LEAP* Workshop Jan 21, 2008 Ulrich Hess, Chief of Business Risk Planning Ulrich Hess, Chief of Business Risk Planning Poverty and Shocks: why insurance/safety nets can be an answer *Livelihoods + Early Assessment + Protection

AGENDA Poverty and Shocks Getting out of poverty Peoples approaches Roles of social protection and insurance

Poverty and Shocks Poverty is about lack of –means –access –opportunities Shocks can be –Independent: health, life –Correlated: weather, price –Recurrent yet unpredictable –Pervasive: one event puts livelihood at risk Persistent shocks can trap people in poverty

Getting out of Poverty means… Generating surpluses For capital and/or skill accumulation to achieve sustainable income growth How do people get there? Two archetypical approaches:  The Entrepreneur  The Security seeker

The Entrepreneur (“Where is profit?”) Foregoes consumption –Saves start-up capital –Invests in education or information Takes measured risks –Applies fertilizer/quality seed –Makes deals by transforming information and/or stuff

The Security Seeker (“Where is pain?”) Foregoes consumption –saves for tomorrow –Invests in social networks Avoids risk –Applies the more drought resistant local seed –Diversifies crops and income sources

Social Protection Protects both from destitution risk and therefore reduces peoples’ “insurance savings” = less foregone consumption Allows security seeker to balance his portfolio of activities Enables entrepreneur to put more capital at risk

Insurance Protects against losses = more measured risk taking: –Allows the security seeker to take out small weather risk free loans for seed (WI helps supplier) –Allows the entrepreneur to invest in new technology and businesses (WI helps banker)

Conclusion: Protect people and their profits against recurrent shocks People are both entrepreneurs and security seekers Social Protection against pain, insurance for profit People need both instruments to get out of poverty!