Effective Risk Management Critical to Poverty Eradication: 2014 World Development Report

World Bank6 October 2013: According to the World Bank Group's 2014 World Development Report (WDR), titled ‘Risk and Opportunity: Managing Risk for Development,' effective risk management is critical in the fight to end poverty because it can provide both resilience to withstand adverse events and the ability to take advantage of development opportunities.

The report explains that: adverse shocks, particularly health, weather and economic shocks, play a major role in pushing and keeping households below the poverty line; and managing risks responsibly and effectively can save lives, avert economic damage, prevent development setbacks, unleash opportunities, and bring security and prosperity to people in developing countries. The WDR argues that: rather than rejecting change to avoid risk, people and institutions must prepare for the opportunities and risks that accompany change; and proactive, systematic and integrated risk management efforts are required. “Our new approach calls for individuals and institutions to shift from being ‘crisis fighters' to proactive and systematic risk managers,” said World Bank President Jim Yong Kim.

The report focuses on: the process of risk management rather than focusing on a particular risk; how risk affects people rather than institutions or governments per se; and the opportunity of risk, rather than solely considering its detrimental aspect. WDR Director Norman Loayza explains that managing risks effectively requires moving from dependency to self-reliance, and from isolation to cooperation. The report finds that the benefits from risk preparation, such as inducing people to be less risk averse, can outweigh its costs and, because most individuals lack the capacity to confront shocks, they must depend on shared action and responsibility.

The report also discusses climate change and its implications for development, stating that mitigating climate change exemplifies a global public good that requires collective action. It indicates that countries and communities are ill prepared to address the impacts of climate change because, while proactive and cost-effective measures to manage disaster risk are often available, they are not adopted due to inertia, short sightedness or reasons of political economy. Changing such behaviors is difficult because the benefits are diffuse and long-term while the costs are immediate.

Therefore, a strong risk management strategy requires knowledge, protection, insurance and coping, as individuals and societies often fail to proactively tackle risk due to a lack of resources and information, missing markets and public goods, and social exclusion. The WDR proposes managing risk at the household, local, national and global levels, and in a way that aligns with and supports broader objectives, such as national development plans, municipal infrastructure investment programmes and household savings goals. At the country level, the WDR recommends setting up national risk boards, an institutional reform already in place in Singapore, and being considered in Morocco, Jamaica, and Rwanda. [Publication: 2014 World Development Report] [WDR Website] [World Bank Press Release] [World Bank Feature Story on the WDR] [Blog Hosted by the World Bank's Chief Economist]