Global Poverty Research Group

Managing risk and the implications for poverty

Overview

Poor rural and urban households in developing countries face substantial risks, which they handle with risk-management and risk-coping strategies, including self-insurance through savings and informal insurance mechanisms. Despite these mechanisms, however, vulnerability to poverty linked to risk remains high. Stefan Dercon has continued his work on risk and poverty of which one part has focused on understanding the strategies households use to cope with risk. A paper, with Joachim De Weerdt, has focused on whether networks are relevant for risk-coping in a village in Tanzania, using detailed panel data. The implications of having overlapping networks for standard risk-sharing tests were examined, and the impact of health shocks on consumption across households was tested. It was found that health shocks have substantial effects on consumption but also that networks were contributing to risk-sharing. Given that there is substantial exclusion from networks, and inequality in terms of the wealth of networks, the village is clearly not the appropriate unit to study risk-sharing, even in this setting, with relatively poor households with relatively limited market interaction.

     Another paper by Stefan Dercon, reviewing the evidence on risk-management and risk-coping strategies, prepared as a background paper for the World Development Report 2000/01, has now appeared in World Bank Research Observer. It shows that risk and lumpiness limit the opportunities to use assets as insurance, that entry constraints limit the usefulness of income diversification, and that informal risk-sharing provides only limited protection, leaving some of the poor exposed to very severe negative shocks. Public safety nets are likely to be beneficial, but their impact is sometimes limited, and they may have negative externalities on households that are not covered. Collecting more information on households' vulnerability to poverty - through both quantitative and qualitative methods - could help inform policy.

Recent publications

Dercon, S. and J. De Weerdt, ‘Risk-sharing networks and insurance against illness’, CSAE working paper WPS/2002.6, 2002.

Dercon, S., ‘Income risk, coping strategies and safety nets’, background paper prepared for the World Development Report 2000/01. A shorter and edited version has now appeared in World Bank Research Observer, Vol. 17: 141-166, 2002.

Reseachers to contact for this project

Stefan dercon