Weather Risk and the World Food Program 2003 M.A.L.D
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WEATHER RISK AND THE WORLD FOOD PROGRAM ATHESIS PRESENTED TO THE FACULTY OF THE FLETCHER SCHOOL OF LAW AND DIPLOMACY BY BENJAMIN DANIEL MAZZOTTA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY MAY 2011 DISSERTATION COMMITTEE DANIEL W. DREZNER, CHAIR JENNY C. AKER PATRICK WEBB i Abstract Weather risk management is a set of financial products including insurance, catastrophe bonds, and derivative contracts based on seasonal precipitation and temperature. Interna- tional organizations have recently put their toes in the water to see whether insurance and weather derivatives can help them secure conditional access to necessary funds for pre- dictable emergencies. Ethiopia is the epicenter of financial innovation for food security, first in the form of a pilot weather insurance program at World Food Program, and sub- sequently with a risk financing program in the Productive Safety Nets Program. Why did these organizations innovate in this way? Financial theory predicts that firms optimize a portfolio of hedged and unhedged cash flows to protect the organization from risk. Rational choice predicts that firms seek the greatest possible access to funds while preserving the greatest latitude for operational independence. I show that the safety net program seeks to improve foresight and transparency over its program objectives, rather than credibility with international creditors or even operational partners in the field. I analyze the deci- sions made by WFP and PSNP related to financial risk management, using process tracing and grounded theory. Applications of the research include contract design for international humanitarian assistance, and potentially a market opportunity for financial services in the international public sector. ii Acknowledgments This dissertation would not have been possible without the support of my family and espe- cially my wife. I am deeply grateful. Many organizations have provided financial means, administrative assistance and en- couragement over the years. I gratefully acknowledge funding and institutional support from the Fletcher School and its various funds including the PhD Program Travel Assis- tance, the Institute for Human Security, the Dean’s Discretionary Research Fund, the John Roche Memorial Fund, the Frank C. and Christel W. Nichols Scholarship Fund; and also the Tufts University Provost Research Fellowship. The Feinstein International Center gra- ciously extended its hospitality, refined my ideas, and let me ride the coat tails of its sterling reputation during my visit to Addis Ababa in January 2010. My thanks also to all of the various faculty and colleagues who have supported my work and provided invaluable criticism since I first applied to the Fletcher doctoral program: Daniel Drezner, Jenny Aker, Patrick Webb, Steven Block, Katrina Burgess, Kerry Chase, Matthew Kahn, Michael Klein, Margaret McMillan, William Moomaw, John Curtis Perry, Julie Schaffner, Anna Seleny, Peter Uvin, Peter Walker; Susan Banki, Melissa Birch, Scott Borgerson, Lauren Greenberg Brodsky, Susanna Campbell, Ethan Corbin, Joshua Gleis, Elke Jahns, Nick Kenney, Jeff Kubiak, Abi Linnington, Tom McCarthy, Patrick Meier, Ronnie Olesker, Courtney Richardson, Xanthe Scharff, Andrea Strimling, and Rockford Weitz. The Fletcher School staff, especially Dean Sheehan’s office and Jenifer Burckett- Picker, provided crucial support at various stages. iii BENJAMIN D. MAZZOTTA EDUCATION 2011 Ph.D. Fletcher School of Law and Diplomacy, Tufts University Medford, MA International Political Economy, Development Economics and Interna- tional Monetary Theory and Policy Advisers Daniel W. Drezner (chair), Jenny C. Aker, and Patrick Webb Weather Risk and the World Food Program 2003 M.A.L.D. Fletcher School of Law and Diplomacy, Tufts University Medford, MA International Political Economy and Development Economics Certificate of International Development, Economic Analysis Track Revealed Preferences in United States Bilateral Aid, 1960-2000 1998 B.A. Yale University New Haven, CT Political Science and Theater Studies EXPERIENCE 2004-2011 US Cyber Consequences Unit Cambridge, MA Research Director for Economic Relationships 2009-2010 Cultural Change Institute, Tufts University Medford, MA Research Fellow 2009 (May) Duhok Business School Duhok, Iraq Visiting Lecturer 2008-2010 Space Policy Working Group, Tufts University Medford, MA Analyst 2007-2009 Fletcher Graduate Writing Program, Tufts University Medford, MA Director 2008-2009 Institute for Global Maritime Studies Gloucester, MA Research Fellow 2003-2009 Tufts University Medford, MA Teaching Assistant for Departments of Economics, Political Science, and Fletcher School of Law and Diplomacy Courses: International Politics, International Trade and Investment, Econometrics, Empirical Topics in Development, Foreign Economic Policy of the United States, Development Economics, and Introduction to International Relations 2000-2002 Peace Corps Senegal (United States Government) Ndoulo, Senegal Environmental Education Extension Agent Manager, Thienaba Community Training Center iv AWARDS 2008 Presidential Award for Citizenship and Public Service (1 of 12), Tufts University 2006-2007 Provost Fellow (1 of 17), Tufts University 2004 Robert B. Stewart Prize, Fletcher School, Tufts University Outstanding first-year student 1998 Master’s Prize, Berkeley Residential College, Yale University SERVICE 2008 Chair, Ph.D. Journal Club 2007 Founding Co-Chair, Fletcher Doctoral Conference 2007 Hiring Committee, Assistant Professor of Development Economics 2006 Chair, Ph.D. Forum (a student-coordinated speaker series) 2006 Hiring Committee, Director of Career Services 2006 Hiring Committee, Director of Ginn Library 2005 Student Committee Representative 2004 Library and IT Committee Student Representative PUBLICATIONS 2008 Benjamin D. Mazzotta. “Bring short sea shipping to Providence,” Prov- idence Journal. March 21, 2008. 2008 John Curtis Perry, Scott Borgerson, Rockford Weitz, et al. America’s Deep Blue Highway: How Coastal Shipping Could Reduce Traffic Con- gestion, Lower Pollution, and Bolster National Security. Gloucester, MA: Institute for Global Maritime Studies. CONFERENCES 2011 Benjamin D. Mazzotta. Prominence and polarity in international trade: A relational concept of power. Paper presented to the Annual Conven- tion of the International Studies Association, Montreal,´ QC, March 17, 2011. 2011 Benjamin D. Mazzotta. Leverage in cyberspace, without deterrence. Paper presented to the Annual Convention of the International Studies Association, Montreal,´ QC, March 19, 2011. 2010 Benjamin D. Mazzotta. Seeing trade patterns: Trade cartograms per- mit data-driven teaching. Paper presented to the International Studies Association Northeast Section, Baltimore, MD, November 4, 2010. 2010 Benjamin D. Mazzotta. Trade cartograms: A method for visualiz- ing dyadic datasets. Paper presented to the UseR! 2010 conference, Gaithersburg, MD, July 23, 2010. v 2010 Benjamin D. Mazzotta. Weather risk management and the World Food Program. Paper presented to The Future of Food and Nutrition, Fried- man School of Nutrition, Boston, MA. April 10, 2010. 2008 Benjamin D. Mazzotta. Preliminary findings of the Short Sea Shipping Study. Paper presented to the Short Sea Shipping Symposium, Univer- sity of Massachusetts at Dartmouth, Dartmouth, MA, March 26, 2008. LECTURES 2010 Benjamin D. Mazzotta. Cybersecurity in international relations. Lec- ture for Boston College. 2009 Benjamin D. Mazzotta. How to visualize dyadic datasets. Lecture for the Ph.D. Colloquium, Fletcher School, Tufts University. 2008 Benjamin D. Mazzotta. Weather risk management and the World Food Program. Lecture for the Harvard Extension School, Harvard University. 2008 Benjamin D. Mazzotta. Weather risk management and the World Food Program. Lecture for the Ph.D. Colloquium, Fletcher School, Tufts University. 2008 Benjamin D. Mazzotta. Cell phones in emerging markets. Lecture for the Fletcher School, Tufts University. 2008 Benjamin D. Mazzotta. Complexity science in international relations. Lecture for the Fletcher School, Tufts University. Contents 1 Introduction 1 1.1 Overview . .2 1.2 WFP Drought Insurance . .2 1.2.1 Risk Management for WFP . .4 1.2.2 Weather Risk Management . .4 1.3 Problem Statement . .7 1.3.1 Puzzle . .9 1.3.2 Research Question . 12 1.4 Hypotheses . 16 1.4.1 Coordination Problems . 16 1.4.2 Funding Windows and Constraints . 22 1.4.3 Transparency . 25 1.4.4 External Conditions . 27 1.5 Summary of Hypotheses . 31 2 Literature Review 33 2.1 Overview . 33 2.2 Weather Risk Management . 34 2.2.1 Catastrophe Risk Markets . 40 2.2.2 Weather Risk in Emerging Markets . 42 2.2.3 Risk Management in the Public Sector . 44 2.2.4 Poverty Traps . 47 2.2.5 Global Public Goods . 48 2.3 Index-Based Risk Transfer Products . 49 2.3.1 Plain Vanilla Weather Derivatives . 49 2.3.2 Trade Financing . 51 2.3.3 Microinsurance . 51 2.3.4 Price Hedges . 54 2.3.5 Commodity Price Risk and Public Finance . 56 2.4 Coordination Problems . 57 2.4.1 Donor Harmonization . 63 2.4.2 Food Security . 66 vi CONTENTS vii 3 Theory 74 3.1 Risk Management Decisions . 74 3.2 Coordination Problems . 77 3.3 Funding Constraints . 81 3.4 Transparency . 82 3.5 Financial Market Function . 84 4 Methods 86 4.1 Introduction . 86 4.2 Case Selection . 87 4.3 Documents . 90 4.3.1 Project Documents . 90 4.3.2 Datasets . 91 4.4 Interviews . 91 4.4.1 Interview Method . 91 4.4.2 Subjects . 93 4.4.3 Narrative . 94 5 Analysis 96 5.1 Project Background . 96 5.1.1 Drought Insurance