In the face of social unrest, economic crises, and more frequent natural disasters, preparation and recovery efforts by governments, communities, and individuals have become increasingly essential, says a new report from the World Bank Group. Effective risk management can provide both resilience to withstand adverse events and the ability to take advantage of development opportunities, it said adding it is, therefore, a critical ingredient in the fight to end poverty.
According to the World Development Report (WDR) 2014, titled, Risk and Opportunity: Managing Risk for Development, adverse shocks, above all health, weather shocks, and economic crises, play a major role in pushing households below the poverty line and keeping them there.
The report concludes that managing risks responsibly and effectively could save lives, avert economic damages, prevent development setbacks, and unleash opportunities. Risk management can be a powerful instrument for development, bringing security and the means of progress to people in developing countries and beyond.
Over the past 25 years, the world has experienced rapid integration, economic reform, technological modernisation, and increased democratic participation, but has also endured financial turbulence, job and income loss, and environmental damage. The WDR contends that rather than rejecting change in order to avoid risk, people and institutions need to prepare for the opportunities and risks that accompany change.
The report argues that proactive, systematic, and integrated risk management efforts are needed more than ever. The report finds that the benefits from preparing for risk could significantly outweigh the costs, citing an example that mineral supplements designed to reduce malnutrition may yield benefits 15 times greater than the costs. The report also finds that preparation induces people to be less risk averse. For instance, having access to rainfall insurance can induce farmers to invest in fertilizer, seeds, and other inputs, instead of simply stashing money in a mattress as a cushion for when the next dry spell comes.
Some risks have fallen dramatically in recent years as life expectancy, for example, has risen thanks to expanded immunization, better safety nets, and improved forecasting of cyclones, tsunamis, and quakes. Moreover, most developing countries undertook reforms over the last decade that helped them build greater resilience to swings in global capital flows.
This improved resilience helped countries maintain growth and poverty reduction during the recent global financial crisis. The report finds that because most individuals remain ill-equipped to confront many shocks, they must depend on shared action and responsibility at different levels of society. Effective risk management consists of combining the capacity to prepare for risk with the ability to cope afterwards, while pitting the upfront cost of preparation against the probable benefit, according to the report.
A strong risk management strategy consists of four components: knowledge, protection, insurance, and coping, it said.
