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.
How should we deal with this uncertainty? The economics and public policy literatures are filled with theories, papers, and books on decision making under uncertainty. They can be summarized with two words: planning and preparation. Klaus Jacob – a disaster risk management expert at Columbia University and World War II survivor – wrote “I grew up in a war environment. And what I learned is that you can plan your fate, at least to some degree, if you assess your risk and do something about it.”
It is natural and even expected that planning be done with uncertainty in mind. Surprisingly, however, planning by countries and institutions is often undertaken as if things were to remain constant. Ignoring uncertainty when making plans is something of a paradox; yet it is all too prevalent.
To better account for risk and uncertainty in policy making, the World Development Report 2014 offers several policy recommendations to reduce the losses and improve the benefits that people may experience while conducting their lives and pursuing development opportunities. Its overarching advice is that risk management should be implemented in a proactive and integrated way to optimize its effectiveness. For this purpose, the WDR 2014 advocates establishing a national risk board to mainstream risk management into countries’ development agenda. This could be a new agency or come from reform of existing bodies: what is most important is a change in approach—one that moves toward a coordinated and systematic assessment of risks at regional and national levels.
Implementing this approach is not easy – it may require a substantial change in the way governments develop and put in practice their general plans, moving from planning under certainty to considering change and uncertainty as fundamental characteristics of modern economies.
This advice is not only for governments, of course. It is also valid for international organizations, like the World Bank, as they advise on and support countries’ development programs. The World Bank is restructuring its strategy to achieve its goals of eliminating extreme poverty and boosting shared prosperity. From the perspective of the WDR 2014, there are two main threats to achieving these goals. They are, first, the social and economic losses associated with negative systemic and idiosyncratic shocks and, second, the missed opportunities for development owing to lack of resources and excessive risk aversion. Both threats result from mismanaged risks.
Effective risk management is essential for development and, therefore, indispensable for the World Bank to achieve its goals. This recognition should guide the new Bank’s strategy. It should permeate its operations, advice, and even structure. In particular, it should guide the most important and comprehensive component of the Bank’s strategic relationship with its clients – the Country Partnership Framework. Likewise, in the ongoing discussions on the Bank’s reorganization, risk management could be a strong “beam of light” that cuts across the proposed Global Practices, shifting perspectives and shedding light on policy making under uncertainty. Only then, the Bank would be following what the WDR 2014 is asking from national governments: a proactive and integrated approach to risk management. A Country Partnership Framework and a Bank’s reorganization without clear, explicit, and fundamental consideration of risk and risk management would suffer from the “planning paradox” of making plans while ignoring uncertainty.