This past Sunday, the World Bank released it’s 2014 World Development Report titled Risk and Opportunity: Managing Risks for Development. This report delves into the process of risk management, looking at how it should be conducted, what obstacles prevent people and societies from conducting it effectively, and how these specific obstacles should be overcome.
The theme of this years report will not come as a surprise to most, as ‘resilience’ is one of development’s sexiest new buzzwords. In the age of aid effectiveness, these concepts have massive appeal to donors because proactive and systematic risk management can help to build resilience and protect hard-won development gains (read: investments).
While on the surface the report focuses on preparing for, preventing, and mitigating risk, the real message that the World Bank hammers home is about creating an environment where people are less averse to taking risks. Many people may be baffled by this concept – why would we want to invest in risk management only to encourage more risk? Let’s follow the argument.
Under the leadership of Dr. Jim Yong Kim (the President), the World Bank has set out to transform risk management from being viewed as merely a control function to one that is more dynamic and responsive to change. When risk management is only focused on regulation and preventing potential losses, it results in missed opportunities day after day. In his forward to the report, Kim illustrates the link between risks and opportunities:
“Pursuing opportunities requires taking risks, but many people, especially the poor, are often reluctant to do so, because they fear the potential negative consequences. Failure to act can trap people in poverty, leaving them vulnerable to negative shocks and even less able to pursue opportunities that would otherwise improve their well-being”.
The report cites the example of farmers in Ghana and India whose access to rainfall insurance has encouraged them to take on risks in search of higher yields, such as increasing their investments in fertilizer, seeds, pesticides, and other inputs. Taking these risks has led to increased prosperity and other positive development outcomes. Conversely, Ethiopian farmers who lack access to risk management tools often choose not to use fertilizer because they fear drought and other potential shocks. They prefer to stash their money in a mattress for when the next dry spell comes, as opposed to investing in intermediate inputs
In many cases, the risk of inaction is often the worst option of all.
Illustrating the extent to which risk management can unlock constructive development opportunities is the first step towards changing the way people perceive risk, and how they strategize and execute risk management.
This past summer, Dr. Jim Yong Kim came to my work place (the North-South Institute) for a round-table discussion with key leaders of Canada’s private, academic, and third sectors. This was the first time that I really started thinking about risks and rewards in development. While the Bank’s 2014 report looks mostly at risk on the micro level, during the round-table discussion Dr. Kim mentioned that the Bank itself must become more bold and not be afraid to take risks to support projects that have the potential to transform a country or a region. While one of the key constraints in development may be an individual or nation’s aversion to risk, international development institutions and donors are equally guilty of this.
I think that part of the World Bank’s underlying strategy is that by changing the way institutions think about risk and risk management on-the-ground, it might lead them to adapt the way they approach risk internally. While a farmer may shy away from taking risks because they fear negative repercussions, a donor agency may not pursue a new project or strategy that has the potential to transform a country due to fear of resource waste, pressure to avoid fiduciary risks, or concern that the outcome will have negative effects on their reputation ( for more take a look at this ODI report).
Now, I’m not saying that international development agencies and donors should start taking crazy risks in search of massive rewards (à la Wall Street traders). That is simply not possible, especially due to the role that public opinion plays in development and foreign aid. However, I do think that we need to eliminate incentives to take part in excessive risk aversion if we want to see truly substantial and transformative change.
In my opinion, individuals, societies, and institutions could be doing a much better job at managing the trade-offs between risk, opportunity, and reward, and implementing effective risk management strategies will be the first step towards remedying this.
So what do you think? Do you agree that excessive risk aversion is hurting development? Do you think that implementing risk management strategies will actually encourage people to take “smart risks”? I’d love to hear your thoughts in the comments section!