International financial institutions need to do more to protect the poorest from disasters

Wars, bad weather and unstable geology threaten to return millions of people to poverty and remain a major obstacle to others making their first escape. From flood swept-Mozambique to drought-stricken Somalia to war-ravaged Yemen we witness the terrible human and economic costs of crises. The poorest people in the poorest countries bear the brunt. They are six times more likely than people in rich nations to be injured, lose their home, be displaced or require emergency assistance. Climate change threatens to make things worse, pushing a further 100 million people into extreme poverty by 2030.

As the world’s financial leaders gather in Washington this week to welcome the new President of the World Bank and to discuss future policies of the major international financial institutions, they are rightly asking how their collective financial and technical assets can be used to better protect the poorest from crisis risk.

They should do three things.

First, stop treating crises as surprises - start to plan for them.

We may be shocked by crises, but we are rarely surprised. Meteorologists and climate specialists can tell us with increasingly gloomy precision about the likelihood of extreme weather events. Although seismologists still struggle to predict the timing of earthquakes, school textbooks map the geography of faultlines. The outbreak of wars is less predictable, but it is well known that once wars start they go on for a long time, forcing many to become refugees and leaving many others at heightened risk of hunger, injury and death.

The majority of crises are, then, known unknowns. We might not know exactly when or where they will occur, but we have a good idea that something will happen. And if we know that much, then it is possible to plan better ways to prevent and prepare for crises. That planning can make all the difference.

Rather than waiting for something terrible to happen, then quickly scramble to raise the money and design a response, there are an increasing number of examples of responsible investment in preparedness which are delivering better results for the poorest and better value for investors. For example, in drought prone areas of Kenya when rainfall dips below pre-agreed levels, households automatically receive a lump sum cash payment. Because affected populations know what they will receive and when, they can make better decisions.

The problem is that the right incentives are not in place for governments to invest in this kind of preparedness as a matter of routine. Why allocate your own budget to invest in preparedness, if this reduces the amount of ‘free’ money you are eligible for in the aftermath of crises? The World Bank could help by providing funding for preparedness on terms that are at least as good - preferably better - than it currently offers through ‘emergency’ financing instruments, such as the Crisis Response Window.

Second, invest more in instruments that are designed to anticipate and proactively manage risk.

The Pandemic Emergency Facility is a good example of an anticipatory financing instrument. Using a combination of insurance and cash, it provides predictable finance to respond quickly to major disease outbreaks. It was triggered recently in the Democratic Republic of Congo, providing rapid finance to drive the response to the ebola outbreak. Lessons from that initiative are being applied to design the new Famine Action Mechanism, which promises to radically improve international efforts to address extreme food insecurity.

Finally, check that we have the right institutions for the job.

A mature financial system includes both banks and insurers. Yet when it comes to the international financial institutions set up to combat poverty and boost economic growth, almost all are banks. This is a missed opportunity. Buying an insurance product does more than provide financial protection—it brings in the insurer as a partner in your risk management. Institutions like the World Bank need to focus less on providing cheap loans after disasters, and more on providing cheap loans before the disaster to buy insurance, and to pay for the kind of prevention and preparedness that make insurance cost-effective. The World Bank is playing an important role in fostering such institutions, for example, the Caribbean Catastrophe Risk Insurance Facility and its counterpart in the Pacific, but it should commit to do more.

Never before have the risks to development been so well understood. Never before has there been such a strong set of tools to manage those risks. Time then for those gathered in Washington to commit to use their collective financial muscle to better protect the poorest from those risks.

Stefan Dercon is Professor of Economic Policy at the Blavatnik School of Government and the Economics Department, and a Fellow of Jesus College. Between 2011 and 2017, he was Chief Economist of the Department of International Development (DFID)

Daniel Clarke is the Director of the Centre for Disaster Protection. Daniel is an actuary and development economist. He has worked with more than forty developing country governments on disaster risk finance in close collaboration with bilateral and multilateral development institutions, and the private insurance and reinsurance industry.

Stefan and Daniel co-authored the book Dull Disasters? How planning ahead will make a difference (Oxford University Press).

Paul Gallagher