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WDR 2014

Avoiding the “Planning Paradox”: The New World Bank Strategy Must Take Risk and Uncertainty into Account

Norman Loayza's picture

The following post is a part of a series that discusses 'managing risk for development,' the theme of the World Bank’s upcoming World Development Report 2014.

As the ancient Greek philosopher Heraclitus wrote, the only thing constant is change. And with change comes uncertainty. Faced with choices for bettering their lives, people make virtually every decision in the presence of uncertainty. Young people decide what to study without knowing exactly what jobs and wages will be available when they enter the labor market. Adults decide how much to save for retirement in the face of uncertain future income and health conditions. Farmers decide what to cultivate not knowing with certainty whether there will be enough rain for their crops and what demand and prices their products will command in the market. And governments decide the level of policy interest rates and fiscal deficits in the presence of uncertain external conditions and domestic productivity growth.

Myopia and (dis-)incentives - The political economy of managing risk

Jun Erik Rentschler's picture

The following post is a part of a series that discusses 'managing risk for development,' the theme of the World Bank’s upcoming World Development Report 2014.

It is an old and well known criticism of electoral politics: the conflict between short political mandates and long term objectives. To galvanize political support, policy makers not rarely resort to “benevolent” political measures, such as short-sighted tax reductions or infrastructure investments, which are often more beneficial to their own election polls than to their electorate. Such political myopia is alarmingly common, and stands in the way of effective policy making in the long term interest of people.
Risk management is one of the fields in which effective action tends to be impaired by political myopia. For instance, implementing comprehensive regulation in the financial sector, or imposing stringent environmental requirements on certain industries, would help managing the risks of financial or environmental crises. Similarly, the installation of early warning systems for tsunamis or hurricanes could provide decisive information for preparation and timely evacuation. 

Increasing Flood Risks Create Major Challenges for World’s Coastal Cities

Stéphane Hallegatte's picture

Increasing flood risks create a major political and institutional challenge for the world’s coastal cities as ambitious and proactive action at the local level over the next decades will be needed to avoid large-scale flood disasters. However, the implementation of flood risk management policies meets many obstacles. 

In a recent study written with colleagues Colin Green, Robert Nicholls and Jan Corfee-Morlot as part of an OECD project on urban vulnerability, we estimate how flood risks could change in the future in 136 coastal cities, in response to increasing population and wealth, local environmental change, and climate change. We find that because current flood defenses and urbanization patterns have been designed for past environmental conditions, even a moderate change in sea level is sufficient to make them inadequate, thus magnifying flood losses to catastrophic levels. If no action is taken to reduce flood vulnerability, most coastal cities would become inhospitable and dangerous places to live, with annual losses in excess of $1 trillion dollars.
 

Oil Price volatility – its risk on economic growth and development

Jun Erik Rentschler's picture

The following post is a part of a series that discusses 'managing risk for development,' the theme of the World Bank’s upcoming World Development Report 2014.

Crude oil is arguably one of the single most important driving forces of the global economy, and changes in the price of oil have significant effects on economic growth and welfare around the world. Indeed, the level of oil dependency of industrialized economies became particularly clear in the 1970s and 1980s, when a series of political incidents in the Middle East disrupted the security of supply and had severe effects on the global price of oil. Since then, oil price shocks due to such exogenous events have continuously increased in size and frequency (cf. Figure 1). While oil demand tends to be slow moving, mainly driven by economic growth and to some extent climate policies, the prospects of future oil supply are highly uncertain – not least considering persistent political instability in exporting countries and the uncertainty regarding the discovery of new reserves. As a result of such uncertainties, oil prices could undergo further (increasingly) drastic fluctuations in the future.

Catastrophe bonds: The international community can facilitate the development of innovative risk management tools

Sébastien Boreux's picture

The following post is a part of a series that discusses 'managing risk for development,' the theme of the World Bank’s upcoming World Development Report 2014.

One thing financial markets are good at is innovating and creating new instruments that meet the ever-evolving needs of investors and economic agents  managing their risks (such as national or subnational governments). In the mid-1990s, after hurricane Andrew and the Northridge earthquake in the United States, it became increasingly clear that some risks were too big to insure with existing instruments. This matters most to governments and insurers who have to pick up the pieces after a natural disaster as the frequency and cost of natural hazards have been increasing over the past few decades.

In the aftermath of a natural disaster, governments have to shift budgetary resources away from new investments for development to relief and reconstruction efforts. For insurance companies, catastrophic events can put pressure on their financial viability. One way to relieve the pressure is to transfer such risks to capital markets. That is how catastrophe bonds (cat-bonds) were born, as financial instruments to further disperse the risk of natural disasters more broadly and use the risk-taking capacity of institutional investors worldwide. 

Help Us Help You: Sharing the Responsibility for Managing Risk

Martin Melecky's picture

The following post is a part of a series that discusses 'managing risk for development,' the theme of the World Bank’s upcoming World Development Report 2014.To know more and share your feedback click here.

Who should be responsible for managing risk?
Sometimes those given the responsibility have the least capacity. People are generally capable of dealing with certain small risks. But they are inherently ill equipped to confront large idiosyncratic risks (household head falling ill), systemic risks that affect many people at the same time (natural disasters), or multiple risks occurring either simultaneously or sequentially (low harvest due to droughts followed by food insecurity due to a food price increase).  To manage these different types of risks, people need support from other socioeconomic systems.

If the responsibility needs to be shared, who should share it?
Too often the first response to shared responsibility is to turn to the government for support. Government support, however, could require additional resources, possibly through increased taxes to ensure fiscal sustainability. Increased taxes could be burdensome for the economy and leave fewer resources for self-reliance (self-protection and self-insurance), which could be the most effective actions to manage some risks.

Moreover, government support can distort incentives, causing those affected by risk to take less responsibility for managing it (a situation known as moral hazard). For instance, some U.S. homeowners in disaster-prone areas do not buy disaster insurance knowing they can count on government aid if their home is destroyed.  Hence approaches to sharing responsibility must ensure that risk takers or those exposed to risk retain some “skin in the game.”

Seizing Opportunities under Extreme Risks: Fragile and Conflict-Affected States

Inci Otker-Robe's picture

Fragile and conflict-affected countries confront some of the most extreme risks and constraints to their management that, if unaddressed, could create a vicious cycle of poverty, fragility, and conflict with far-reaching implications beyond these states. A well-balanced and collective approach to risk and opportunity can build on the progress made toward better development results going forward.

One thing that fragile and conflict-affected states (FCSs) have in abundance is the extreme risks facing their people. In these environments, consequences of risks materializing are often a matter of life and death. People living in such states make up only 15 percent of the world population, but represent nearly one-third of all people in extreme poverty, one-third of the HIV-related deaths in poor countries, one-third of people lacking access to clean water, one-third of children who do not complete primary education, and half of children dying before reaching their fifth birthday. Only eight of the 36 FCSs have so far met the Millennium Development Goal (MDG) of halving extreme poverty, according to a new World Bank analysis, and the upward trend in the number of poor in FCSs (figure) is expected to take their share in the global poor population to 50 percent by 2015, according to an OECD report. The majority of MDGs in fragile states will not be met by 2015.

The incidence of extreme risks in FCSs is matched by the prevalence of severe constraints on the ability of people to manage risk. Characterized typically by high levels of corruption, weak governance and institutional capacity, an unfavourable environment for doing business and low competitiveness (figure), these states offer limited access to functioning market mechanisms, communities, or governments that provide an enabling environment for managing risk. Three quarters of the limited foreign investment in fragile states go to only seven (resource-rich) states.

Danger of a pandemic

Olga Jonas's picture

The following post is a part of a series that discusses 'managing risk for development,' the theme of the World Bank’s upcoming World Development Report 2014.

On February 15, 2013, an asteroid 45 meters across sailed past the Earth at 4.9 miles a second.  This was the closest encounter on record with an asteroid this big. Such rare events trigger fear because people overestimate the risk of unusual events – at least for a while. The odds of other rare events are often underestimated. People have a hard time understanding frequencies that are longer than a human lifetime; politicians discount probabilities of disasters that are unlikely to hit while they are in office and so they underinvest in prevention. In sum, we have trouble assessing low-probability, high-impact risks – the kind of events dubbed as Black Swan by Nassim Taleb. 

Responding to concerns about the asteroid, The Economist (Danger of death! Feb. 14, 2013) created a graphic to illustrate how we are unlikely to die from asteroid impact (odds of one in 75,000,000). The chart showed that more prosaic, but still rare, dangers were worse.  For instance, 27 people died in 2008 in America from contact with dogs (a one in 11,000,000 chance of death).  The ranking also showed the odds of death in any given year from a range of causes, such as heart disease, choking, falling down stairs, cycling, and bee stings.

Risk-taking by the enterprise sector can support people’s resilience

Xubei Luo's picture

The following post is a part of a series that discusses 'managing risk for development,' the theme of the World Bank’s upcoming World Development Report 2014.

Live in a poor country in Africa but get an ultrasound analysis by one of the top medical experts in the world? Sound like a dream? A tech firm, iMedcare Technologies Co., showcased a process at the 13th Infopoverty World Conference held in New York on March 25–26 by which using data transmitted like a mobile phone call, doctors thousands of miles away can analyze ultrasound results at low cost and prescribe treatment in real time

Is this innovation good? Clearly, yes. Long-distance medical treatments in India and several countries have shown the great potential that technology has in helping people manage risks, starting with  day-to-day health issues. Are all these innovations bound to succeed? Clearly, no. Taking risks to innovate is an integral part of pursuing opportunities. For an individual enterprise, the results are seldom guaranteed; in fact, a large share of innovative firms fail.  But for the enterprise sector as a whole, innovation is a risk worth taking. The small share of innovative firms that survive often push the frontier of productivity in the economy and produce great gains and improvements in well-being.

Going through the hoops with the support of the financial system: The Story of Jan Sarkis

Martin Melecky's picture

The following post is a part of a series that discusses 'managing risk for development,' the theme of the World Bank’s upcoming World Development Report 2014.

A composite story based on prevailing business practices

In January 1990 after the Velvet Revolution, Jan Sarkis, the son of a Greek immigrant in rural Czech Republic, decides to start a business to produce bottled juices. To obtain needed machinery and funds for working capital (fruits, containers, bottles, etc.), Jan takes credit from a local bank. He had heard from the locals that the region used to experience periodic floods. Although Jan hasn’t experienced any himself, he still buys flood insurance from a reputable insurance company.  In the 90s, rural Czech Republic was prone to thefts and burglary. So, Jan decides to protect his savings by depositing them in a bank. Good times settle in Czekia, and Jan’s business and the country begin to boom.

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