The Role of Social Risk Management in Development: A World Bank View Robert Holzmann and Valerie Kozel 1 Introduction for development, and second, that spending on social Social protection and labour policies are important for protection is not luxury consumption but instead is a sustainable and equitable economic growth, contribute necessary investment for achieving sustainable and in fundamental ways to human development, and are equitable economic growth. Section 3 describes the essential for poverty reduction. There is broad key elements of the SRM framework. Section 4 then agreement across countries, international institutions, outlines the major ways that SRM has helped the and the wider development community that social Bank in rethinking social protection programmes, protection is critical to achieving international stimulated a more dynamic view on poverty, and development objectives, including the Millennium fostered concerns with vulnerable groups. The SRM Development Goals (World Bank 2007). framework has been further developed and refined over time: Section 5 describes new challenges and The World Bank has been engaged in social work in progress, e.g. towards a more robust and protection and labour activities for more than two operational definition of vulnerability, the importance decades, providing strategic advice and support to of back-up plans in risk management, exploring countries throughout the world. The conceptual empirical links between risk and growth. A few foundations of the Bank’s social protection strategy concluding remarks stand at the end. are set forth in Social Protection Strategy: From Safety Net to Springboard (World Bank 2001), and have been 2 Risk and development applied and deepened in recent World Development Risk matters for human and economic development Reports (WDRs) and other major Bank publications. – in many settings, risk and the absence of adequate The strategy is driven by three fundamental risk management instruments are together one of development objectives – good jobs, greater security, the main causes of chronic as well as transitory and enhanced equity – and is innovative in placing poverty. Consider the following simple schema (Table particular emphasis on risk and risk management as a 1): uninsured risk affects behaviour ex ante – poor and complement to social protection’s more traditional marginalised groups may adopt various measures to emphasis on equity and basic needs. protect themselves in the event of a shock, including avoiding potentially risky but profitable economic The Bank’s work on risk and vulnerability is activities. Thus risk avoidance works to reduce future underpinned by the Social Risk Management (SRM) welfare levels. There is a further welfare loss when a framework, which has been discussed widely in global shock actually occurs; and shocks also affect forums and is used extensively outside as well as behaviour ex post (Dercon 2005). within the Bank. This article describes the SRM framework and its key contributions to the global Men, women and children in low-income countries development debate. To this end, Section 2 describes face many risks, some unique to themselves and their the rationale behind SRM thinking and its key families (idiosyncratic) and others shared more widely contributions: first, that risk and access to risk (covariate). Idiosyncratic shocks are closely linked to management instruments matter in fundamental ways human development. Consider the case of ‘health IDS Bulletin Volume 38 Number 3 May 2007 © Institute of Development Studies 8 Table 1 Risk, growth and poverty: what do we know, what do we need to know? Implications for outcomes Implications for outcomes Uninsured risk Risk In terms of levels Shock ‘risk coping’ In terms of levels ‘Sources of risk’ management In terms of growth ‘realisation of the decisions In terms of growth decisions In the short run state of the world’ In the short run In the long run In the long run Table 2 Strategies and arrangements of social risk management – examples Arrangement strategies Informal Market-based Public Risk reduction Less risky production In-service training Good macro-economic policies Migration Financial market literacy Pre-service training Proper feeding and weaning practices Company-based and market-driven Labour standards Engaging in hygiene and other labour standards Child labour reduction disease-preventing activities AIDS and other disease prevention Risk mitigation Portfolio Multiple jobs Investment in multiple financial assets Asset transfers Investment in human, physical and real assets Microfinance (saving, credit and Protection of poverty rights (especially Investment in social capital (rituals, reciprocal insurance) for women) IDS Bulletin gift-giving) Support for extending financial markets to the poor Insurance Marriage/family Old-age annuities Mandated/provided insurance for Volume 38NumberVolume 2007 3May Community arrangements Disability, accident and other insurance unemployment, old age, disability, Share tenancy (e.g. crop insurance) sickness, etc. Tied labour Risk exchange Extended family Labour contracts Risk coping Selling of real assets Selling of financial assets Disaster relief Borrowing from neighbours Borrowing from banks Conditional or unconditional transfers Intra-community transfers/charity Public works Sending children to work Subsidies 9 Seasonal/temporary migration capital’. Ideally, everybody is born with a full health provision of risk management instruments leads to capital that degrades slowly but progressively over redistribution mainly towards the poor, and hence time. The poorest, however, already show the marks more equal welfare position than measured by mere of shocks that hit their mother prior to birth. After monetary income inequality (Holzmann 1990). birth, further shocks to income and nutrition exhibit the well-documented effects of stunting, which can Last but not least, the equity effects of better risk include permanent effects on cognition and learning. management suggest having in turn, major efficiency Health shocks occur throughout an individual’s effects for development. Assisting equality of lifetime; if not properly treated these lead to an opportunity typically helps the most marginalised in a accelerated degradation of health capital with society, with important effects on development concomitant impacts on skill acquisition and income outcomes (World Bank 2004). Assisting equality in for the individual, as well as effects on the next outcome can – within limits – encourage risk taking, generation. a crucial element for development and economic growth. On the other hand, establishing full equality Health is only one example. Many other shocks, such in outcome threatens to eliminate any effort, as any as droughts and floods, price fluctuations and gains from risk-taking would be socialised. inflation, wars and civil strife, but also disability and unemployment, impact on individual behaviour and 3 The SRM framework – key elements investment decisions. Lack of access to instruments The SRM framework is based on two important designed to deal with these risks and help individuals principles: (1) the poor are typically most exposed to and households smooth consumption can lead to diverse risks, ranging from natural to man-made risks income-smoothing through sales of assets, or the and from health to political risks, and (2) the poor adoption of less profitable production technologies. have the fewest instruments to deal with these risks, If the shocks are very strong, or repeated or e.g. access to government-provided income support bunched, individuals and their families may be and market-based instruments like insurance. These trapped permanently at low levels of wellbeing, or principles have important consequences: (a) the poor pushed even deeper into destitution, from which are the most vulnerable in society because shocks are there may be no chance of recovery. likely to have the strongest welfare consequences for them; and (b) high levels of vulnerability cause the There is a growing body of empirical evidence on the poor to be risk averse and thus unable or unwilling to links between risk, shocks and wellbeing in low- engage in higher risk/higher return activities. Access income settings.1 Although challenges remain on the to better instruments to manage risk – either ex ante policy front, the conclusions for human and or ex post – would allow the poor to take more economic development are clear. (potentially high reward) risks and thus provide them with an opportunity to move gradually out of poverty. First, assisting individuals, households and Hence providing risk management instruments to communities to better manage risks is not a luxury individuals, and in particular to the poor, can be that only rich countries can afford. On the contrary, viewed as both an end and a means to development. providing appropriate risk management instruments, including social protection, is an essential investment The main elements of the SRM framework are to ensure that all people, and in particular the derived by introducing the notion of asymmetric poorest, move permanently out of poverty. information in a world of diverse risks, in a more Everybody is vulnerable to poverty – the shock(s) only explicit way than has been done previously. need to be strong enough. Good risk management Compared with an ideal world (à la Arrow-Debreu), contributes to efficiency. this has several consequences for managing risks; most importantly: