Insurance against Poverty An end to risk-induced poverty traps in Ethiopia? : Insurance against Poverty An end to risk-induced poverty traps in Ethiopia? Stefan Dercon
University of Oxford
and WIDER, United Nations University
Insurance against Poverty : Insurance against Poverty
Research funded by the World Institute of Development Economics Research
Team of 20 researchers, lead by Stefan Dercon
Study forthcoming Oxford University Press, Spring 2004.
Background : Background The world community has set itself ambitious targets on poverty, the Millennium Development Goals
Despite progress in many contexts and countries, at times disappointing progress
Background (ctd) : Background (ctd) What about Ethiopia?
History of Risk and Shocks
Continuing poverty persistence and destitution
Drought and other shocks still disrupting livelihoods and the economy
Purpose : Purpose To argue that the lack of insurance and protection is a cause of persistence in poverty
To explain how risk implies that policies to stimulate aggregate growth may still leave many behind
To broaden the discussion about policy options, beyond just safety nets, and the importance of learning and building on indigenous insurance mechanisms
Questions : Questions 1. Diagnosis: How important is risk for poverty?
2. Elements of a Cure: What to do?
Central Thesis : Central Thesis
Reducing vulnerability is good for growth and crucial for poverty reduction
Insurance against poverty is more than a safety net
Structure : Structure 1. The Cost of Risk: the link between risk, shocks and poverty persistence
2. Developing Social Protection: learning from indigenous institutions
3. Beyond Safety Nets
Risk and Poverty : Risk and Poverty Developing countries face pervasive risk and shocks, including drought, health and economic shocks
Short term humanitarian cost is important….
Evidence suggests ‘transient’ poor are substantial group
Transient poverty : Transient poverty Study in 15 villages in rural Ethiopia, in 1994-95, three rounds
About 45 percent below ‘national’ poverty line in each round
About two-thirds poor in each period, but about one third moving in and out of poverty
substantial part related to ‘shocks’
But misleading… : But misleading… ‘Transient poverty’ is not the same as the poverty cost of risk
‘Transient poverty’ suggests that bouncing back is painless, and that people are myopic
Starting point: people actively try to ensure their own survival and future
Responses to risk : Responses to risk Households respond to risk using sophisticated mechanisms:
Risk management: shaping the risks they face by choosing particular activities (diversification, low risk activities)
Risk coping: coping with the consequences of high risk, e.g. using savings and mutual support networks
The cost of risk : The cost of risk These strategies are costly in terms of mean returns, and therefore long term poverty (ex-ante impact)
Low risk activities and assets have a low return
Asset poor households have to keep risk lowest
Despite strategies, still large impact when shocks occur, involving losses in assets, health, skills, further limiting poverty reduction possibilities (ex-post impact)
The cost of risk: ex ante : The cost of risk: ex ante Ex-ante impact?
India, Tanzania: 25 percent loss in mean return of the poor relative to the rich due to assets and income portfolio choices
Less adoption of new technology in India due to risk
Zimbabwe: risk reduced capital accumulation by up to 40 percent, largely linked to ‘ex-ante’ behaviour
The cost of risk: ex-ante : The cost of risk: ex-ante Evidence from rural Ethiopia?
diversification but constrained by access to resources, resulting in very low return portfolios by the most vulnerable (dungcakes, charcoal,…)
a policy of fertiliser adoption in agriculture via uninsured credit with strict credit contract enforcement?
The cost of risk: ex-post : The cost of risk: ex-post Ex-post impact?
China, Bulgaria, … Household income growth rates affected for long periods (5-10 years) after serious shock
evidence on nutrition and education of children: e.g. in Zimbabwe after drought, up to 7 percent lower lifetime earnings due to lower height and lower school attainment
children taken out of school with possible permanent effects (India, Indonesia)
The cost of risk: ex-post : The cost of risk: ex-post Ethiopia? Evidence on growth in food consumption between 1989 and 1997 in 6 villages.
Bad rainfall shocks have long-lasting impact (lower growth for 5-10 years)
Extent of suffering during famine in 84-85 affects growth in the 1990s!
Conclusion: the cost of risk : Conclusion: the cost of risk Evidence from many contexts, including Ethiopia, points to risk-induced poverty persistence and possibly even
‘poverty traps’
= situations from which no escape is possible using own means and resources, even if there is substantial growth in the economy
Implication for Policy? : Implication for Policy? Risk is a cause for poverty traps, for untapped profitable opportunities and for lower growth, or:
The return to ‘social protection’ is substantial
Public action to reduce vulnerability is good for equity AND efficiency/growth
Structure : Structure 1. The Cost of Risk: the link between risk, shocks and poverty persistence.
2. Developing Insurance against Poverty: learning from indigenous institutions.
3. Beyond Safety Nets.
How? : How? Policy should not just be an ‘post-crisis’ safety net; still, it is important.
Try to address problem ‘ex-ante’ by menu of policies to strengthen ability of the poor to insure themselves
= “Insurance against Poverty”
Learning from risk strategies : Learning from risk strategies Purpose: finding better ways of providing protection and insurance
Starting point: learn from how people manage and cope with risk
My focus: indigenous institutions
Learn from them, build on them?
Indigenous risk-sharing : Indigenous risk-sharing Communities and networks providing ‘insurance’, reciprocal support
Strength:
Embedded in communities, exploiting information and norms to avoid standard failures in providing insurance and protection;
Emerged as solution to lack of insurance, not ‘imposed’ or captured by elite/state/NGOs
Indigenous risk-sharing : Indigenous risk-sharing Weaknesses:
Limited to frequent, individual specific, not community-wide risks
Marginal groups may well be excluded
May not be able to withstand change
Indigenous institutions : Indigenous institutions BUT:
Emerging evidence that semi-formal indigenous groups stronger than informal networks – with less exclusion and stronger to withstand change
e.g. Iddirs in Ethiopia, but also funeral societies in Tanzania
Indigenous institutions : Indigenous institutions Study in rural Ethiopia (5 communities)
Regular contributions, payout at funeral
Often 10 or more groups per village
Hholds members of on average 3 groups
Inclusive and relatively stable groups
Large asset holdings (mean=$400)
Clear rules and regulations, elected committees
Indigenous institutions: STRATEGY for POLICY : Indigenous institutions: STRATEGY for POLICY Strengthen these groups by offering more opportunities for insuring and protecting its members – wider insurance, savings, asset creation.
But careful balance is needed to avoid loss of all advantages of indigenous groups (including their independence, informational advantages, limited capture and flexibility to handle change).
Structure : Structure 1. The Cost of Risk: the link between risk, shocks and poverty persistence.
2. Developing Insurance against Poverty: learning from indigenous institutions.
3. Beyond Safety Nets.
Beyond safety nets : Beyond safety nets Policy to reduce vulnerability to risk is typically reduced to ‘a safety net’, to reduce ex-post the welfare impact of a shock.
BUT
Conclusion 1: Reducing vulnerability is good for growth and crucial for poverty reduction
Conclusion 2: Safety nets are relevant, but providing ex-ante opportunities to the poor to protect themselves is crucial
“TEXTBOOK POVERTY AND VULNERABILITY POLICY” : “TEXTBOOK POVERTY AND VULNERABILITY POLICY” Attack poverty by strengthening ASSET BASE and ACCESS TO RESOURCES of the poor:
Encourage human capital formation (education, better health)
Encourage physical capital formation (investment, new technology)
Build complementary public goods (infrastructure, community goods)
Attack vulnerability to risk by providing SAFETY NET in case a bad shock occurs.
Ex-ante protection: the missing link : Ex-ante protection: the missing link The poor’s attempts to ‘accumulate’ these assets are easily undermined by shocks
Too much is at stake for them to risk scare means by investing in an asset base that is easily lost
E.g. losing livestock, facing destitution from loan repayments after shock, taking children out of school, etc.
Offering ‘insurance’ to protect asset base, by strengthening risk strategies
Insurance against Poverty: examples : Insurance against Poverty: examples Strengthening ‘risk coping’:
Stimulating self-insurance, by offering better savings products, accessible to the poor (in kind and in cash)
Building on indigenous insurance schemes (e.g. community or funeral societies)
Developing insurance products suitable for the poor – easy access, easy triggers; e.g. rainfall insurance, possibly linked to credit for inputs
Insurance against Poverty: examples : Insurance against Poverty: examples Strengthening ‘risk coping’ (ctd)
Better functioning of key markets when crisis hits (livestock, grain markets)
Address the disproportionate attention to microcredit in favour of savings and insurance
Strengthening ‘risk management’
Reducing constraints on low risk diversification and asset formation, e.g. microcredit
Fostering security of asset ownership, eg tenure security
Ex-post measures : Ex-post measures ‘Safety nets’, post-crisis transfers have their place
Some well-known issues:
-targeting
-timing
-form of support
-public vs private asset creation
Ex-post measures : Ex-post measures Beyond technical issues of delivery, key issue for our purposes:
CREDIBILITY that support will come when crisis hits, otherwise NO IMPACT on ability of the poor to take up risk and engage in risky, profitable opportunities.
Safety nets in Ethiopia : Safety nets in Ethiopia Just as anywhere in the world – room for improvement on targeting, types of support and linking between asset formation and temporary support (relief versus development)
Credibility of safety nets? % covered by FFW/Food Aid : Credibility of safety nets? % covered by FFW/Food Aid
Insurance against Poverty: how to deliver? : Insurance against Poverty: how to deliver? A menu of ex-ante and ex-post measures, where all are fully credible to the poor: an enforceable right to basic protection
Needs open, transparent and sustainable institutions with clear regulatory framework to foster credibility
With a clear role of aid and donor support to provide ‘reinsurance’ of the system
Purpose : Purpose To argue that the lack of insurance and protection is a cause of persistence in poverty
To broaden the discussion about policy options, beyond just safety nets, and learning and building on indigenous insurance mechanisms
Central Thesis : Central Thesis
Reducing vulnerability is good for growth and crucial for poverty reduction
Insurance against poverty is more than a safety net