Risk and Opportunity

World Development Report 2014

Presenter
Rizwan Shah

Reg No; 4114 SE-BSECO/S22

 Agenda of the Presentation

• Risk management can be a powerful instrument for

development.
• Beyond the ideal: the obstacles to risk management
• Cohesive and connected communities are more
effective.
• Public policies to improve local risk management
• Creating jobs and supporting innovations
• Flexibility and formality in the enterprise sector
• The financial System
 Risk management can be a powerful
instrument for development
• The past 25 years have witnessed unprecedented changes around the
world many of them for the better.
• Across the countries many countries have embarked on a path of
international integration, economic reform, technological modernization,
and democratic participation.
• Although challenges and inequalities remain, economies that had been
stagnant for decades are growing, people whose families had suffered
deprivation for generations are escaping poverty, and hundreds of millions
are enjoying the benefits of improved living standards and scientific and
cultural sharing across nations.
• If ignored, these risks can turn into crises that reverse hard-won gains and
endanger the social and economic reforms that produced these gains.
• The solution is not to reject change in order to avoid risk but to prepare for
the opportunities and risks that change entails.
• Risk management is cost-effective— yet not always feasible
• Not only can risk management save lives, avert damages, and unleash opportunities, but
preparation for risk often has high returns.
• A regimen of mineral supplements designed to reduce malnutrition and its related health
risks, for example, may yield benefits 15 or more times greater than the cost of the
program.

Beyond the ideal: The obstacles to risk management

• It is always related to the obstacles and constraints facing individuals and societies,
including lack of resources and information, cognitive and behavioral failures, missing
markets and public goods, and social and economic externalities. This realization leads to
an important message

Missed opportunities for good risk management

• Almost half the average yearly rainfall fell in a single day, leaving in its wake more
than 400 deaths and extensive damages to buildings and infrastructure.
• reports have spelled out precisely what to do to reduce the risk of flooding.
Twenty years ago, a master plan (the Brimstowad Report) provided a list of
recommendations to make the city more resilient to floods, and nearly $200
million was approved to implement the plan. But 12 years after the report was
published,
• Households : Household members can help one another manage risk and pursue
opportunity When household members share risks, they can increase their own
resilience and that of the household. Economic theory suggests that individuals
should be able to smooth consumption over their life cycle

Cohesive and connected communities are more effective

• Household members can help one another manage risk and pursue opportunity
When household members share risks, they can increase their own resilience and
that of the household. Economic theory suggests that individuals should be able to
smooth consumption over their life cycle
• In higher-income countries, local governments routinely clear drains and provide
policing, sanitation, and clean water. In poor countries—and particularly
• in poor neighborhoods—local governments often do not provide these basic public
goods of common protection

Public policies to improve local risk management

• communities’ risk management is grounded in their core strengths—cohesion,
vitality, survival skills—but communities usually do not deliver insurance and
protection at a large enough scale, leaving many risks uncovered; weaknesses such
as exclusion and conflict also often limit community risk management
Public policies continue
• communities’ risk management is grounded in their core strengths—cohesion,
vitality, survival skills—but communities usually do not deliver insurance and
protection at a large enough scale, leaving many risks uncovered; weaknesses such
as exclusion and conflict also often limit community risk management

The ways that the enterprise sector can help people confront risks
• The enterprise sector comprises workers, owners, the arrangements that organize
their relationships within an individual enterprise, and the technology that turns
labor and capital into goods and services.
• a single enterprise might seek to maximize its profits, the enterprise sector as a
whole is not confined to this objective.

Flexibility and formality in the enterprise sector improve people’s resilience and
prosperity:
• The shift to greater flexibility and formality can take time, and it requires
complementary reforms to strengthen institutional capacity and improve
regulations
• When state institutions are weak and regulations are cumbersome, there are
trade-offs between flexibility and formality. When state institutions are strong and
regulations are sound, flexibility and formality can be symbiotic.
 For good risk management, people need a range of financial tools:
• The financial system supports risk management by offering various financial tools to
people and their support systems (households, the community, enterprises, the state,
and even the international community)
• The financial system supports risk management by offering various financial tools to
people and their support systems (households, the community, enterprises, the state,
and even the international community)

Financial crises hurt people: How can they be prevented?

• Financial crises hurt people directly and indirectly Banking crises can affect people’s
wealth, human capital, income, health, and even safety. By one measure, the average
loss of output during banking crises in the past four decades has been substantial in
both advanced countries (32.9 percent of GDP) and emerging economies (26
percent).27
• The average loss was much smaller in low-income countries (1.6 percent of real GDP),
most likely because the penetration of financial services is low

Gearing macroeconomic policies toward aggregate stability

• Using macroeconomic policies to manage economic crises and cycles Reducing
instability and uncertainty. Macroeconomic volatility is a source of short-term concern
and an impediment to achieving long-term development goals.
• Greater output volatility—especially when accompanied by crisis episodes—lowers
long-term growth. Increasing output volatility by one standard deviation leads to a 1.3
percentage point reduction in growth per capita; this decline is even more sizable (2.2
 Generating sustainable fiscal resources to finance stabilization policies and long-
term social programs:

• Making fiscal room to maneuver to cope with shocks and unexpected obligations
Funding for stabilization policies and long-term social programs is limited by the
ability of the government to save and borrow resources.
• Making fiscal room to maneuver to cope with shocks and unexpected obligations
Funding for stabilization policies and long-term social programs is limited by the
ability of the government to save and borrow resources.

Global problems call for global players

• Unmanaged risk does not respect boundaries. Once triggered, pandemics and
financial crises can circle rapidly around an increasingly interconnected globe.
Conflicts can quickly spill over into neighboring countries. Droughts, floods, and
violent storms can devastate an area, a country, or an entire region.
• Unmanaged risk does not respect boundaries. Once triggered, pandemics and
financial crises can circle rapidly around an increasingly interconnected globe.
Conflicts can quickly spill over into neighboring countries. Droughts, floods, and
violent storms can devastate an area, a country, or an entire region.
How does the international community enhance risk management?
• The international community supports national efforts to manage risks by
addressing some of the key obstacles to effective management of risks that go
beyond national capacity:
• information gaps, limited access to markets and resources, externalities imposed
by actions of other actors, and cognitive and behavioral biases. Members of the
international community contribute to strengthening the key pillars of risk
management