Making Development Less Risky

Scientific American: Making Development Less Risky

Life at the bottom of the world’s income distribution is massively risky. Poor households lack basic buffers—savings accounts, health insurance, water tanks, diversified income sources, and so on—against drought, pests, disease and other hazards. Even modest shocks, such as a temporary dry spell or a routine infection, can be devastating.

These risks have knock-on effects. To take one prime example, the expected economic return on the use of fertilizer is very high in Africa, yet impoverished farmers cannot obtain it on credit because of the potential for a catastrophic loss in the event of a crop failure. Their households cannot bear the risk of a loan, and so they remain destitute. Managing risk is therefore important not only for smoothing out the well-being of these farmers over the years but also for enabling their escape from extreme poverty.

For these reasons and others, financial risk management is likely to come to the forefront of strategies for poverty reduction. Microfinance has already introduced markets for the poor. Microinsurance and other kinds of risk management will likewise yield important tools. …