Development Report Poverty dynamics and economic mobility Increasing risks of globalizationcalls for new approach to Social Protection which

moves from ex-post poverty to ex-ante vulnerability considerations; from safety-nets to springboards

motivated the development of new conceptual framework for SP: Social Risk Management

Social Risk Management Framework:Basic thrusts:

The poor are typically most exposed to diverse risks (natural and man-made)

The poor have the fewest instruments to deal with these risks

The poor are the most vulnerable as shocks have strongest welfare consequences

The high vulnerability makes them risk averse and thus unable or unwilling to engage in higher risk/high return activities

Road Map

Central elements of SRM framework SP as SRM: Main strategic conclusions The need of an operational definition of the

vulnerability concept Risk and vulnerability assessments Crisis management - what have we learnt Social expenditure review

Central Elements of SRM

Takes account of the multiple sources of risk and their characteristics (such as idiosyncratic and covariant risk) to address vulnerability

Operates with multiple strategies (prevention, mitigation, coping) and arrangements (informal, market-based, public) to deal with risk

Attempts to match the multiple suppliers of risk management instruments (such as households, communities, NGOs, and governments) with key demand groups (formal, informal-urban and informal-rural workers)

Sources and Forms of RiskMicro Meso Macro

(idiosyncratic) (co-variant)

Natural Rainfall Earthquake

Landslide Floods

Volcanic eruption Drought

Strong winds

Health Illness Epidemic

Injury

Disability

Life-cycle Birth

Old-age

Death

Social Crime Terrorism Civil strife

Domestic violence Gangs War

Economic Unemployment Output collapse

Resettlement BoP, financial

or currency crisis

Harvest failure Technology or

Business failure ToT shocks

Political Ethnic discrimination Riots Political default

on social prog.

Environmental Pollution

Deforestation

Nuclear disaster

Social Protection as Sector or SRM as Theme

SRMSP

Redistribution

Risk Management Strategies

Prevention Strategies - to reduce the probability of down-side risk

Mitigation Strategies - to decrease the impact of a future down-side risk– Portfolio diversification

– Insurance

– Hedging/Risk exchange

Coping Strategies - to relieve the impact once the risk (the event) has occurred

Risk Management Arrangements

Informal arrangements, e.g.– marriage, real assets, mutual community support

Market-based arrangements, e.g.– cash, bank deposits, bonds and shares, insurance

contracts

Publicly provided or mandated arrangements– social insurance, transfers in cash and kind,

subsidies and public works

Arrangements/Strategies

Informal/personal Formal/ financialmarket-based

Formal/publicly-mandated/provided

Risk reduction Less risky productionMigration

Labor standardsVETLabor market policiesDisability policies

Risk mitigation

Portfolio Multiple jobsInvestment in human, physicaland real assets

Investment inmultiple financialassets

Multi-pillar pension systemsSocial Funds

Insurance Marriage/familyCommunity arrangementsShare tenancyTied labor

Old-age annuitiesDisability/Accident

Mandated/provided forunemployment, old-age, disability,survivorship, sickness, etc.

Hedging Extended familySome labor contracts

Risk coping Selling of physical and realassetsBorrowing from neighborsIntra-community transfers/charitySending children to work

Selling of financialassetsBorrowing frombanks

Transfers/Social assistanceSubsidiesPublic works

Matrix of Social Risk Management (examples)

Strategic ImplicationsSocial Protection as a theme SRM emerges as a theme giving SP an

advocacy and analytical role in other sectors– Addressing national shocks (economic crisis,

natural disasters, civil strive)– Financial markets– Rural development– Infrastructure investments– HNP and Education

Strategic Implications Social Protection as a sector Extending the traditional reach of SP

– Informal and market-based arrangements– Gender focus and lens– Balancing informal, market-based and public

interventions Rethinking public interventions

– Strengthening risk reduction, inter alia• Providing equitable and inclusive labor markets• Eliminating harmful child labor

Strategic Implications Social Protection as a sector (2 of 2)

Rethinking public interventions– Fostering risk mitigation, inter alia

• Old age income security• Income support for the unemployed

– Improving risk copying, inter alia• What is the appropriate balance for the three types of coping

(needs-based cash transfers, in-kind transfers, subsidies and fee waivers, and public works programs)?

• How much is enough? - the fiscal issue

• How can coping assistance help with risk mitigation and reduction?

Vulnerability: A concept in need of definition and operationalization

A main objective of new framework is to move from backward to forward looking approach in poverty reduction

Poverty is not static but dynamic Welfare position is influenced by shocks and

the availability of instruments A mere ex-post view of poverty does not

catch future poor and the effects of risks on current poor

Poverty dynamics

Percentage of Households who are:Always poor Sometimes poor Never poor

China 1985-1990 6.2 47.8 46.0Côte d’Ivoire 1987-1988 25.0 22.0 53.0Ethiopia 1994-1997 24.8 30.1 45.1India 1976/76-83/84 21.9 65.9 12.4Indonesia 1997-98 ..8.6 19.8 71.6Pakistan 1986-1991 3.0 55.3 41.7Russia 1992-1993 12.6 30.2 57.2South Africa 1993-1998 22.7 31.5 45.8Vietnam 1992/93-97/98 28.7 32.1 39.2Zimbabwe 1992/93-1995/96 10.6 59.6 29.8

Defining vulnerability Goal:

(i) to allow for an analytically sound but empirically meaningful measurement of vulnerability over time at the individual and group levels(ii) to permit an assessment of the impact of SRM instruments on vulnerability

Literature reveals different definition in economics, sustainable livelihood, food security, sociology/ anthropology, disaster management, the environment, or the health/nutrition literature

Proposal for discussion:vht = Pr(cht+1 c) PrCht = c(Xh, Ih, t, h, ht)

Risk and Vulnerability Assessments

If both the sources and forms of risk matter for poverty, we have to know and understand the main risks to provide appropriate risk management instruments

This suggests a three state approach– an assessment which details, measures and

assesses the crucial risks– an assessment of the available instruments– a plan to close the gap, including costing

Dimensions of risk assessment

Top-down approach– macro-view: macroeconomic risks, natural

risks, major health risks, security risks– Latin American study

Bottom-up approach– micro-view: what do the poor perceive as

the most threatening risks for their livelihood

Assessed Risk in Ethiopia by Rural Population during Past 20 Years

Type of risky event Percentage of householdreportedly effected by type ofevent

Mode year of most recent severeevent

Harvest failure (due to drought,flooding, etc.)

78 1984

Policy problems (resettlement,taxation, etc.)

42 1985

Labor problems (illness or death,divorce, etc.)

40 1993

Oxen problem (disease, theft,distress sale, etc.)

39 1993

Other livestock (as above) 35 1984Land problem (land reform,transfer to family member)

17 1989

Asset losses (Fire, theft,villagisation, etc.)

16 1885

War 07 1989Crime/banditry 03 1986

Managing Social Risk in Argentina: Main Risks and Policy Responses(Summary Table)

Age group/Main Risk

Role for OtherPrograms

Role for Social ProtectionSocial Insurance Social Assistance

Number ofIndigent & PoorUncovered

0-5Stunted development

PHC ServicesPre-schooleducation

--Early ChildDevelopmentPrograms (ECD)

400,000 ind.1,000,000 poor

6-14Low educationquality

Improve primaryschool quality -- -- --

15-24Low secondaryschool completion

Improvesecondary schoolaccess/quality

--Scholarship/return to schoolincentiveprograms

100,000 ind.400,000 poor

25-64Low income(unemployment/underemployment)

Labor-intensivegrowth and labormarket reforms

Unemploymentinsurance

Workfare/incometransfers

800,000 ind. 3,750,000 poor

65 and OverLow income --

Social security(contributorypensions)

Non-contributorypensions (incometransfer)

24,000 ind.200,000 poor

General PopulationLow accessto/quality of healthcare

Low housing quality

Provision ofhealth svcs.

Mortgagefacilities,infrastructureinvestment

Health insurance

----

Housing subsidies

1,700,000 ind.6,000,000 poor

200,000 hh.ind.800,000 hh. Poor

Economic Crisis Management:What have we learnt from Latin America

and East Asia for SP

Financial and economic crisis is a large covariate shock:– if deep and protracted, likely to exhaust

risk management capacities of households and capacity of government

– family and community arrangements tend to break down

– governments are no prepared to handle rising number of needy individuals

Joint WB/IMF/ADB/IADB Study for APEC MoF

Distilling lessons from 6 APEC countries:Chile, Indonesia, Korea, Mexico, Peru and Thailand

Main findings include: The availability of timely and reliable information on poor and

vulnerable groups is critical for the design and implementation of social safety net programs

Pre-crisis planning can contribute to the design of effective safety nets. Planning will include an assessment of risks and target populations together with identification of program instruments, financing and a strategy for reducing or phasing out programs after the crisis

Main findings continued Ideally, safety net instruments should be in place before a crisis

occurs. It is essential that the programs are targeted; provide adequate protection to the poor; avoid creating a culture of dependency among beneficiaries; and are consistent with economic incentives and overall targets of macroeconomic and fiscal policy

Social safety nets should build on existing public programs and mechanisms for targeting and delivery

Transparency and accountability in the design and implementation of programs and in the use of resources are critical to the effectiveness of social safety net programs.

The involvement of NGOs, community groups and religious organizations can be promoted to enhance efficiency and accountability

Social Sector Expenditure Reviews

SRM suggests than an integrated view on social expenditure needed

Poverty Reduction Strategy Paper calls for review of budgetary expenditure

Available reviews insufficient– Government Finance Statistics– ILO Social Expenditure Reviews/ ESSPROS– World Bank Public Expenditure Reviews– Reviews by bi-lateral donors, etc.

SSER Calls for systematic methodological

framework of social expenditure, financing and performance review

Calls for participation of IMF, ILO, other development banks, bilateral donors, etc.

Would provide comparable results, benchmarks for consultants, and institution building in client countries

SSER

Proposed three-layered approach– Identify the scope and structure of a country’s

social sector– Monitor the necessity, appropriateness and

capability of social sector programs/ interventions to reduce poverty

– Evaluate the economic effectiveness of social sector programs and interventions provided or financed by the public sector

SSER Pragmatic approach

– pilot approach: a few countries per region– sequential approach: identification of main

programs, and selective follow-ups– qualitative assessments/memorandum

items Learning exercise

– cross-country experience/benchmarking/-good and best practice

– developing the research agenda Financing: ???

Concluding remarks

New concept focuses on vulnerability - a dynamic view of poverty. It promises to be more effective for accelerated and lasting poverty reduction

While promising, there ate many open conceptual and operational issues

A coalition is needed between multi-lateral institutions and bilateral donors, national and international research institutions, donor and client countries