No.

9904

Social Protection Discussion Paper Series

Social Protection as Social Risk Management:

Conceptual Underpinnings for the
Social Protection Sector Strategy Paper

Robert Holzmann
Steen Jorgensen

January 1999

Social Protection Unit

Human Development Network
The World Bank

Social Protection Discussion Papers are not formal publications of the World Bank. They present preliminary and
unpolished results of analysis that are circulated to encourage discussion and comment; citation and the use of such a
paper should take account of its provisional character. The findings, interpretations, and conclusions expressed in this
paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated
organizations or to members of its Board of Executive Directors or the countries they represent.

For free copies of this paper, please contact the Social Protection Advisory Service, The World Bank, 1818 H Street,
N.W., MSN G8-802, Washington, D.C. 20433 USA. Telephone: (202) 458-5267, Fax: (202) 614-0471, E-mail:
[email protected]. Or visit the Social Protection website at http://www.worldbank.org/sp.
 Social Protection as
Social Risk Management
Conceptual Underpinnings for the
Social Protection Sector Strategy Paper

Robert Holzmann*
Steen Jorgensen **

January 1999

*
Director, Social Protection, Human Development Network, The World Bank
Tel.: (1-202) 473.004, Email: [email protected]
**
Sector Manager, Social Protection, Human Development Network, The World Bank
Tel.: (1-202) 473.4062, Email: [email protected]
 The revolutionary idea that defines the boundary between modern times and the past is the mastery of
risk: the notion that the future is more than a whim of gods and that men and women are not passive
before nature.

Peter L. Bernstein (1996): Against the Gods – The remarkable story of risk.

I. Background

The Social Protection Family of the World Bank is scheduled to develop its Sector
Strategy Paper (SSP) by the fall of 1999. This is an opportunity for the sector to take
stock of its accomplishments and to develop the strategic thrust of the Bank’s future work
in this area. This note serves as a conceptual background piece for this work, and is
currently being used as background for the development of regional social protection
(SP) strategy papers.

SP is a young, but very dynamic portfolio of the World Bank. While elements of SP
have always been present in Bank activities, recent economic developments have brought
the need for appropriate social safety nets, labor market programs, and retirement income
schemes into sharper focus. These include the restructuring of Eastern Europe begun in
the early 90s, the enhanced emphasis on poverty reduction in the recent years, and the
current financial crisis in East Asia. As a result, Bank lending in the social protection
area has increased nearly six-fold since 1992 with a lending volume of $ 3015 billion in
FY98, amounting to over 13 percent of total Bank lending. An important shift has been
towards the increasing use of policy-based lending (e.g., Russia, Kazakhstan, Korea, and
Brazil).

World Bank Lending for Social Protection (FY92-FY98)

3500

3000

2500
$ (in millions)

2000

1500

1000

500

0
FY92 FY93 FY94 FY95 FY96 FY97 FY98

Fiscal year

Source: World Bank

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The lending and non-lending activities by the World Bank in the SP area cover a wide
range of activities, including:
• crisis support for the poor;
• development of job placement offices and retraining programs;
• the technical and financial support of pension reform in many countries; and
• conceptual work on labor standards, child labor, and disability.

While all of these activities fall clearly within the domain of SP, a convincing conceptual
framework which links those programs together credibly is only slowing emerging. Yet
such a conceptual framework is required if past activities are to be appropriately assessed
and compared, current activities improved upon, and new activities better designed. The
development and presentation of such a conceptual framework is the purpose of this note.
This exercise is an ongoing process in which each draft reflects feedback from the World
Bank’s regional, policy and research departments, and feedback from clients, inter-
national partners and academic institutions. Feedback and comments should be sent to
either of the authors.

To develop the conceptual underpinnings, the objectives and instruments of SP are

viewed under the rubric of Social Risk Management (SRM). SRM consists of public
measures intended to assist individuals, households and communities in managing
income risks in order to reduce vulnerability, improve consumption smoothing, and
enhance equity while contributing to economic development in a participatory manner.

To support the approach and its logic, the structure of this note is as follows: Chapter 2
sets the stage and presents global trends, definitions and outlook. Chapter 3 presents key
issues of SRM, from the reasons for World Bank concern to a typology of strategies and
instruments and ends with the role of the main actors. Chapter 4 focuses on the
boundaries of SP/SRM and on three key policy issues to balance equity, efficiency and
political sustainability. Chapter 5 ends with preliminary list of ways in which the new
framework may effect our view of SP and the development of new and better
instruments.

II. Setting the stage: global trends, definitions and outlook

A. Global trends and increases in risk

Recent trends in the evolution of trade, technology, and political systems have created
great opportunities for improvements in welfare around the world. Globalization of trade
in goods, services, and factors of production has the world community poised to reap the
fruits of global comparative advantages. Technology is helping to speed innovation and
holds the potential to remove the major constraints to development for many people.
Political systems are increasingly open, setting the stage for improved governance by
holding those in power accountable to larger segments of the population. Combined,

3
these trends create a unique
opportunity for unprecedented social Issues for Poverty Reduction
and economic development. “The key issue for the early part of the next century is
how to bridge [the] gap between opportunity and risk.
The other side of the coin, however, The challenge for policy makers is the design and
implementation of institutions, mechanisms and policies
reveals that the exact same processes at various levels to harness the potential for poverty
that increase the opportunity for reduction, by setting a long term course which will
welfare improvements also increase access global and local opportunity but allow broad
the variability of the outcome for sharing of the gains from development, while managing
society as a whole and even more so the short term risks of inequality, vulnerability,
marginalization and social dissolution. This is not an
for specific groups. This was easy task, and crucially important will be learning from
demonstrated on a worldwide scale in a detailed evaluation of experiences with actual
1998 with the global financial crisis. interventions in the past. It is important to go beyond
There is no certainty that any such broad strategies, to draw lessons for implementation
improvements will be widely shared which take into account time horizons and social
constraints that policy makers actually face.”
across individuals, households, ethnic
groups, communities, and countries. Source: Ravi Kanbur, Staff Director of World
Increased trade or better technology Development Report 2000 on Poverty (1998).
can increase the differences between
the “have” and “have-nots” just as it can increase the opportunity for all, depending on
the social context into which it is introduced and the policy measures taken.
Globalization-induced increases in income variability combined with marginalization and
social exclusion can, in fact, increase the vulnerability of major groups in the population.

In other words, the risks are as large as the potential rewards. To further complicate
matters, the trend towards globalization and the higher mobility of production factors also
reduce the ability of Governments to raise revenues and pursue independent economic
policies and, thus, to have national policies when they are needed most. This three-part
challenge is the background for a strategy of Social Protection. This strategy paper will
outline what governments can and should do to help individuals, households, and
communities to better manage income risk and, most importantly, what the World Bank
can and should do to support these efforts.

B. What is Social Protection and what should it do?

Social Protection (SP) consists of public interventions to assist individuals, households

and communities in better managing income 1 risks. The objectives of these interventions
are a subset of the overall development objectives of economically sustainable
participatory development with poverty reduction. Specifically, SP seeks to:

1
Ultimately the goal for individuals and households is to optimize welfare through appropriate consum-
ption choice, including availability of basic goods and services. As a policy variable we are concerned with
income, its level and variance, because both determine the consumption possibilities in a free choice
setting, and it is a variable we can help influence. We use the widest possible definition of income
including in-kind, imputed income etc. This broad definition takes care of concerns about social services
which cannot readily been bought on the market and uses monetary equivalents for analytical purposes (see
Section IV.B).

4
• Reduce the vulnerability of low-income households with regard to consumption and
access to basic services;
• Allow for better consumption smoothing over the lifecycle for all households and,
consequently, for more equal welfare distribution of households;
• Enhance equity particularly with regard to the exposure to shocks and the effects of
shocks.

In addition, well-designed and well-implemented SP interventions fostered by

government actions contribute to solidarity, social cohesion, and social stability of a
country.

Public interventions for more effective risk management can be:

• indirect (such as fostering the capacities of households to reduce the variability of
income, improving saving capacities and risk-sharing, or facilitating the operations of
market institutions such as banks, insurance companies and pension funds) or
• direct (such as providing transfers, subsidizing assets or goods, implementing public
works programs, or mandating old-age income insurance).

While income risk is considered as individual, the measures to manage the risk are
largely co-operative or social. Measures can be provided by the public or private sector,
can be either formal or informal, and can be ex-ante (prevention and mitigation) or ex-
post (coping) interventions.

C. How does thinking about SP as Social Risk Management help

improve our work?

Currently, social protection is often defined as a collection of measures that includes: (1)
social assistance, (2) social investment and development funds, (3) labor market
interventions, and (4) pensions and other insurance-type programs. The overall concept
unifying these areas deals with improving or protecting human capital.2 Within each of
the areas that Social Protection covers, there are, generally, a well-developed theory and
operational practice. However, all too often we end up operating within the four
cylinders and not looking at cross-cutting issues or we do not analyze the social
protection system as a whole.

There are several advantages to using social risk management as the analytical frame-
work for social protection, including:

• The concept is universal (i.e., time-space-independent) in that it brings a series of

different interventions under one framework which can be applied both to all

2
The link with human capital explains the placement of social protection organizationally within the
human development network of the World Bank. As discussed later in the paper, social risk management
requires a broad view of assets, and improving and/or protecting human capital is linked to the
improvement and/or protection of other types of household’ capital.

5
 countries and over time. The appropriate mix between public/private, formal/-
informal, and ex-ante/ex-post arrangements differs among countries due to types of
income shocks, level of economic and institutional development, culture and
traditions. This precludes blueprints for countries, but also avoids seeing each
country as specific case from which few lessons can be drawn.

• It also provides a unifying framework to assess the economic development effects of

risk management arrangements. While some informal risk-sharing arrangements are
rational from the individual or household point of view, they may impede economic
development. While some formal and public arrangements work in their risk
reducing capacity, they may hinder economic growth.

• The concept is institution-oriented, stressing the importance of functioning

informal/formal, private/public institutions and, hence, institution-building to manage
income risk optimally. It covers the gamut of institutions from the family (and the
need of appropriate rules to prevent child labor supply and spousal abuse) to
community support networks, public employment agencies, and private pension funds
(and the appropriate regulatory and supervisory framework).

• It forces the discussion of appropriate interventions to begin at the individual and

household level. This means that all interventions (direct public provision, public
financing, regulations of the market etc.) should be judged by how they help
individuals and households to better manage risk.

III. Key Issues of Social Risk Management

A. Why are we concerned with social risk management?

There are four main reasons why the World Bank is concerned with social risk
management. First, the fight against poverty is the central mission of the World Bank,
and a better understanding can be achieved and improved instruments developed if
poverty is gauged in terms of vulnerability, that is, the increased probability of the lower
income strata to become or to remain poor. Second, improved consumption smoothing
due to better arrangements to manage income risk for all does not only increase
individual and societal welfare, but also improves the welfare distribution in society as
well. Third, improved equity is a major societal concern with its importance increasing
with the number and depth of income shocks. And last, the form of risk management has
an important bearing on economic development – some may hinder it, some may support
it.

Vulnerability (within a poverty eradication concept) can be defined as the risk of

economic units (such as individuals, households, and communities) to fall below the
poverty line (i.e., having insufficient consumption and access to basic services) or, for
those already below the poverty line, to remain in or to fall further into poverty. Anti-
vulnerability policies are designed to prevent this from happening – ex-ante – and, as a
result, to reduce the cost of ex-post poverty alleviation measures once individuals are

6
below the poverty line. Traditional anti-poverty policy is only concerned with bringing
individuals up to the poverty line or at least reducing the depth of poverty (Lipton and
Ravallion, 1995). Enhancing the static anti-poverty concept with the dynamic
vulnerability concept through risk management measures should prove to be welfare
enhancing. It will also build concern for the social and economic processes that drive
movements around and below the poverty line. This, in turn, will provide focus on the
development (dynamic aspects) of poverty eradication and the social context in which
vulnerability reduction must take place (including highlighting the importance of social
exclusion and marginalization).

Special cases are the individuals at the bottom of the income distribution. These people
are so close to a “survival line” that they become extremely risk adverse, and exhibit
other non-linearities in behavior and outcome (Ravallion, 1997). In our understanding,
these people are the most vulnerable. For individuals higher up in the income
distribution, small shocks (i.e., loss of income) may have the same probability of
occurring as for those in the lower strata. The severity of the effect, however, will be
lower because they can rely on accumulated assets while, for the people close to a
survival line, all shocks are catastrophic and endanger even the most basic consumption
(Jalan and Ravallion, 1998). Even though this is a special case, the basic conceptual
framework still applies. The goal is to help these people better manage their risks – they
just have an extreme form of risk and almost no capacity to manage risk by themselves.
The intervention most often used is a direct transfer (in-kind or in-cash, by the state or
community members) or an asset reallocation. This lifts the household far enough above
the “survival line” to allow them to take more risk and engage in higher return activities.

Consumption smoothing and welfare distribution: Economic considerations and

empirical evidence suggest that economic units have a preference for smooth
consumption, spreading the consumptive use of expected income over a long period, even
a lifetime (Alderman and Paxson, 1992; Besley, 1995; Deaton, 1997; Gerowitz, 1988).
Because income realization is mostly stochastic and, during periods of negative shocks,
income can be very low or even negative, this requires appropriate risk management
instruments, such as saving and dis-saving possibilities in order to achieve a welfare-
enhancing smooth consumption path. Yet, societal welfare is not only increased because
the welfare of all individuals rises.

If society values a more equal welfare distribution across individuals, better risk
management can enhance the welfare distribution and societal welfare without actually
re-distributing income among individuals. Under the likely scenario that the lower
income strata is more constrained with consumption smoothing capacities, enhanced
public support for risk management arrangements lifts the constraints on the welfare level
of this income segment to a larger extent, leading to a more equal distribution of
individual welfare.3

3
Simulations suggest that this effect of risk management dominates the income re-distributive effect for a
large set of parameters. See, Holzmann (1990).

7
Improved Equity is a main objective of SRM. The importance of direct public
interventions for equity reasons increases once the concept of shocks is taken into
consideration. The discussion of equity is traditionally gauged in two polar concepts:
equity of opportunity and equity of outcome. While libertarians support the former, more
leftist positions support the latter and consider the first insufficient. The concept of
equity of opportunity has much appeal if resulting differences in income distribution are
due to differences in individual efforts only, but it falters if main shocks threatening the
survival of individuals are taken into account, strengthening the demand for ex-post
corrections. The concept of equity of outcome has a lot of appeal on moral grounds, but
it falters once changes in individual behavior are accounted for. As a consequence,
improving equity treads a fine line between the minimum concept of furthering equal
opportunity and the maximum concept of attempting equal outcome.

Economic Development: The instruments of social risk management are not neutral in
economic development (Ahmad, Dreze, and Sen, 1991). Sending children to work as a
measure to cope with income loss by the household is detrimental to their future income
chances and the growth of the economy. Providing overly generous public pension
benefits financed by labor taxes is likely to distort individual labor supply and saving
decisions with static and dynamic efficiency losses. Risk management instruments may
also foster economic development. A functioning family is, perhaps, the best instrument
to reduce and mitigate individual income risk. Appropriately regulated and supervised
funded pension provisions may contribute to financial market development and economic
growth. Hence, risk management arrangements need to be carefully evaluated, changed
or re-designed in order to maximize their contribution to the development of our client
countries.

B. How to conceptualize social risk management?

We will suggest a typology for types of risk, strategies, instruments and institutions
involved in risk management. This section briefly introduces the typology while the
following sections (C through F) goes into more detail, explaining what we mean by the
different definitions. The basic typology breaks down into four main categories

I. The type of income risk incurred, with three main distinctions:

• Catastrophic vs. non-catastrophic shocks
• Idiosyncratic vs. covariant shocks
• Single vs. repeated shocks

II. The type of strategies to address these income shocks with three main distinctions and
subcategories:
• Risk reduction strategies (introduced ex-ante in order to increase the level of
expected income and/or reduce the variance) such as active labor market policies.
• Risk mitigating strategies (introduced ex-ante in order to reduce the income
variance with occasional costs for the expected income) in the form of:
• Portfolio diversification (multiple assets with different risk characteristics)
• Insurance (pooled coverage through payment of insurance premium)

8
 • Hedging (risk exchange)
• Risk-coping strategies (introduced ex-post, i.e., once the risk has occurred) such
as dis-saving/borrowing, charity, means-tested transfers and public works.

III. The type of instruments by the formality of arrangements, with three main
distinctions:
• Informal/personal arrangements (such as marriage, mutual community support,
and real assets such as cattle, estate and gold)
• Formal/market based arrangements (such as financial assets and insurance
contracts)
• Formal/publicly mandated or provided arrangements (such as rules and
regulations, social insurance, transfers, and public works)

IV. The type of institutions/actors in social risk management:

• Individuals/households
• Communities
• NGOs
• Market institutions (such as banks and insurance companies)
• Government

C. What are the risks considered? – a typology of risks

Income risks have many forms. They may affect individuals/households as a result of
sickness, unemployment or bad harvest, or they may hit a whole community or even
country as a result of epidemics, natural disaster, environmental problems or inflation.
For a better understanding of the possible policy responses and applicable instruments,
there are three important categories that aid in the classification of the main
circumstances with which individuals/households must cope (Murdoch 1997).

Catastrophic vs. non-catastrophic shocks: In the life of a household, some events occur
with low frequency, but have severe income effects – like old-age, death in the family,
and disabling accidents or illnesses, permanent unemployment, and the technological
redundancy of skills. These catastrophic events can hit households hard and may require
a continuing flow of transfers to the affected household if it cannot acquire sufficient
assets.

At the other end of the scale are high frequency events with non-severe income effects –
like transient illness, crop loss, and temporary unemployment. Protection against these
non-catastrophic events need not require long-term net transfers to the afflicted
household. If appropriate mechanisms are available, households may use savings, loans,
or reciprocal gifts with no net transfers from others over time.

Idiosyncratic shocks vs. covariant shocks: The second important distinction is whether or
not only some households in a community suffer losses (idiosyncratic shocks like non-
communicative illness or frictional unemployment) or whether all are hit at the same time
(covariant shocks like drought, inflation or financial crisis). Many more mechanisms are

9
available for coping with idiosyncratic shocks than covariant shocks. The latter can be
particularly devastating, leaving households with nowhere in the community to turn for
relief. It should be remembered, however, that, for poor and isolated households, even
idiosyncratic shocks might be difficult to cope with.

Single vs. Repeated shocks: A third distinction concerns shocks following one another –
like drought followed by sickness and death. The recurring nature is also referred to as
the degree of autocorrelation and highly autocorrelated events are typically difficult to
handle through informal means.

D. What are the main strategies to address income risk? –

a typology of strategies

Background: In a world with complete information, all of the shocks above could
potentially be addressed with market-based solutions. Each risk would be known, have a
price, and able-bodied individuals could fully insure themselves against them. All non-
able-bodied persons (the deserving) would rely on public or private transfers provided for
altruistic or other reasons. Yet, complete information is only a theoretical benchmark
while asymmetric information in the real world gives rise to:
• transaction costs (and the non-existence of formal inter-temporal market institutions
in many developing countries); and
• moral hazard, adverse selection, and insufficient property rights (and the existence of
publicly supported and/or mandated provisions).
• As a further implication of asymmetric information, the risk distribution is not
necessarily exogenous, but can be influenced by government measures. Insurance,
even if it exists, is not necessarily the best ex-ante strategy compared to pre-saving,
for example. And, in face of catastrophic/covariant/repeated shocks, there is a need
for ex-post interventions.

In an imperfect world, there are many strategies to help households better manage income
risks (Alderman and Paxson, 1992). These can be grouped in three broad categories4:

• Prevention strategies - to reduce the occurrence of the risk giving rise to income
loss. They are introduced ex-ante in order to increase the level of expected income
and to reduce the income variance.

• Mitigation strategies - to mollify the risks through improvement or provision of

instruments which reduce the income variance ex-ante with occasional costs to the
expected income.

4
For a different taxonomy of risk addressing strategies, see Townsend (1994). The proposed broad
differentiation between ex-ante and ex-post measures, however, falls short of distinguishing between
measures which prevent or reduce the risk to occur, and those which attempt to mitigate the risk for
exogenously given risk distributions.

10
 Types of capital and social risk management

For social risk management the definition of assets needs to be very broad. It would still include
physical capital (land, buildings, and livestock), financial and human capital, but should also include
social capital (belonging to groups with trust and high levels of cohesion) and the family structure itself
(Davies, 19988; Ellis, 1998; Moser, 1998). While our theoretical constructs still have a long way to go
in just coming to grips with an operational definition of social capital and an asset-like application of
family structure, practical experience and statistical evidence suggests their importance in an asset
management framework.

For instance in poor households in many parts of the world, preference is given to expenditures that
invest in social capital over investments in human capital. E.g., the household prioritizes gift giving
and costs associated with rituals over paying school fees. The giving of gifts and participation in
rituals, is a form of membership fee to belong to a certain social group, i.e., an investment in social
capital. Much of the literature on women, focus on the role of investing in family structure. E.g.,
women give up a job with a higher return for the “protection of the family.”

Other examples indicate that the level social capital (measured via a trust index or a participation
index) is positively related with GDP per capita and has a positive impact on economic growth. Hence,
appropriate investment in “social capital” is a means to improve income conditions and reduce
poverty, but the ways need still to be explored.

• Coping strategies - to relieve the impact of the shock; to improve instruments or

provide transfers and other income support measures once the negative income shock
has occurred.

(i) Strategies to prevent or reduce the occurrence of income risks by all economic actors,
but mostly by governments, have a very broad range that surpasses the traditional scope
of social protection. These strategies are comprised of sound economic policy, public
health policy, environmental policy, dam construction, and many more areas of public
intervention.

Preventive social risk management is typically linked with measures to reduce the risk for
income generation, notably for labor. It is concerned with labor standards because
occupational health risks impede future labor income and abusive child labor impairs
health, education, and the emotional stability of children and their income chances as
adults. It is concerned with vocational education and technical training because lower-
skilled workers are more vulnerable to income risk and a well-trained labor force can
better cope with macroeconomic and structural shocks. It is also concerned with the
(mal-) functioning of the labor market, resulting from bad labor market regulations, wage
setting agreements or overly high minimum wages which lead to labor market imbalances
and the resulting income loss due to unemployment. But pro-active policies are also
applied once the reduction in ability to obtain gainful employment has occurred, such as
for the disabled, where policies are designed and implemented to enhance their earning
chances, reduce their vulnerability and dependence on private and public transfers.

(ii) Strategies to mitigate ex-ante income risks can take various forms including assisting
with portfolio diversification, insurance, and hedging. The objective of these actions is to

11
reduce the variability of income if a shock were to occur. While these actions can happen
informally (through personal contracts and networks) or formally (through anonymous
market relations), the government can improve the efficiency or equity of existing
instruments or provide or mandate the provision of instruments. Again, many of these
actions transcend traditional social protection policies. For example, providing the
information on field and crop diversification or weather patterns will help reduce harvest
and income risk.

A central instrument to reduce the variability of income consists of relying on various

assets from which returns are not perfectly correlated, i.e., portfolio diversification (Ellis,
1998). This requires the acquisition and management of different assets such as physical
capital, financial capital and human capital in their different forms. For example, if
individuals can only invest in human capital, they can still diversify in different
occupations, but perhaps at the detriment of the average return. If individuals can only
invest in physical capital and cannot diversify, they may choose a lower return with a less
risky technology. If women cannot own or inherit land and have no access to safe
financial instruments, they may acquire gold and jewels. Government policy that
improves the access to different assets not only allows a better risk mitigation, but may
allow for high rates of return as well.

The second and perhaps most important form of risk mitigation comes in the form of
informal and formal insurance. It is easy to state the characteristics of formal or market
based insurance – the payment of a risk-based insurance premium gives rise to future
state-contingent payments. Informal insurance arrangements are a bit trickier to describe
in that they come in different and often disguised forms because one “institution” serves
insurance and non-insurance type functions (such as the family and the community).
This mix and the basis of informal insurance – trust as a result of repeated interactions –
renders the involvement of government to strengthen the insurance function hazardous.
Furthermore, some economists argue that mutual insurance is alien to traditional agrarian
societies and, while those informal mechanisms provide insurance, they are guided more
by a principle of balanced reciprocity5.

While hedging has an increasing importance for financial markets (e.g., forward
exchange rate contracts) and is based on risk exchange or payment of a risk premium to
somebody for taking over the risk, these arrangements do not appear to work in an
income-related environment and formal provisions. The effects of asymmetrical
information are too strong. However, elements can be found in informal/personal
arrangements. For example, various family arrangements or some labor contracts are
more germane to hedging than insurance.
5
Balanced reciprocity means that for any “gift” there is a strong assumption that at some, as yet unknown,
time in the future there will be a counter gift. Hence informal insurance arrangements may be similar to a
loan where the repayment loan is state contingent (e.g. see Plateau 1996, Ligon et al. 1997). Evidence for
the latter is provided by Udry (1990; 1994) for Nigeria. On average a borrower with good realization
repays 20.4% more than he has borrowed while a borrower with bad realization repays 0.6% less than he
borrowed. Moreover, repayment are contingent on the lender’s realization. A lender with a good
realization receives on average 5% less than he lent, but a lender with a bad realization receives 11.8%
more than he lent.

12
(iii) Coping - to alleviate the impact of Dis-saving in human capital
the shock once it has occurred. The
An extreme form of dis-saving is in human
main forms of coping consist of capital. There are many examples from
individual saving/dis-saving – Africa and other low-income countries (e.g.,
borrowing/repayment or the reliance on World Bank (94)) of how people when
non-requitable public or private faced with a shock cut back on the number
transfers. Despite these formal and and size of meals. I.E., a direct dis-saving
in human capital – because this is often the
informal instruments, the government only asset that they possess. Unfortunately
has an important role in coping with there is no way to recuperate this loss, if the
income variability once the risk/loss has lack of meals affect children at certain ages.
occurred. Individual households may This is another example of how a family
not have saved enough to cope with risk management strategy is good in the
short run, but is detrimental over a longer
multiple or longer lasting shocks, run.
running out of financial resources to
finance their consumption. Households
may have accumulated important assets for old age, but are faced with the uncertainty of
length of life span. De-cumulating the assets over the uncertain remaining life span may
leave them with too little consumption at high age or too much (unintended) bequests at
early death if the assets cannot be converted into a (fair) annuity stream. Finally,
individuals may have been poor for their entire lifetime with no possibility to accumulate
assets at all, being rendered destitute by the smallest income loss.

E. The type of instruments by the formality of arrangements – a

typology of instruments

The level of formality can distinguish the instruments/arrangements used under each
strategy. Three distinctions are proposed:

• Informal/personal arrangements (such as marriage, mutual community support, and

real assets such as cattle, estate and gold);
• Formal/market based arrangements (such as financial assets and insurance contracts);
• Formal/publicly mandated or provided arrangements (such as rules and regulations,
social insurance, transfers, and public works).

(i) Informal/personal arrangements: With the lack of market institutions and public
provisions, the response by individual households is self-protection through
informal/personal arrangements. This sidesteps most information and coordination
problems, but may be limited in its effectiveness. Examples include: the buying and
selling of real assets; informal borrowing and lending; crop and field diversification; the
use of safer production technologies (such as growing less risky crops); and the storing of
goods for future consumption. Lacking formal (anonymous) insurance markets
households may also engage in personalized insurance, i.e., informal risk sharing. They
build on direct information (which avoids moral hazard and adverse selection) and
relationships developed over years or generations (trust). Examples include: marriage
and the extended family (and the implicit exchange provisions); remittances between
friends and neighbors; investing in social capital; engaging in share tenancy; credit

13
contracts with state-contingent repayment; and the commitment to long-term contracts
that guarantee a steady flow of income (tied labor).

A main advantage of informal insurance arrangements is the close interpersonal relation-

ship and, in view of the good information base, the virtual absence of moral hazard and
adverse selection. This comparative informational advantage of private agents with local
knowledge speaks in favor of private arrangements strengthened by government actions.
On the other hand, many elements of such arrangements may appear at odds with familial
values such as the strong position of the (male) household head to ensure contract
compliance or the forced marriage of (female) members to distant location to ensure risk
diversification.

(ii) Formal/market based arrangements: With the existence of market-based institutions

such as money, banks, and insurance companies for intertemporal exchange, individual
households will also use these instruments for managing income risks. But, in view of
their limitations due to asymmetric information, their use will be restricted. Their use,
however, will rise with financial market development.

Financial saving as well as the accumulation of other assets that can be sold at fair market
prices is perhaps the most important asset management instruments used to address
income variability. Pre-saving is inferior to full and fair insurance in as much as it leads
to discontinuities in the consumption path (if the income risk no longer exists and the
savings is now spent) or to lower lifetime consumption and lifetime utility (if the saving
is involuntarily passed on as inheritance). Yet, if no fair insurance arrangements exist,
pre-saving is powerful instrument to cope with high frequency and non-autocorrelated
income shocks for the poor. This empirical evidence suggests that the establishment of a
sound banking system and non-inflationary policy is an important device to cope with
consumption vulnerability.

Similar considerations apply to the capacities of individuals to borrow during periods of

income loss. Assets may exist, but prices may be temporarily low, transaction costs high
or the individual household may not have had the time to accumulate. Borrowing is also
important to buy for inputs during period of low cash income and to secure future income
streams. Because formal market institutions are reluctant to lend to households without
secured earnings, micro-financing is an important instrument of social risk management.
In the case of barriers to trade such as private (asymmetric) information, limited
communication, and limited legal systems, efficient credit delivery systems of financial
institutions may require explicit or implicit insurance provisions in loan contracts. And,
in doing so, makes (public) interventions in favor of women, poor, and remote areas a
redistributive instrument of social policy.

The early acquisition of life savings accounts and annuity contracts allows the handling
of catastrophic shocks from disability and old age. Similarly, buying health, property,
and crop insurance and saving and borrowing facilities aid in the management of high
frequency downturns. Yet, market-based arrangements may not be able to cope with the
consequences of asymmetric information (moral hazard and adverse selection) and

14
provide unemployment insurance or pension annuities only at grossly actuarially unfair
prices.

(iii) Formal/publicly mandated or provided arrangements: To overcome the effects of

adverse selection, governments can mandate insurance of all unemployed (pooling),
pursue meritorious goals (income redistributing and coping with myopia) or safeguard
the government against strategic behavior of individuals as a result of minimum benefits.
It can mandate or provide insurance for old age, disability, survivorship, accident, and
sickness. In addition, the government has a whole array of instruments to cope with the
consumption effect of lost income. The choice will not only depend on distributive
concerns, but also on the available fiscal resources and administrative capacities, and the
type of shock. It will also depend on efficiency concerns because the form of provision
will impact individual labor supply and saving decisions that the government can only
monitor insufficiently. Governments may provide public works at below market wage.
This self-targeting instrument can substitute for, or complement unemployment benefits.
Governments can provide social assistance benefits in-cash or kind in a targeted manner
(i.e., means tested) for all below a determined poverty line. Or governments can provide
a minimum income in a universal manner to the total population (demogrants) or a
subgroup (such as the elderly).

Table 1 fills the intersection of main strategies and arrangements with typical examples.

F. Institutional roles - who does what in social risk management

Because the issue of social risk management emerges as a result of private (asymmetric)
information, the role of the actors/institutions can be seen in their capacity to best cope
with information asymmetry. But because this asymmetry also gives rise to imperfect
market institutions (market failure) as well as non-benevolent government behavior
(policy failures), the relative roles have to be viewed in perspective.

Because individuals/households have all the private information, most risk management
can take place on the household level. Risk-mitigating strategies through the acquisition
of different assets and risk-coping strategies through accumulation and decumulation
decisions optimize the consumption path to a large extent. But, in view of insufficient
market institutions (such as access to credit), not all decisions are socially desirable even
though they may be perfectly rational for the individual or the household. For instance,
taking girls out of school to help fetch water during a drought may be rational in view of
lacking access to credit, but the loss to society is much greater than the short term
individual gain. SP interventions need to be designed so they work with and build on
such strategies. Instead of lowering the cost of schooling, it may be more appropriate
from a societal point of view to invest in a better water supply closer to the village or to
provide better access to credit.

Next to households, communities have a large stock of private information. Hence,

lacking the appropriate market institutions, communities have developed various informal
mechanism of risk-sharing in developing countries. Examples include ‘susu’ schemes in
West Africa; mutual support arrangements reinforced through celebrations and rituals;

15
Table 1: Strategies and Arrangements of Social Risk Management

Arrangement Informal/Personal Formal/ Financial Formal/Publicly-

Strategies market-based mandated/Provided

Risk reduction
Less risky production Labor standards
Migration VET
Labor market policies
Disability policies

Risk mitigation
Multiple jobs Investment in multiple Multi-pillar pension
Portfolio Investment in financial assets systems
human, physical and Social Investment
real assets Funds
Asset transfers
Marriage/family Old-age annuities Mandated/provided
Insurance Community Disability/Accident insurance for unem-
arrangements ployment, old age,
Share tenancy disability, survivor-
Tied labor ship, sickness, etc.
Hedging Extended family
Labor contracts

Risk coping
Selling of real assets Selling of financial Transfers/Social
Borrowing from assets assistance
neighbors Borrowing from Subsidies
Intra-community banks Public works
transfers/charity
Sending children to
work
Dis-saving in human
capital

and burial societies in Andean countries. But while those mechanisms may provide
informal insurance, some of them may be socially undesirable because they perpetuate
dependency structures or impede on economic development.

NGOs may not have as much private information as tightly-knit communities, but their
local and informal character allows them to monitor individual behavior better then full-
blown market institutions. This explains the existence and importance of NGO-
sponsored savings and micro-credit schemes in many countries. The latter may also be
provided by Social Investment Funds which have the rationale of efficiently circum-
venting (inefficient) public administration and being demand-driven and, consequently,
also able to cope with information asymmetry.

16
Market institutions such as banks and insurance companies have to rely on public
information and, as a result, cope with issues of moral hazard and adverse selection. On
the other hand, if well-regulated and supervised, the shareholder value concept leads
them to transparency and high efficiency providing individuals nationwide with the broad
variety of risk management instruments. Market institutions in a competitive
environment, however, can also be efficient instruments to deliver public services
financed by the public sector (such as job placement, social assistance payments, etc.).
The main challenge in coping with this new principal-agent problem between the public
and private sector institutions is to draft contracts that circumvent the private information
problem as much as possible.

Finally, the government has many important roles in the area of social risk management.
The most important of these roles are: (i) facilitating the set-up of financial market
institutions to this end; (ii) establishing the regulatory and supervisory framework,
including a transparency requirement and consumer information; (iii) providing risk
management instruments where the private sector fails (unemployment insurance) or
individuals lack the information for self-provisions (myopia); (iv) providing social safety
nets and large scale transfers in the case of main or recurrent shocks; and (v) providing
income distribution if the market outcome is considered unacceptable from a societal
welfare point of view.

IV. Boundaries and Balances of Social Protection as Social Risk

Management

Defining Social Protection as SRM raises many key questions, including: (A) the
delineation with other sectors; (B) the role and scope of distributive policies; (C) the
impact of risk management, or its absence, on static and dynamic efficiency, i.e.,
economic development and growth; and (D) the political sustainability of the proposed
best technical solution.

A. Boundaries with other sectors

There are many overlaps with what falls under SP and what is covered by other sectors,
particularly in the area of risk prevention and reduction. Any economic and other
governmental policy that enhances growth and reduces income variability also supports
the objectives of SP. This means that there is a need for delineation at the analytical and
institutional levels. This does not mean that the SP strategy for a country should not
begin with raising the awareness of a sound and credible economic policy as being
crucial for a well-functioning SRM system.

(i) Building greater awareness about the importance of broad policies to create a less
risky environment for households and communities is primordial. There is still an
insufficient understanding among academics in the developed world and policy makers in
client countries of sound macroeconomic policy, sound financial markets, enforcement of
property rights, respect of basic labor rights, or growth-oriented policies as the first and
best ingredients to reduce the consumption effects of variable income. If those policies

17
are in place, households are much less vulnerable and can achieve most of their
consumption smoothing with personal instruments. This calls for measures to build
greater awareness within client countries and among donors.

(ii) There may be a specific role in SP alerting other sectors that preventive measures are
required and are cost efficient in present value calculation. Recent examples are the
effects of “El Niño” and the welfare implications of this catastrophic shock for the
concerned worldwide population. Ex post measures of the government to cope with the
income effects may prove more expensive in present value terms than ex ante measures
in the area of public infrastructure (Vos and de Labadista 1998).

(iii) Among the specific measures to reduce the income risk ex-ante, there are many
measures that potentially transcend other sectors. The suggested analytical delineation is
based on labor market relations with SP taking care of measures which reduce the risk of
wage income variability, leaving the risk reduction policies for other incomes (from
physical and financial capital) to other sectors. While better functioning labor markets
contribute to enhanced human capital, there are other sectors that contribute to its
protection and improvement (such as education and health).

(iv) The common goal of improving human capital or reducing income risks in
agriculture where income accrues to households through joint input of labor, land and
capital creates areas of joint ownership of cross-sector activities. Examples include:
vocational education and technical training, child labor, disability, and micro-finance. In
these areas of joint ownership, an institutional delineation is suggested with the lead
taken by one sector, joint work or full integration of work depending on the budgetary,
personal, and institutional setting.

B. Scope, form, and limits of re-distributive activities

On the surface, SRM does little to provide a role for the re-distributive activities
traditionally seen as a core element of SP (or the welfare state, see Barr, 1998). This
impression may result from the fact that, in a SRM setting, there is a more than
interpersonal redistribution to enhance the welfare distribution of households, cohorts,
and generations. Improved inter-temporal distribution of income allows better
consumption smoothing and is welfare enhancing without a re-distribution of income
among individuals or cohorts taking place. For example, a re-designed pension system in
view of population aging can contribute to inter-generation equality without an explicit
redistribution between cohorts. Still, four issues deserve special attention: (i) resource
flows from the “better-off” towards the most vulnerable and lifetime poor; (ii) non-social
income; (iii) issues of social inclusion/solidarity/cohesion/stability; and (iv)
generation/regional/inter-country inequality needing to be addressed.

(i) The mission of poverty reduction dictates that waiting for economic growth to lift
everybody above the poverty line is insufficient. At least a minimal amount of resources
are needed to help cope with the most drastic forms of poverty. This traditional anti-
poverty concern is the reason for social safety net/social assistance programs worldwide.
The concept of vulnerability supports these poverty concerns, but puts them in a dynamic

18
framework in which the risk of becoming poor is also accounted for, and risk
management mechanisms are assessed in their capacity to minimize this probability in
distributive effectiveness and dynamic efficiency terms. Within the traditional poverty
view, the level of poverty and available budgetary resources of a country as well as its
preferences determine the scope of such interventions. For example, if 60 percent of the
population live below $2 per day, the budgetary resources may not be available to
address deep poverty. The form of intervention is, in part, determined by efficiency
considerations, i.e., supporting the poor while minimizing distortionary effects and
poverty traps.

(ii) The concept of SRM is largely, but not exclusively focused on income variability
with income very broadly defined and encompassing market income, imputed income,
income in-kind, etc. This broad definition of income takes care of concerns about social
services that cannot readily be bought on the market. These services require public
intervention through public provision, financing or regulation to force private provisions
(such as rules for children to take care of their elderly parents). Hence, SRM is not
restricted to the monetary aspects of income/consumption support for the vulnerable poor
of the society, but merely emphasizes the income equivalent for analytical reasons.

(iii) There are, of course, other aspects of SP that cannot readily be cast into income
equivalents. The most important of these are concerns for social exclusion/inclusion,

The three main political paradigms of social exclusion

The first paradigm is usually coined the solidarity paradigm with exclusion defined as “the rupture of
a social bond between the individual and the society, referred to as social solidarity.” A society is
characterized by cultural boundaries, by which the poor, ethnic minorities or unemployed end up as
deviant outsiders. The source of integration of these groups would be “moral integration.” The state is
obliged to aid in the insertion of the excluded.

The second paradigm, represented by Anglo American liberalism, draws exclusion as a consequence
of specialization, which refers to social differentiation, economic division of labor and a separation of
life spheres. The mere fact that individuals differ does not yet raise concern. It is the discrimination
aspect that is seen as a problem. Separation of spheres would not lead to hierarchically ordered social
categories, if individuals were free to move across boundaries. In a liberal view of society the
contractual exchange of individual rights is a basis of welfare. If this exchange, if mobility between
spheres is impossible, then division of labor may end up in social exclusion.

The third paradigm sees exclusion as a consequence of the formation of group monopoly. “Powerful
groups, often with distinctive cultural identities and institutions restrict the access of outsiders to
valued resources through a process of social closure”. A good example is labor market segmentation
that draws boundaries of exclusion between and within firms. While in the specialization paradigm the
source of integration is exchange, the monopoly paradigm relies on citizens’ rights as a means to
change the status of exclusion.

Source: Silver (1995) and Badelt (1998).

social solidarity, social cohesion, and social stability. In order to address these qualitative
objectives of social policy, a clear definition is required for determining the appropriate
instruments. With regard to social exclusion, various definitions exist (see box) with the

19
solidarity paradigm the most used and, likely, the most useful one. Largely independent
of a precise definition, all dimensions of these qualitative social policy objectives – social
inclusion, solidarity, cohesion, and stability – can be defined as positive externalities
resulting from a well designed and implemented SRM in view of asymmetric
information. For example, a well designed income support system for unemployed will
not only enhance individual welfare through lower vulnerability and better consumption
smoothing, but will also carry toward the qualitative objectives such as social stability.
Furthermore, effective social risk management strategies will have to take account of the
gender dimension (see box).

SRM and Gender

Effective SRM strategies need to include an understanding of how gender relations affect the
implementation and impact of different policies or programs. It is essential in developing SRM
approaches that a clear recognition of the different roles of men and women shape how policies are
designed and carried out. The structure of gender roles and expectations help shape the capacity of
women, households and communities to absorb and adjust to economic shocks.

Policies of Social Risk Management thus require a gender lens that incorporates the needs of
individuals into a wider set of social and economic relations. For example, in terms of gender
perspectives, these can include such factors as labor markets, credit markets, social conventions,
dynamics of local food availability, or women’s participation in key tradable’ sectors.

Development of SRM strategies can include an analysis of the demands on women in the household or
family life. The design of SRM programs as related to potential economic shocks can incorporate
past experiences that guide formulating gender aspects of prevention and coping systems.

(iv) Last but not least, SP raises the issue of income redistribution between generations,
regions or nations. Distributive issues between generations emerge when public transfer
programs increase current period consumption at the cost of capital stock formation and,
thus, at the detriment of the incomes of future generations or when an aging population
squeezes the consumption possibilities of the active generation. Important regional
income differences in a country, federation or supra-national body (such as the EU) raise
the issue to what extent an income redistribution should take place to support income
convergence (through transfers enhancing capital accumulation) or equal social and
economic conditions (though transfers increasing the consumption possibility), and the
conditions under which these transfers are effective (Hervé and Holzmann, 1998).
Finally, the large and often rising income differences between the rich (northern) and the
poor (southern) countries give rise to claims of needed redistribution in a globalized
world (Deacon et al., 1997). Those issues, while clearly important, transcend SP and
touch on many questions of macro, fiscal, and international economics as well as
international welfare economics for which the analytical basis, economic effects, and best
instruments are not yet fully established.

C. Economic development issues

SRM is not neutral to economic development: it may support it through the choice of
more productive production technologies, and the way gender is dealt with (see box) but

20
it may also hamper it through the elimination of risk and changes in individual behavior.
This renders the choice of risk management instruments an important tool for economic
development and may give rise to a trade-off between short-term effectiveness and long-
term dynamic efficiency.

(i) There are many arguments for the view that insufficient risk management instruments
impede efficient decisions and economic growth. Because the poor are risk averse, the
absence of adequate risk instruments makes them pay an even higher price and, hence,
contributes to poverty. There are various ways in which this can occur. One way is via
effects on production decisions. For example, outmoded agricultural technologies can
persist because they are less risky and credit is scarce. Another channel is through
portfolio behavior. By this argument, uninsured risk induces poor credit-constraint
households to hold unproductive wealth. Lastly, one channel is through the investment in
human capital. It is argued that lacking access to credits means poor families must pull
their children out of school to provide labor in the face of an income shortfall (see box).
Against this background (which has economic appeal and some supporting empirical
evidence), it is suggested that the provision of adequate risk management instruments
allows the choice of more efficient production technologies, portfolio selections or
decisions for human capital formation.

SRM and Children

Children tend to be invisible in the shaping of policies on poverty reduction and risk management.
Generally children are incorporated into the category of the “household”, but this can obscure
important distinctions in terms of age and gender. Attention to children in SRM initiatives should give
attention where possible to the social fabric of the community rather than individualized interventions.

At times of economic shocks, parents and communities face hard decisions in regards to schooling,
work and residence. What are adaptive strategies that can help children balance work and school?
Boys tend to work more directly in income earning settings, while girls often respond by taking on more
household responsibilities. Both take part in household enterprises depending upon the locale and
economic needs.

SRM strategies can identify key indicators and areas of vulnerability in the lives of children, and thus
shape prevention and coping programs. SRM approaches can provide support for the fabric of the local
community in order to reduce the pressures on children to live on the street or accept harsh
employment conditions. SRM can also identify programs with local organizations that can remove
children from harmful or at risk settings, as the costs to children already at risk will increase in times
of economic shock.

(ii) Full insurance against risks allows a choice on the efficiency frontier based on risk
preferences. However, private and public insurance is characterized by asymmetric
information leading to problems of moral hazard and adverse selection. As a result and
as noted above, private insurance markets may not be established or may not be efficient.
The public provision of insurance against income risk may improve the outcome for a
wide range of risks, but may also reduce individual efforts (such as job search) or lead to
taking too much risk. And may end up in a worse situation than without such protection.

21
It is often feared that the reduction in individual effort may be compounded by pervasive
income distribution that is often part of public welfare systems. In addition, welfare state
interventions may imply a redistribution paradox where more redistribution results in
more inequality (Sinn, 1994). This calls for a careful analytic and empirical assessment
of publicly provided and managed risk management instruments.

(iii) Starting with informal SRM instruments in less developed economies, one can also
be confronted with a trade-off between distributive effectiveness versus dynamic
efficiency. A wide variety of informal arrangements may be effective in providing risk
mitigation for the covered group, but it may come at high costs for current and future
income, particularly for the poor. On the other hand, many publicly provided alternatives
appear costly in the short run because additional budgetary resources have to be raised
and harmful distortions and disincentives are introduced. De-placing informal with
public arrangements may imply long-term efficiency gains if, for example, repressive
informal institutional structures and low-level production technologies are replaced.

D. Political sustainability issues

Discussions about the SP programs (or more generally about the welfare state) have long
been seen in a simple trade-off between equity and efficiency once the social welfare
function over individual income positions is defined. Yet, the experience with public
interventions and attempted reforms has taught us that the best technical solution may not
be politically sustainable. As a result, the original, first, best design is blurred or totally
reversed, while changes to a potentially sustainable second best solution prove politically
difficult or even impossible. This suggests that considerations of political economy have
to be part of system design and reforms. And the simple trade-off has to be extended to a
“menage-à-trois”: equity, efficiency, and political sustainability. At the level of policy
design, three approaches are suggested:

(i) The deterioration in system design and implementation of public SP programs is the
result of not only changing voter coalitions, but of personal interests by politicians and
bureaucrats as well. One method of protecting the original design consists of an
appropriate self-binding mechanism, enhanced transparency, and stricter accountability.
Relatively successful examples of such an approach include the long-term fiscal
projections under the US pension system, present value budgeting in New Zealand, and
periodic evaluations of all existing programs and of proposed changes in many
industrialized countries. While these recent changes often help, more needs to be done
with respect to our client countries.

(ii) Once political sustainability becomes a criterion for program design, the resiliency
toward political risk becomes an important element for program selection. The
conjectured trade-off between equity, efficiency, and sustainability suggests that an
explicit second best solution from an efficiency or equity point of view may be selected if
they are considered more resilient to political risk. Examples include individual savings
accounts to cope with income risk due to unemployment or health compared to unfunded
and publicly managed provisions.

22
(ii) Reforming public programs of risk management such as pensions, unemployment or
sickness benefits proves very difficult politically. Entrenched interests, acquired rights or
a lack of credibility of the proposed alternatives are among the most common obstacles.
While resistance to reform is not specific to SP programs, the problem is particularly
prevalent and difficult to overcome. This suggests that, in order to be able to introduce
new and better instruments of SRM, a better understanding of the political economy of
reform is required.

V. How does this affect our View of Social Protection?

Applying the social risk management concept may change our view of social protection
and the instruments needing improvement or invention. The change will evolve during
the work on the SPSSP, and the development of country-specific, regional, and a global
sector strategies. For this reason, no conclusions are here attempted. The following is a
tentative list for which comments and suggestions are welcome:

• SRM provides an integrated view on informal, market-based and public risk

management arrangements and:
• Stresses the importance of all arrangements, and the shift in importance and
structure with economic development;
• Allows a common assessment of these arrangements against the benchmark –
reduction in vulnerability, improvement in consumption smoothing, enhancement
in equity, and contribution to sustainable economic development;
• Emphasizes that all types of arrangements - while attempting to contribute to risk
management - can be detrimental to economic development.

• Moving from the static poverty to dynamic and risk-based vulnerability concept
broadens the scope of traditional poverty reduction policies from reactive and
transfer-type to pro-active measures.

• Heightens the importance of policy measure to strengthen informal arrangements,

such as:
• Family as pro-active, risk mitigating, and risk coping institution;
• Communities and importance of social capital;
• The role of NGOs in providing risk-mitigating and targeted risk-coping support.

• Fosters the importance of new and innovative formal arrangements, such as:
• Multi-pillar pension systems;
• Individual social accounts to handle multiple risks (unemployment, sickness
disability, survivorship, old-age);
• New delivery systems of health care.

• Offers legitimacy to many intervention as risk management mechanism, such as:

• Micro-credit institutions;
• Targeted credit arrangements to poor, women, and remote areas;

23
 • Social Investment Funds with pro-active (e.g., income generation and education),
risk mitigating (e.g., water supply) and risk coping features (e.g., public works).

• Puts the role of the government in perspective:

• Governments have in important role for the establishing and functioning of
informal and market-based arrangements;
• Governments and public administration also have their own agenda, exposing
such arrangements to political risk.

24
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