Social risk management (SRM) is a conceptual framework developed by the World Bank, specifically its Social Protection and Labor Sector under the leadership of Robert Holzmann, since the end 1990s. The objective of SRM is to extend the traditional framework of social protection to include prevention, mitigation, and coping strategies to protect basic livelihoods and promote risk taking. SRM focuses specifically on the poor, who are the most vulnerable to risk and more likely to suffer in the face of economic shocks. Through its strategies SRM aims to reduce the vulnerability of the poor and encourage them to participate in riskier but higher-return activities in order to transition out of chronic poverty.
Contents
Motivations
Social Protection has been a part of OECD economies for a long time but it has not played much of a role in development work because the imitation of these measures in developing countries is criticized based on equity and efficiency trade-off arguments. This view changed as a result of the following policy, conceptual and institutional triggers that led to the creation of SRM as a new Social Protection framework:
Source of social risks
There are three important categories that aid in the classification of sources of risks:
1. Catastrophic vs. non-catastrophic shocks: Some events occur with low frequency, but have severe income effects like old-age, death in the family, and disabling accidents or illnesses, permanent unemployment, and the technological redundancy of skills. These catastrophic events can hit households hard and may require a continuing flow of transfers to the affected household if it cannot acquire sufficient assets. On the other end of the scale are high frequency events with non-severe income effects like transient illness, crop loss, and temporary unemployment. Protection against these non-catastrophic events need not require long-term net transfers to the afflicted household. If appropriate mechanisms are available, households may use savings or loans with no net transfers from others over time.
2. Idiosyncratic shocks vs. covariant shocks: Some sources lead to losses in only some households in a community like noncommunicative illness or frictional unemployment whereas others hit all households at the same time like drought, inflation or financial crisis. The former are known as idiosyncratic (or micro) shocks while the latter are referred to as covariant (or macro) shocks. Many more mechanisms are available for coping with idiosyncratic shocks than covariant shocks. The latter can be particularly devastating, leaving households with nowhere in the community to turn for relief. For poor and isolated households even idiosyncratic shocks might be difficult to cope with.
3. Single vs. Repeated shocks: A third distinction concerns shocks following one another like drought followed by sickness and death versus shocks that occur as single events. The former are known as repeated shocks and are typically difficult to handle through informal means.
The following table lists social risks and their degree of variance varying from idiosyncratic (micro), regional covariant (meso), to nationwide covariant (macro).
Strategies
Risk management strategies fall in three broad categories.:
Prevention strategies
These are introduced before a risk occurs to reduce the probability of a down-side risk. Reducing the probability of an adverse risk increases people’s expected income and reduces income variance. Both effects increase welfare. Strategies to prevent or reduce the occurrence of income risks have a very broad range varying from small-scale informal arrangements to national economic policies. Examples include:
Mitigation strategies
Mitigation strategies are also employed before the risk occurs to decrease the potential impact of a future down-side risk. Whereas preventive strategies reduce the probability of the risk occurring, mitigation strategies reduce the potential impact if the risk were to occur. Risk mitigation can take several forms:
Coping strategies
Coping strategies are designed to relieve the impact of the risk once it has occurred. The government has an important role in assisting people in coping, for example, in the case where individual households have not saved enough to handle repeated or catastrophic risks. Individuals may have been poor for their entire lifetime with no possibility to accumulate assets at all, being rendered destitute by the smallest income loss and running the risk of being faced with irreversible damages. The main forms of coping consist of:
Feasibility study: Togo
In coordination with national governments of Togo and Yemen, World Bank conducted two feasibility studies of the social risk management framework.
Within the Africa Region, Togo was selected as a pilot country to test this approach. The process of application was launched with a workshop in Lomé for key stakeholders from the government and civil society in November 1998. During the workshop, available data was analyzed to determine sources of risks, available arrangements of social protection and vulnerable groups in Togo.
Since Togo’s independence in 1960, the government has provided social security for the privileged minority working in the formal sector and social assistance to a few people or groups conventionally identified as vulnerable (widows, orphans, handicapped). This leaves 95% of the Togolese to rely mostly on informal arrangements through both internal arrangements, which are organized by the prospective beneficiaries and external arrangements, which are organized by agents generally not belonging to the community.
In order to improve social protection, the government rethought its social protection policy in the framework of SRM and the following prevention, mitigation and coping strategies were proposed:
Criticisms
There is a lack of empirical evidence of SRM’s practical application. Besides Yemen and Togo, SRM has not been experimentally studied within the development field. This raises skepticism regarding the framework’s feasibility in the arena of international development.
SRM is sometimes also viewed as a neo-liberal framework that limits the government’s role to coping strategies that spring into action only in the case of market failure.
Its aim to encourage riskier activities that reap higher returns has also come under fire in light of individual risk-taking behaviors that are determined by a multitude of factors and not just decreased risk vulnerability. Also, riskier behaviors not only hold the potential for higher returns but also for bigger losses making World Bank’s encouragement of such activities inappropriate.
Lack of risk monitoring and reviewing to maintain an updated inventory of contextually appropriate risks and strategies is another serious deficit of the SRM framework.
Future implications
World Bank’s Social Protection and Labor Sector is under the process of formulating its Social Protection and Labor Strategy 2012 – 2022. Conceptual note for the strategy outlines four indicative strategic directions:
The upcoming Strategy is also aimed at dealing with SRM’s operational issues exhibited by lack of sufficient guidance to design and implement effective social protection systems.