Insurance against Poverty

Insurance against Poverty

Insurance against Poverty

Insurance against Poverty

Synopsis

Poor people in developing countries are often affected by droughts, floods, illness, crop failure, job loss, and economic downturns. Much of their energy goes into coping with these shocks and into day-to-day survival. While insurance and credit markets, combined with widespread socialsecurity, provide an important cushion against poverty in rich countries, the need for immediate survival may lock the poor into persistent poverty in developing countries. The poor in developing countries do have informal mechanisms to cope with risk and misfortune. These are based on income diversification, risk avoidance, self-insurance by saving together with family, and community-based mutual assistance. Nevertheless, the scope of these mechanisms remains limited. Repeated individual-specific shocks such as illness or pests, or covariate risks associated with drought, flood, or recession, undermine the ability of individuals and their families to cope with risk. We now know much more about vulnerability to risk and how poor people cope. Even more importantly, we have learned much about the large long-term consequences of these risks, which condemns many to persistent poverty and excludes them from economic growth. But there is much that can be done. Themicro-level studies that underpin this book offer new insights on how effective public action could be more effective in protecting the vulnerable against persistent poverty. Policy should focus on providing a comprehensive menu of ex-ante and post-crisis protection mechanisms, including new formsof insurance, savings, safety nets, and the means to strengthen the poor's asset base. Local communities have a big role to play: public funds should not be used to replace indigenous community-based support networks; rather they should be used to build on the strengths of these networks to ensurebroader and more effective protection. With numerous thematic chapters and case studies of both best practice and of failure, from a mix of low-income and middle-income countries across the developing world, this book evaluates alternatives in widening insurance and protection provision, and makes an important contribution to the topicalfield of insurance and risk.

Excerpt

The poor in developing countries are regularly exposed to risk and shocks such as drought, floods, illness, pests, commodity price changes, and recession. The usual policy response has been to develop some form of safety net, as a supplement to more general long-term economic growth-oriented policies; but the prevailing view in developing countries is that these safety nets are insufficient to avoid recurrent hardship.

Economists have long been interested in the welfare implications of risk and its consequences for poverty. However, the potential of risk and shocks to contribute towards low growth, persistent poverty and even poverty traps, has only recently received serious attention in the applied theoretical literature. More importantly, rigorous testing of these models has only become feasible recently with the availability of panel data in developing countries.

This study brings together new contributions that address these theoretical and empirical challenges. The book focuses on crucial questions for policymakers: how strong is the case for more public action? What can be done? What can be learned from existing informal institutions? Can we build on them? What initiatives could be taken to provide more protection?

Overall, the answer is that much can be achieved if policies are carried out with renewed commitment and credibility: providing insurance against poverty is not impossible.

Tony Shorrocks

Director, UNU-WIDER

December 2003 . . .

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