Risks and Opportunity: Managing Risks for Development

The newest World Development Report by the World Bank Group focuses on the risk and its management, as well as its impact on development issues. Opportunities are concomitant with risks and their mismanagement can lead to a reverse of hard-won progress as well as an endangering of the social and economic structure that was at its base. The consequences of mismanaged risks may destroy lives, assets, trust, and social stability. And more often than not, the poorest are hit the hardest.

Risk management can be a powerful instrument for development

Defining risk management as the process of confronting risks, preparing for them and establishing coping strategies with their effects, the report declines two goals for it:

•          the resilience, the ability of people, societies and countries to recover from negative shocks
•          And the prosperity, derived from the successful management of positive shocks that paves way for opportunities for development.

Acquiring knowledge, building protection and obtaining insurance are the prerequisites for preparing to risks and negative shocks.

Why preparing for risks is important

World Development Report 2014 from WB_Research

According to the report, evidence suggests that the benefits of risk managements overwhelmingly outweigh the cost of not to.  Mismanagement of risks create crises. 

• During 2011–12, the famine in Somalia claimed 258,000 lives, despite 11 months of repeated warnings; opportunities for early intervention were missed by the donor community to avoid political and security risks.

 Managing risks means also to assess, evaluate various risks and to take proactive action to counter them. Defining the priorities is thus crucial in developing countries, due to the limited resources. “For instance, a small country prone to torrential rains and also exposed to international financial shocks must decide how much to spend on flood prevention and how much to save to cushion against financial volatility”.

Managing risks must be systemic

Having addressed the benefits of the management of risks, the report calls for a systemic approach to counter exogenous shocks. Risk management requires shared action and responsibility at different levels of society (from the household to the international community). Their complementarity can be broken down this way:

•  At the household level, by pooling resources, protecting its members—especially the vulnerable— and allowing them to invest in their future.
• Communities can provide informal networks of insurance and protection by helping people deal with idiosyncratic risks and pooling resources to confront common risks.
• Enterprises can help absorb shocks and exploit the opportunity side of risk and by extension, contributing to more stable employment, growing income, and greater innovation and productivity.
• The financial system through savings, insurance, and credit can provide useful risk management tools, while managing its own risks responsibly.
• The state has the scale to manage systemic risks at the national and regional levels, to provide an enabling environment for the other systems to function, and to provide direct support to vulnerable people. Social protection (insurance and assistance), public goods (national defense, infrastructure, law and order), and public policy (regulation, macroeconomic management) will be its main mediums.
• The international community, by enabling policy coordination, and giving support to states when they cannot absorb the impact of the risks they face.

In conclusion, the report calls for a mainstreaming risk management into development programs by national government through the creation of national risk board. Such an institution will require a change in approach (a coordinated and systematic assessment of risks at the national and international levels) for more positive outcomes.  The report recognizes that a susbstantial change in the way of doing might be required in the implementation of this recommendation. Five key principles to states are thus put forward:

• Governments should not generate uncertainty or unnecessary risks
• Governments should provide the right incentives for people and institutions to do their own planning and preparation, while avoiding imposing risks or losses on others
• Governments should keep a long-run perspective for risk management by building institutional mechanisms that transcend political cycles
• Governments should promote flexibility within a clear and predictable institutional framework
• Governments should protect the vulnerable, while encouraging self-reliance and preserving fiscal sustainability

The report is available on this link