Ruchira Bhattamishra, World BankChristopher B. Barrett, Cornell University

November 10, 2008

There is growing recognition in the development community that:◦vulnerability to adverse shocks is a defining

characteristic of poverty◦risk management is central to poverty reduction

policy because uninsured risk exposure is both cause and consequence of poverty.

Uninsured risk

Poverty

There is also growing recognition in the development community that:

◦community-based and community-driven development can be effective in filling key gaps between national- and household-level strategies.

But there’s a major gap in the literature on community-based risk management arrangements (CBRMAs) … hence this survey.

Convey importance of social protection to economic growth and poverty reduction

Provide catalog of existing community-based risk management arrangements (CBRMAs)

Discuss strengths and weaknesses of CBRMAs

Stimulate discussion of implications for SP projects, especially as implemented by Social Funds

Insuring downside risk can stimulate significant technology uptake, investment and other behaviors that foster growth, especially among the poorest and most risk averse subpopulations.

Effects of social protection are especially pronounced in places characterized by “poverty traps” with multiple welfare equilibria:

◦ Ex post effect—prevents the numbers of chronically poor from growing in the wake of a shock that destroys productive assets;

◦ Ex ante effect—improves incentives, ‘crowds in’ private asset accumulation and new technology uptake, making sustainable escape from poverty more feasible.

◦ Both effects reduce the number of households needing assistance, which lets true humanitarian assistance $ go further.

Let’s look a bit more at the economics that underlie these claims…

Barrett, Carter and Ikegami (2008) offer simulation-based evidence on the impacts of social protection.(Solid blue is with social protection, green is autarky, red is targeted transfers.)

Covariate risk vs. Idiosyncratic risk◦ Covariate risk affects households in the same locate at the same time

(e.g., weather, disasters, war, prices, financial crises, etc.).◦ Idiosyncratic shocks are (the component) specific to one household

(e.g., illness, crop yield shocks, property loss due to fire or theft, etc.). CBRMAs can help households cope with idiosyncratic shocks, less so with

covariate shocks, unless risk is reduced or transferred outside the community.

The empirical literature suggests that idiosyncratic risk is considerable, implying significant scope for risk pooling within communities.

Even covariate risk can be managed within communities through risk reduction efforts (e.g., through NRM) and external risk transfer (e.g., through index-based insurance).

Asset risk (loss of human capital, livestock, land, etc.) vs. income risk (loss of current period revenue)

Long-term (structural ) vs. one-off (transitory)◦ Stunting due to drought in Zimbabwe in 1980s caused 14

percent reduction in lifetime earnings (Alderman et al.2006). Implications for poverty persistence: poverty traps or at least

very slow recovery and thus high persistence of shock-induced poverty.

CBRMAs can not only address one-off income risk but also, and perhaps more importantly, longer-term asset risk by developing community/ individual capabilities.

Typology of strategies under SP Social Risk Management (SRM) framework (Holzmann and Jorgensen 1999):

1) Risk reduction: ex ante; reduce exogenous income variability and/or probability of asset loss (e.g., water control, EGS).

2) Risk mitigation: ex ante; reduce endogenous income variability and/or probability of asset loss through portfolio diversification, insurance, hedging, etc.

3) Risk coping: ex post behavioral adjustment (investment and consumption adjustment, asset sales, borrowing) and/or risk transfer.

Households employ a combination of strategies. But poor households typically have limited recourse to 1 and 2 and resort to 3, often through transfers (gifts, food aid, etc.).

o Incomplete financial markets leave uninsured risk.

o Sale of assets restricted to those that have assets, typically not the poorest, and may seek to asset smooth.

o In the event of common shock, assets and income may move together, limiting ability to consumption smooth.

o The poorest (such as disabled, female-headed households) often unable/unwilling to access public works programs.

o Informal risk sharing often the only avenue open to poor households, but social invisibility/exclusion a problem for the poorest and most marginal populations (e.g., Santos and Barrett (2008) in Ethiopia, Vanderpuye-Orgle and Barrett (forthcoming) in Ghana).

Community based risk management arrangements (CBRMAs)

Define “community” loosely in order to include agents whose relations have an informal and non-market character

Include all coordinated strategies used and managed by social groupings of individuals for the purpose of protection against the adverse effects of various types of risk.

Include both indigenously developed, “informal” and externally-initiated, “semi-formal” arrangements.

Indigenous CBRMAs Externally-driven CBRMAs

Simple transactions More complex transactions

Accounting/financial management skills not required

Some accounting/financial management skills required

Transfers typically ex post Transfers both ex ante (akin to “premiums”) and ex post (akin to “claims”)

Premiums and coverage not well-defined, often state-contingent

Typically well-defined premiums and coverage

•Key similarities between indigenous and externally-driven CBRMAs: Use of interpersonal relations in management & contract enforcement.

•Key differences: see below

Risk Reduction Risk Mitigation Risk Coping

Informal/ Indigenous

Community management of natural resources, standing water, waste, etc.

Rotating access to common property resources.

Private remittances.

Rotating savings and credit associations (ROSCAs)

Funeral/burial societies. Inter-household transfers. Private remittances. Redistribution of common

property resources (“fuzzy” property rights).

Risk Reduction Risk Mitigation Risk Coping

Semi-formal/ External agency

Public goods and services (e.g., veterinary and health care programs; sanitation programs; community-based information systems, small-scale irrigation and infrastructure projects).

Microfinance.

Microfinance. Accumulating savings and

credit associations. Cereal banks. Grain banks. Credit-based quasi-

insurance & quasi-options.

Health insurance associations

Public employment guarantee schemes.

Limitations of indigenous CBRMAs ◦ Exclusion of poorest or other marginalized sub-populations◦ Inability to manage covariate risk

Role for SP intervention…◦ SFs can potentially build on existing institutional networks

to support CBRMAs Can use large size of networks for risk pooling purposes Can build on experience with participatory approaches to

develop innovative, demand-driven risk management products.

Promote inclusion by provision of subsidies Support start-up of viable MFIs Expand menu of projects Support provision of risk-reducing public goods Support risk coping after covariate shocks via

intermediaries

Identify cleavages in existing CBRMAs. Can design safety nets schemes explicitly aimed at

reducing costs of social interaction between different social groups. ◦ E.g., Macedonia Community Development Project.

Can subsidize cost to poorest households to enable their inclusion. ◦ E.g., subsidize ex ante contributions for health insurance

associations.

Cover start-up costs of viable financial institutions.◦ E.g., microfinance institutions.

Some relevant insights from behavioral economics Cognitive difficulties in assessing risk; choice

bracketing; representativeness; etc.

Include innovative programs.◦ Can go beyond thinking of SF as instrument for primarily

developing “brick-and-mortar” outputs and providing basic services.

Design safety nets schemes explicitly aimed at creating behavioral change and supporting risk management, both for one-off income risk as well as long-term asset risk.◦ E.g., can develop PTAs in addition to building schools.

Provision of risk-reducing public goods and services through community arrangements◦ Builds longer-term capacity of community.◦ Addresses not only one-off income risk but also more long-

term asset risk.

Build capacity of communities to tap into reinsurance markets◦ Emphasize risk management rather than crisis

management. Underwrite start-up costs associated with creating

risk-transfer products◦ E.g., underwrite cost of developing data series for pricing

index-based insurance products. These are non-manipulable, suitable for risk-layering. In addition, they can support risk coping for both slow-onset (e.g., drought) as well as sudden-onset risk (e.g., earthquake).

Use community information for effective two-tier allocation of disaster assistance (Alderman 2001).

Specific problems affecting Social Fund intervention for risk-management◦ Administrative concerns

Other problems (which affect community initiatives in general)◦ Scalability, crowding-out, etc◦ Manipulation by local elites◦ Corruption◦ Limits of community decision-making◦ See also Mansuri and Rao (2004), Conning and Kevane (2002),

Ensminger (2007).

Differences in administering periodic investment/ preparing proposal vs. overseeing regularly running program.

Expanding menu to include innovative programs implies need for new training for program managers.

Range of CBRMAs ◦ Differences in membership and leadership structure, the

nature of activities, history, longevity, etc.◦ Differences in political economy and socio-economic

environment.◦ Differences between informal and semi-formal

arrangements in level of technical/financial and accounting assistance required.

CBRMAs will have different abilities to effectively absorb external assistance, depending on the nature of activities, history, etc…

Lack of existing evidence on impact of scaling up…

Disruption of existing CBRMAs ◦ “Rockefeller” effect: external assistance can change

characteristics of a previously effectively functioning group.◦ E.g., Gugerty and Kremer (2008) study in Kenya.

Project benefits captured by local elites Corruption

◦ Decentralized, community-led approaches can result in rampant misappropriation of project benefits, given the absence of well-functioning checks and balances, remote governance structures, absence of media, and low levels of education. E.g., Ensminger (2007) study in Kenya.

Limitations in technical decision-making and management◦ Positive impact of community participation in non-technical

decision-making (such as targeting/project choice) but not so for technical decision-making.

◦ E.g., Khwaja (2004) study in Pakistan.

More complex accounting/financial knowledge needed for “semi-formal” versus “informal” CBRMAs.

Need for econometric or experimental evidence comparing community-based models with other models (e.g., social marketing, public-private partnerships, etc.) that do not use community for project design or project delivery.◦ Compare impact, cost-effectiveness: Social Funds can

provide valuable crucible for such analyses.

Address key questions What are some of the main constraints and opportunities for

SF programs supporting risk management? How can these interventions achieve the right scale of

implementation?