Insurance for development

Published on September 29, 2016   30 min
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Hello, my name is Chris Barrett. I'm a professor of Applied Economics and Management at Cornell University in the United States. And today, we'll be discussing Insurance for Development.
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The general economic case for insurance rests on two principles. The first is that people prefer stable to unstable consumption. The easiest way to think about this is that most of us prefer to have three meals a day and only three meals a day each day. We prefer not to have one meal one day, three, four meals the next day, six the another day, so that on average we have three. So stability is a basic principle we see in human preferences for consumption. What that implies is that if we have fluctuations in the income that we use with which to buy things to consume, we will save when we get a paycheck and then borrow from our savings to pay for consumables each day or each week or we will borrow, say, using a credit card. Or in the case of a shocked income, say, losing a job, we might draw on insurance, unemployment insurances is a common example. So we try to stabilize consumption against short-term income fluctuations through saving, borrowing, or insurance. The second principle behind insurance is that the permanent income we enjoy is threatened by the risk that we could lose productive assets. One of the most obvious ones is that people die. So if the principle breadwinner in a family passes away, that's a major shock of earnings permanently to that family. So people commonly have life insurance on the major breadwinner in a household. Similarly, we have health insurance for the prospect of a disruption of our ability to get to work. We have property insurance against the possible loss of our home or our business or our automobile, etcetera. The risk of loss of productive assets threatens permanent income. And so we especially try to insure against those losses. Those losses are especially acutely felt for people who are at risk of falling into a poverty trap. Think of somebody who loses their home to a fire but has no home insurance and has no support system, they become homeless. How easy is it for them to find further employment and to remain non-poor? It's terribly difficult. So most insurance is really around assets not around income, it's about protecting against the catastrophic loss of the productive assets on which our future incomes depend more than on stabilizing income. And these concerns are especially acute for the poor because a small loss is more acutely felt by poor people than by rich people and because the poor are much less likely to have safety nets around them and at greater risk of falling into a poverty trap.
2:49
Poor communities also face much greater income and asset risk. Most poor people in the developing world live in rural areas and they're employed in agriculture, either as farmers or as farm workers. And a large share of that agriculture is rain-fed. So at a very basic level, if the rains come late or the rains don't come at all, or there's too much rain and there's flooding, the agriculture productivity of the region is hurt, their incomes are hurt, they may lose a job, they could lose their whole farm. So their livelihoods are very dependent on a highly stochastic, risky, exogenous system of weather. There are also problems that there are less secure property rights, less firm rule of law. So when somebody steals property or bandits come and attack a convoy and take the goods that are being transported from one market to another, it's less likely that there will be enforcement of the property rights of the original owners. Or for example, a woman who is widowed, living in particular areas where only a man is recognized as able to own land, the widow may suddenly lose access to the land that her husband held as other male descendents from the extended family take over the land and displace her and her children. So the security of property rights is also much less firm in most low income areas. There is demonstrably greater exposure to natural and manmade disasters, whether it's major droughts, the sort that leave cattle emaciated, as you see in lower left-hand figure, whether it's violence that displaces people from their regular homes, like the woman and child in the center photo in the slide, or whether it's a plague, like the locust that one sees in the lower right photo coming through rice fields in Madagascar. These disasters strike much more frequently in developing countries. And there are fewer state-provided safety nets, the sorts of things that protect all of us, emergency disaster assistance, unemployment insurance, state-provided or employer-provided health insurance or life insurance coverage. Those things commonly don't exist in poor countries.
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Insurance for development

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