Risk management can help poor people overcome crises and get ahead

Aid workers and policymakers should shift from being crisis fighters to proactive risk managers, says World Banki

Residents watch from their homes as floodwaters run down a street in Santo Domingo, capital of the Dominican Republic. Photograph: AP

Drought, pandemic, tsunami, violent crime, financial meltdown – the world is full of risks, and the poor are often most vulnerable to their effects. Instead of simply responding to crises, aid workers and policymakers should anticipate and help to guard against such rare and potentially devastating events, according to the World Bank's world development report 2014, published this week.

"We're advocating a sea change in the way risk is managed," the World Bank president, Jim Yong Kim, says. "Our new approach calls for individuals and institutions to shift from being 'crisis fighters' to proactive and systematic risk managers."

After the world suffered major crises in 2008, including shocks to the global financial system and spikes in the prices of food and fuel, the concept of risk management has gained prominence in international development. The links between risk, livelihoods and poverty are all too clear, the World Bank report says.

"Mounting evidence shows that adverse shocks – above all, health and weather shocks and economic crises – play a major role in pushing households below the poverty line and keeping them there," the report says.

But forward-thinking interventions can help offset the costs of future shocks. Bangladesh offers a good example, says Norman Loayza, the report's director.

"In 1970, a large typhoon caused 300,000 deaths [in Bangladesh]. In 2007, a typhoon of the same characteristics and strength caused only 4,000 deaths," Loayza says in a video statement. "The reason for the change was that the country [had] built a number of shelters. It went from having only 12 shelters in 1970 to having 2,500 in 2007 … It also had a system of warning the population and a system of forecasting these events."

But risk management isn't just about mitigating the effects of crises; it can also help people get ahead. Farmers in Ghana and India who had access to rainfall insurance were more likely to invest in fertiliser, seeds, and other farming inputs, the report said, instead of sitting on their money to guard against potential future shocks.

The concept of risk management isn't new, says Tom Mitchell, head of the climate and environment programme at the Overseas Development Institute, but given the extreme events of the recent past, "it's probably more important than ever".

Several recent studies have predicted that extreme events will become more common, Mitchell says. If we fail to anticipate and plan for those events, then we could risk giving up many of the development gains made over the past few decades.

In a time of government austerity, thinking about risk management can also help limited aid money have a greater impact. In most cases, as the World Bank report shows, the price of preventive interventions is much smaller than the long-term costs of handling a full-blown crisis. Moreover, the effects of risk-management interventions may pay off for years to come.

"We've not really done a lot to think about the long-term durability of some our development investments," says Mitchell. "If risk management helps us to do that, then all the better."

But risk management is only as effective as our ability to anticipate the extreme events that may strike in the years ahead. To some extent, uncertainty is inherent to the process.

"The risks that we'll face in 10 years' time will probably look very different to the risks we faced 10 years ago," says Mitchell. "Development progress is really dependent on our understanding those differences."