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The inside story of WDR 2014, Risk and Opportunity: Managing Risk for Development

Norman Loayza's picture

The King of Egypt dreamt that seven strong and healthy cows were eaten by seven scrawny and ugly ones. Then, he dreamt that seven hearty ears of corn were replaced with seven scorched and damaged corncobs. He didn’t know what to make of these dreams and asked his advisors to interpret them. No one could. From his cell in prison, Joseph learned of the King’s dreams and interpreted their meaning: Seven years of abundance would be followed by seven years of drought in the land of Egypt. The years of famine would be so abysmal that they would erase the memory of the plentiful years. Joseph advised the King to prepare, using the bounty of the good harvest to withstand the calamity of the times to come. The King followed Joseph’s advice and saved the people of Egypt from hunger and disaster.     

This story presents in a nutshell the message that we wanted the World Development Report 2014 (WDR 2014) to convey: In the face of an uncertain world, preparation in good times is essential for resilience in bad times and for prosperity always.

The message is powerful and clear. However, going from a general notion to the specifics of a World Development Report remained a daunting task. When we started working on the Report, the most repeated comment we received went something like this, “Risk and uncertainty is too broad a topic to handle in a single report. And, anyway, how do you define risk?” The topic was wide and abstract, hardly the material for a straightforward WDR. It became imperative for us to sharpen the focus of the Report and organize its structure around this focus.

The inside story of the WDR 2014, at least in its initial phase, was one of lengthy brainstorming sessions. They were mostly within the team but benefitted enormously from the advice of colleagues in the Research Group and the rest of the World Bank. There were three major intellectual milestones that allowed us to define the Report and made it into what we hope is a useful and relevant contribution.   

The first was to focus on the process of risk management rather than on a particular risk. This would add value to an already exhaustive literature on handling specific risks, from job and food insecurity to financial crisis and climate change. Moreover, focusing on the process of managing risk allowed us to consider the synergies, trade-offs, and priorities involved in addressing different risks in different contexts. It also allowed us to consider the common obstacles that prevent people and societies from conducting effective risk management. We thought that this cross-cutting approach to risk was needed to make the best use of scarce resources when faced with a variety of risks, as is the case all over the world but particularly in developing countries. A cross-cutting approach is especially challenging given that each risk area has developed into a particular field, with its own methods and even terminology. Through the WDR 2014, we attempted to provide a common framework that can bridge across areas of expertise as diverse as disaster risk management, social protection, and financial and macro prudential policy.

The second milestone was to focus on how risk affected people rather than institutions or governments per se. In hindsight this may seem like an obvious choice. It was not. Once we decided for a people-based approach, however, everything else fell into place. The report would not consider the risks of specific projects, firms, banks, organizations, or even governments. Rather, it would consider how those institutions contribute (or not) to an environment where people could best manage their risks. For instance, we would worry about whether people have good jobs, and not whether they were provided by one firm or the other. Likewise, we would worry about stability of the overall financial system, rather than the viability of a particular bank. And we would be concerned with having sensible public regulations and policies in place, and not whether this or that government provided them. We found that looking at the world from the position of a family was a superb disciplining device. Families do not address risks in silos – they make an integrated set of decisions on how and how much to invest in dwellings, health care, education, migration, jobs, and so on and so forth. And families need connections to markets and communities to best handle the risks (and opportunities) they face. From this perspective, for instance, a faulty fiscal and monetary policy is damaging not only because it weakens government finances but most importantly because it generates macroeconomic instability, which affects everyone and especially the poor.

The people-based perspective we adopted explains our insistence in presenting risk management as a shared responsibility, where different groups and institutions in society play a complementary role in supporting the individual’s own efforts. As in John Donne’s poem – used by Ernest Hemingway for the title of his magnificent novel – we claim an interconnection, a risk-sharing that underlies the strength of all social fabric: “And therefore never send to know for whom the bell tolls. It tolls for thee.”      
The third milestone was to consider the opportunity side of risk and not only its detrimental aspect. After all, people and societies take risks voluntarily in the expectation that something beneficial will result. This consideration presented risk management not only as a defensive mechanism but also as the basis for a developmental strategy – the objective of risk management went beyond resilience, extending to the search for prosperity. Along with an approach that escaped the “doom-and-gloom” of other studies, this led us to a practical definition of risk that a general audience could understand and relate to: risk is defined as the possibility of loss, with its counterpart, opportunity, defined as the possibility of gain. Risk and opportunity were then, for our Report, like two sides of the same coin.

The WDR 2014 title, Risk and Opportunity, is meant to highlight the duality that is intrinsic in innovation and development: risk comes with promise as well as with peril.  In the Chinese word for crisis, wēi jī, the first character means danger from risk, and the second connotes opportunity. Our hope is that the crises the world has experienced in the recent past can lead the way to reforms that bring about new opportunities… and that the WDR 2014 can become a useful guide in this process.

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