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Risk and Vulnerability Considerations in Poverty An
Recent Advances and Future Directions
Carlo Cafiero and Renos Vakis
October 2006
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Risk and vulnerability considerations in poverty analysis:
Recent advances and future directions
Carlo Cafiero1
and Renos Vakis2
Abstract
In the recent past, growing attention has been devoted to the attempt to correctlysiderations of exposure to risk in the discussions on poverty reduction and, m
economic and social development. The purpose of this article is to take stock o
forts and to reconsider the relationship between poverty and exposure to risk. short review of current practices of vulnerability measurement to discuss how
is truly consistent with an ex-ante view of assessing the true consequences of rWe argue that one way of addressing this inconsistency is by adding an estimat
ance cost needed to guarantee a socially accepted minimum level of welfare t
consumption expenditure taken as a benchmark to identify the poor. In other wfine an augmented poverty line where the traditional absolute poverty bench
marked up by the estimated cost of insuring against what are considered socia
able risks. We then discuss the practical implications for implementing such afuture research directions.
Keywords: Poverty, Risk, Vulnerability, InsuranceJEL-Codes: I3, G22, O12
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I. INTRODUCTIONInrecentyears,agrowingattentionhasbeendevotedtotheattemptto
cludeconsiderationsrelatedtotheexposuretoriskinthediscussionsonpove
and,moregenerally,onsocialandeconomicdevelopment.Thatexposuretori
oughttobeanundisputedfact.Manyhaverecognizedthatoneoftherecurre
ofhumanactivity isanattempttoreducethedegreeofuncertaintythatsurr
ture.Inthecontextofeconomicdevelopment,ithasalsobeenwidelyrecogni
attemptsmaysometimeshavenegativeconsequencesintermsofgrowthpoten
tialthatcouldbemorefullyexpressedifonlybetterwaystodealwiththeunc
available.
Inthissense,twojustificationsforpublicinterventionsaimedatreduc
suretoriskand/ortheconsequencesofshocksemerge.First,sinceinsecurity
ducing,publicactionstoensureaminimumlevelofsecurityforeveryonemay
Second,privateactionstoreduceexposureortocopewiththeconsequences
eventsmight
be
too
costly
and
inefficient
from
asocietal
point
of
view.
Whilethereiswidespreadagreementonthemeritsofthesetwojustifi
moredisputedseemstobehowtoactuallymeasureboththedegreeofexposu
whatistypicallytermedvulnerability)anditsnegativeconsequencesinterm
Inorder tomeasure these,onewouldneed toassesswho ismore exposeda
givenprospect
is.
Such
quantitative
measures
are
required
to
assess
issues
lik
costattributedtorisk,distributionalconsequencesandtargeting.
Theaimofthispaperistwofold.First,wediscusstheconceptualproble
be confrontedwhen trying todefine thewelfare cost of exposure to risk, an
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therealizationofshocks.Lackingsuchidentificationimpliesmakinganincom
tentially
incorrect
assessment
about
risk
exposure
and
policy
directions.
Second,weintroduceaconceptuallysimpleapproachtoincluderiske
siderations within poverty indicators. We argue thatby directly embeddin
measurementofpoverty, such ameasurebecomes truly forward looking an
manyassumptionsusedintheexistingmethodologies.Whilethepracticalde
plementingsuch
an
approach
are
indeed
great,
we
discuss
directions
for
futu
researchondata collectionandanalysis that canbedone to simplifyandm
tional.
Thepaper isorganizedas follows.Section2reviews theexisting liter
nerability indicators.Twoconcernsare identified.First,andperhaps less imp
taindegree
of
confusion
seems
to
permeate
the
practical
uses
of
the
terms
po
nerability.Such confusion shouldbe resolvedbeforegoingdeeper into speci
measurement,whichisdiscussedinsection3.Second,andmoreimportant,w
fully consistentwayofaddressing thewelfare consequencesof the exposure
therefore to correctly provide guidance forwelfare increasing policies in un
ronments,is
yet
to
be
found.
Section
4,
introduces
asimple
concept
of
an
aug
erty linewhich integrates risk inpovertymeasurement.Section5discusses
implicationsofestimatingsuchameasureandhowfutureworkcanbedirecte
andbroadenitsimplementation.Section6concludes.
II. POVERTY AND VULNERABILITYMerriam Webster Dictionary (on line version, 2005) defines poverty as
one who lacks a usual or socially acceptable amount of money or material posse
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social and political rights and to a wide array of other non material basic nee
most recent attempts to include consideration related to security (World Bank,
This view recognizes, at least in principle, that insecurity is in itself a
comfort and hence it causes a reduction of welfare or well-being.6 Such a view
cepted, and very few now seem to dispute that any civilized society should gran
access to the means and opportunities to reduce the level of insecurity up to
ceptable level. Such an (equity) argument could and should be considered a
tification for the provision of social protection, which thus become an essential
any development oriented policy.
Nonetheless, a well designed and correctly targeted social protection sys
be a factor to boost economic growth (Dercon, 2005). The rationale behind such
that, to try and eliminate uncertainty, the poor are often forced to employ th
sources they possess in activities with low returns, but which assure a minimum
sumption. By providing them with more security, they could mobilize resourc
ties with higher returns, thus effectively promoting growth. This argument is al
to skeptics of social protection, who question the efficiency of costly social pro
ventions in the context of limited financial resources, which they claim - co
invested instead in more efficient activities.
Nonetheless, none of the justifications above explain what a well d
correctly targeted social protection system is. A debate has therefore forme
have been devoted to try and understand how to design policies aimed at red
3The most influential work on the broadening of the view of poverty can be traced back to A
but many have been contributing to the process so that a comprehensive list of references wou
be put here.4
Poverty is hunger. Poverty is lack of shelter. Poverty is being sick and not being able to se
erty is not having access to school and not knowing how to read. Poverty is not having a job, i
ture, living one day at a time. Poverty is losing a child to illness brought about by unclean w
l l k f i d f d (Th W ld B k 2001)
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tainty and how to target them so that they would be efficient in terms of prom
and growth.
Within such debate, the word vulnerability has come to widespre
though sometimes in ways that may lead to confusion.7 Two main definitions
in a broad sense, vulnerability is considered as the condition of being at risk
tially harmful event, and, as such, it is something that should be avoided. In such
nerability reduction objectives are distinct and as legitimate as poverty reducti
Taken from this perspective, although there might be synergies among the two o
example through considerations such as that the poor are more vulnerable), suc
not necessary to justify a role for social protection.
A second definition uses the word vulnerability in a narrower sense to
ability to poverty, i.e. the possibility of becoming or remaining materially poor
Therefore, the fundamental policy objective remains that of reducing poverty
tended more as potential rather than current poverty and social protection becom
also on the grounds that it remove constraints to growth.8
It is this second view which permeates the recent work aimed at meas
ability, as recently reviewed by Hoddinott and Quisumbing (2003), Ligon a
(2004), and criticized by Elbers and Gunning (2003). We do not duplicate their
rather, we note that even an optimistic survey of this literature leaves the reade
eral sense of skepticism on the possibility to use any of the existing measures of
in a fully satisfactory way.
Following Hoddinott and Quisumbing (2003), individual measures of
can be classified as: (a) indexes of expected poverty (VEP), i.e., the probabilityvidual household will fall below the poverty line, (b) indexes of expected utilit
the distance between the utility that would be achieved by receiving an appropr
level of consumption with certainty and the expected utility of the household gi
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utable to past shocks. Each of the three types of measures has its own merits a
as exhaustively described by Hoddinott and Quisumbing (2003) and by Ligon
(2004). Nonetheless, all the proposed measures have two key problems that
solved.
First, in any conceivable practical implementation, the use of observ
from the past will be needed to infer the future distribution of events, which
strong assumptions are made on the unobserved behavior.9 To deal with this, th
proaches give up the possibility of estimating behavioral parameters, and assum
fication purposes, that the structure of the preferences is known either explici
VEP and VEU measures) or implicitly (as in the VER measures).10
As Ligon a
(2004) note: One claim advanced for (at least utility-based) vulnerability me
they avoid the paternalism inherent in poverty measures by reflecting the prefe
household themselves. However, while theres working consensus in the empiri
on what functions usefully reflect household risk preference (the HARA cla
leaves at least one free parameter. [] Estimating preference parameters wi
analyst to observe the outcomes of household decisions (e.g. savings decisions,
etc.) which depend in part on risk attitudes. Even the innovative procedure o
dynamic structural model of households behavior (suggested by Elbers and Gu
does not solve the problem of estimating the distribution of future events to be u
ure vulnerability.
Second, to implement them in practice, these techniques need to rely (t
grees) on assumptions of stationarity and measurement error. That is, to be ab
future distribution of all possible outcomes from the observation of past realizatlyst would have to assume that the future is going to be similar to the past
world).Even if one did not want to assume this, there is a big practical problem
to evaluate the stationary (or not) nature of the distribution of consumption ne
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confounded with the stationarity assumption is the existence of measurement
sumption data which is assumed away in many of the approaches. These are k
that make existing techniques difficult to apply them operationally.
A crucial point of these issues is that, at least the way in which they h
plied so far, all these measures are truly backward-looking. This is unsatisfactor
very concept of vulnerability is a forward-looking one: it should capture the w
quences ofexposure to risk, not that ofhaving been subject to shocks. The exis
and type of available data used cannot identify between these two elements, in
using utility theory for identification. As put by Alwang, Siegel and Jrge
While it is possible to measure losses ex-post [], these are only the static o
continuous process of risk and response. Vulnerability is the continuous for
state of expected outcomes. Ex post welfare losses are neither necessary nor suff
existence of vulnerability. Welfare losses, in and of themselves, are not sufficien
household as vulnerable.
Perhaps what it is truly at the heart of this impasse is the fact that all at
bedding the concept of vulnerability within poverty analysis have not explicitly
the concept of poverty at its roots. In this sense, the natural direction of embe
poverty seems to be one that unifies the view of vulnerability and poverty. The
explores this further.
III. VULNERABILITY AS POVERTYAs discussed above, vulnerability has up to now been defined in either
general condition of being exposed to potentially harmful events or by focusing
sure and its impact onfuture poverty i.e. the risk of remaining or becoming poo
usually refers to a well defined low level of consumption). Still, the existing att
a practical working definition to vulnerability have maintained a distinction be
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Westressinsteadthatsuchadistinctionismisleading:apersonwhoca
forthemeanstoappropriatelymanageriskoughttobeconsideredpoor.Inoth
makenofundamentaldifferencebetweentheconceptofpovertyandthatof
Thatis,apersonispoorpreciselybecausehedoesnotpossesssufficientresou
againstalltheriskswhosepossibleconsequencesaredeemedassociallyintole
ofsuchrisks,farfrombeingabsolutelydefinedinbothgeographicalandhist
sions,
always
starts
with
the
risk
of
dying
of
starvation,
but
grows
to
include
overtime,societiesrecognizeasnolongeracceptable.Inaway,thetermdev
couldbeintendedasthejointprocessofenlargingthelistofintolerablerisksa
sionofthemeanstoinsureagainstthemtothegreatestpossiblenumberofpeo
Thisviewalsorecognizesthatpovertymustbeconsideredanexante
lookingconcept
(indeed
aview
that
is
shared
by
the
recent
work
on
vulner
whatmatters isnot the futurepotential outcomeper se,but rather the con
whichpeople arebound to face theiruncertain future.The simple awarene
shocksisinitselfacauseofdistressorsuboptimalbehaviorandthereforeim
farecost.Thefactthatashockdidnotrealizedoesnotimplythatpeoplewer
ableto
its
risk.
In
this
sense,
the
observation
that
people
have
been
lucky
thattheydidnotsufferawelfareloss.Assuch,toprovidethemwiththeme
moresecuremustbeconsideredawelfareimprovingaction,andtoidentifyth
forwhateverreason lessequippedtofacetheiruncertainfutureandfeeling
likeagoodwayoftargetingpolicies.
Oneconsequenceofthisisthatvirtuallyallmeasuresofvulnerabilityth
proposedsofarneedtobequestioned.Evenwheninprincipletheycanbepre
wardlooking(asonecouldtake,forexample,theconceptoftheprobability
i th f t ) th th li d i b d th b ti f t
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If the inability to insureagainst risk ispoverty,allweneed todo is
measurethemonetarycoststhatwouldbenormallyrequiredinagivenenvir
sureagainstthemostdangerousandfrequentrisks.Thisonlyrequiresacalc
costofinsurance,notthecostsofriskexposure,thefirstonebeing,atbest,alow
thesecond.
IV. THE AUGMENTEDPOVERTY LINEIntegrating the inability to insure against risk directly into poverty me
ceptually simple: it amounts to redefining the typical poverty line to account f
insurance. In this sense, it is equivalent to the exercise of choosing the comp
typical basket of goods and services (as is done in current poverty work) by
cost of insuring against unacceptable risks. An augmented poverty line can be
fined as the:
poverty line that includes the minimum amount of consumption requ
achieve basic needsplus the cost needed for acquiring enough insurance
`Enough means sufficient to cover the exposure to those risks that are
cially unacceptable, while insurance must be intended in a broader sense t
market-traded formal insurance contract, as including all actions which, in exch
sort of either implicit or explicit monetary payment, will eliminate most or all
consequences of the events being considered. The value added (at least from th
point of view) of such a definition is that it directly embeds risk exposure a
costs into the definition of poverty.
In this setting, measuring the consumption gap for household i (that is, th
a ho ehold con mption from the a gmented po ert line) i gi en b
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wherez is the traditional poverty benchmark (that includes food and non-food
the (idiosyncratic) cost of insurance against the predetermined set of risks that
is not able to insure, andyi is household is measured consumption expenditure.
Given ig~ , traditional measures of poverty in the tradition of Foster et a
be simply calculated in the usual way:
P(y, ,z) = =
+
q
i i
i
z
g
n 1
~1
where n is the total population and q is the population below the augmented pov
i).
The observation that i can be (to a large extent) strictly idiosyncra
practical complication: can one really measure i? While there are a number of
doing so (discussed below), they are conceptually not very different from encou
isting poverty measurement methodologies. For example, poverty lines often
typical baskets, like distinguishing between the extreme (focusing on the inab
a basic food basket) and general (which adds to the cost of the food basket the
tial non-food items). Similarly, different poverty lines can arise when considerin
geneous costs and composition of typical baskets across regions (e.g. betw
urban areas). In this sense, the observation that poverty lines have a large idios
ponent is not new and as such, our proposal to add a new component (i.e. risk)
ral extension of existing practices.13
12As an extreme example, consider two identical households (1 and 2) with the exact same
tary wealth, living in the same natural and economic environment, thus facing the same natur
hazards. According to our criterion, they could be located differently relative to the augmen
because of their different ability to manage risk due, for example, to different average levels
this context, a targeted educational program would be the best way to tackle the issue as it woul
its effect of reducing the uninsured cost of risk management (i) for the less educated househo13
Distinguishing idiosyncratic from covariate risk is indeed complicated. In principle, idios
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Still, the fundamental problem that remains to be addressed is ho
measure the cost of insurance to be added to the static poverty line. Conceptual
guish the following three steps:
1. Identify the possible risks to be included in the poverty measure;2. Estimate the cost of insurance for such risks for each household i;3. Calculate ig~ for each i and determine the aggregate poverty indicato
Risk identification
In general, the insurance cost i will be the sum of various risks: over
nomic risk; covariate, village level risk (such as weather risk); and household
syncratic risk (such as health risk), and it can be constructed accordingly by co
type of risk at a time. Cataloguing and incorporating all possible risks is of c
reach both in terms of data requirements but also from a practical point of vie
that it is not necessary to embed all possible risk components before being able
sible conclusions on the relevance of specific risks.
A first step is therefore to identify which risks are considered socially
and therefore insurance against which should be considered part of the basic n
there will still be large inter and intra country differences in how one should
simple review of existing poverty and vulnerability analyses suggests that it m
difficult.14 Indeed, recent use of risk modules in household level analysis cou
guide as to what is considered an important risk. For example, droughts and ma
haps two of the most easily identifiable and frequently reported shocks facing tions in many countries. Assessments to incorporate risk in poverty work wo
include weather and malaria risk for rural populations in the poverty line calcula
The cost for insurance
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arise from both the idiosyncratic nature of risk exposure and from the fact tha
tings (especially in developing countries), such a cost will at best be a simulate
the absence of formal insurance markets for that specific risk. Fortunately, a
exists that has addressed such problems, which we think can be explored to ta
these issues.
Theoretically, the cost to be considered should be analogous to what in
literature is defined as an actuarially fair premium. Where formal insurance
and are well developed, the prevailing market premiums can be used as proxi
premium, possibly after adjustments for transaction costs due to problems o
and/or lack of competition in the supply of insurance.15
In the most common cases where formal insurance markets are not we
the analysis will need to focus on simulating an insurance market. To do so, a
the following will be needed: (a) the probability distribution of the risky event
associated loss for all households exposed to the risk. The hypothetical actuar
mium can then be calculated as the average expected loss, i.e., the premium tha
a market with complete risk sharing.
Information needed to estimate the distributions and the potential losse
ardous events can be sought for in the records of past outcomes, although we m
the losses and probability of events should be measured separately and as mu
possible, trying to avoid the need to impose unjustified behavioral assumptions
tion purpose. The point is that past outcomes carry only partial information o
might havehappenedbut did not happen and the anticipation of which likely af
15In many cases, when households have bought a specific insurance (e.g. health insurance
premiums paid can be potentially included in the aggregate expenditure measure yi (a common
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ior. Moreover, this partial information is necessarily confounded with the effe
which happen to materialize but that had not been anticipated.16
Once this premium, call it i, is estimated, it must be compared to th
cost of eliminating the negative consequences of the same event by engaging in
actions, such as, for example, by changing cropping patterns (risk skewing ac
fined by Dercon, 2005) or by investments.
As an example, consider a situation where the only relevant risk is that o
avoid damages, a farmer could either diversify its crops (i.e., by selecting the
resistant ones) or invest in digging a well. Both actions imply a cost. The min
diversification, say C1, could be assessed through the calculation of the foregon
come when cultivating the best feasible drought resistant crop instead of the m
drought susceptible crop. Data should usually be available on both types of cr
veys of farms in the region or in similar regions. On the other hand, the effectiv
ting irrigation water by digging a well might depend on such things as the depth
water can be found; the nature of the soil; the available digging technology;
quality of water, and so on. The total cost of the investment should then be ann
an interest rate which is representative of the prevailing credit conditions to get
ble annual cost C2. The opportunity cost of insuring against drought, OCi coul
termined as OCi=min{C1, C2}. Then, the (conservative) measure, i, to be ad
come benchmark will be:
i = min{i, OCi}
Once i is calculated for each household i, the gap ig~ and the aggregate poverty
can be then computed using Eq. 2.
V. DISCUSSION AND IMPLICATIONS FOR FUTURE RESEARCHThere are a number of benefits associated with this approach. First, t
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the class of the P measures of Foster et al. (1985), and that, therefore, doe
abandoning the wealth of developed expertise and data in poverty analysis.17
Second, the method clearly distinguishes between the ex ante exposure t
ex post effects of shocks. Only the ex-ante exposure to risk is included as a
poverty. What we add to the traditional poverty line is notan estimate of the
come loss or of a monetary measure of the expected utility loss, which would d
the commonly available data, both on past actions taken and realizations of sh
i we suggest to use ought to represent the cost of uninsurable risk exposure
flecting the ex-ante perception of what the risk might imply.18
Third, we do not need to devise a set of new indicators, and therefore w
to come up with arbitrary ways of weighing them. For targeting purposes, the
one is an indicator of poverty. Any policy could then be targeted to the poor, a
according to whether or not its implementation might reduce some measure of
dence (which now incorporates risk as well). Similarly, sincez and i are calcu
rately, one could compare the relative importance of each, facilitating targetin
design.
Forth, the paradox of households that, based on a concept like vulner
pected poverty, would be considered non poor, yet vulnerable to risk is resolcost of insurance is assessed, no ambiguity exists in classifying a household
and therefore poor, or not.
Fifth, poverty reducing programs can also be evaluated based on their
ment capacity. That is, they could be ranked simply in terms of the extent to w
duce the broadly defined poverty measure which now incorporates risk. For e
17For example, to report on the importance of considering risk related issues and assessin
Kamanou and Murdoch (2002) compare their aggregate vulnerability index with the change in
d l d h h b d h i h di i l h d f b i
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grams that directly provide free insurance opportunities to the poor, by reducin
insurance to be added to the poverty benchmark, would certainly decrease pover
Nonetheless, the feasibility of calculating i remains a huge concern. W
tually the approach is simple, there are a number of constraints and challenge
make it operational. For one, the mere concept of trying to calculate i for e
risk in a given context seems impractical (if not impossible). The data requirem
considering the following demands: (i) deriving a list of risks to be considere
for each household; (ii) the need of information on risk premiums, somethin
complicated in many settings where insurance markets do not exist; (iii) costi
risk prevention instruments that can then be compared to insurance. At the same
of assumptions and data challenges for many of these issues are not qualitati
that those done in existing poverty measurement work. Below, we outline so
where further research could address some of these concerns.
Targeting and aggregation
The idiosyncratic nature ofi implies a huge information cost in its cal
direction to address this is to conduct such calculations at a more aggregate leve
simplification would be to consider large covariate risks (such a weather variatitheir nature affect a large number of households. In this case, we could calcula
minimum cost of weather insurance premiums or irrigation) for all (potentially
holds within a particular region exposed to weather variation.
Such an aggregation concept is akin to poverty mapping methodolo
developed that aim at measuring poverty rates at lower administrative units (lik
ties) by aggregating household level poverty estimates, thus improving precisi
ing the weather example, data on rainfall variation (collected from weather sta
used to define drought prone regions, while rainfall insurance premium inform
t f th ti i t t (lik th t f ll) b bt i d
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made with the opportunity cost of eliminating the negative consequences of th
by engaging in preventative actions.
With the minimum cost i calculated (now i referring to a specific regi
pality), it can be added to a regional poverty line (which by definition affects a
in that region). Further modifications and adjustments can be made to improve
example by excluding non-farm households or households that already have t
manage rainfall risk. In such an example, regional poverty estimates would dir
for the risk of drought and therefore provide an instrument for targeting which
risk and non-risk welfare considerations.
Data requirements and future directions
Much of the data required to do the calculations we discuss are indeed
example, existing consumption expenditure data such as those available throu
Standard Measurement Surveys (LSMS) is already used to assess the welfare
household. In addition, existing data on the production structure of the househ
either within the same LSMS or through other farm/family business surveys,
useful in estimating some of the insurance costs parameters delineated above (
ple on drought). In particular, two conceptually separated pieces of informatiotracted, namely the probability of the events occurring, and the loss caused by
larly, data collected from ongoing existing and pilot programs aiming at promo
ment of insurance instruments in developing countries might also be very helpf
potentially include information like the willingness to pay for insurance, marke
ance information or data to assess insurance premiums.
A number of new areas of research in survey design can also facilita
with respect to welfare and risk. For example, new modules on shocks and ris
included in a handful of household surveys. While more work needs to be don
fi th d l d l i th f th ld f ilit t thi b ll i t
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In addition, recall questions may be used to construct a households hist
sion making process along various dimensions (including decisions under unce
can be done either by revisiting households from an existing household surve
retrospective questions during the collection of new data. Such modules can als
perception modules that could be used to construct risk distributions.21
Simil
work on subjective welfare may be used to incorporate risk in measuring welfar
While none of these approaches are without limitations, they seem to
range of options that can be used to implement our approach and incorporate ri
poverty measurement.
Experimental and evaluation work
Even beyond the construction of a risk inclusive poverty measure, there
need to better understand the welfare consequences of risk and its impact on h
groups. As discussed above, we know very little about how uninsured risk exp
behavior.23 Indeed, at the heart of the problem is one of reverse causality: the
ability in outcomes that we may observe will be the result of actions taken by a
avoidall risks, including those that we did not observe. As such, observed shoc
not be taken as a proxy of the ex-ante uncertainty to which the response was mby observing outcomes it is impossible to assess the risks that people have
choosing their actions or risks that people did no action but did not materializ
At best we can assess what people did for risks that we observe ex-post (as realiz
In this sense, programs that promote guaranteed payout schemes coul
ter understand how behavior changes with increased security (and hence lower
idea behind such intervention is that beneficiaries know ex ante that they will r
cific support (the payout) if a particular risk they are exposed (but cannot insure
terializes into a shock. This does not only involve market based insurance schem
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any intervention that can guarantee a payout if a shock occurs. Existing ongoin
experimental evaluation designs like providing rainfall insurance, income dive
guaranteed employment schemes are indeed exciting new directions to better u
havior under risk and the impact of improved security.
VI. CONCLUDING REMARKSA general agreement seems to exist that exposure to risk is an integr
poverty and that it is inherently a forward looking concept. A short review of
available methods for measuring vulnerability to risk has revealed some concep
tical limitations to address uninsured risk as a direct element of poverty. We pro
way of addressing the problem of directly including risk into poverty analysis
poverty indicators based on consumption gaps measured against a benchmark w
an estimate of the cost of insuring against the risks which are considered socia
able. Such a proposal is consistent with a view of poverty which considers secu
tial element of the wellbeing of households and individuals. In this sense, to
becomes synonymous of beingpoor.
While the practical implications of such an approach raise a number of
lenges, we discuss some directions for future work to address them. These inclu
of integrating aggregate measures of risk beyond the household level in the pov
improved data collection and new pilots to explore ex ante behavior under uncer
directions are needed in order to truly integrate risk exposure in poverty analysi
ion paper will subsequently develop an empirical application of this approach
plore its operational implications.
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plines, Social Protection Unit, Human Development Network, World Bank, Ma
Arrow, K. (1965), Aspects of the Theory of Risk-Bearing, Yrj Jahnsson Lectur
Barrett, C.B. and M. Carter (2004), The Economics of Poverty Traps and PersiAn Asset-based Approach, Cornell University, mimeo.
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Social Protection Discussion Paper Series Titles
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0609 Comparing Individual Retirement Accounts in Asia: Singapore, ThaHong Kong and PRCby Yasue Pai, September 2006 (online only)
0608 Pension System Reformsby Anita M. Schwarz, September 2006 (online only)
0607 Youth Labor Market in Burkina Faso: Recent Trendsby Daniel Parent, July 2006
0606 Youth in the Labor Market and the Transition from School to Work Tanzaniaby Florence Kondylis and Marco Manacorda, July 2006
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0603 Examining Conditional Cash Transfer Programs: A Role for IncreasInclusion?by Bndicte de la Brire and Laura B. Rawlings, June 2006 (online
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by Alain de Janvry, Frederico Finan, Elisabeth Sadoulet, Donald NeKathy Lindert, Bndicte de la Brire and Peter Lanjouw, December(online only)
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by Robert Holzmann, Johannes Koettl and Taras Chernetsky, May 2(online only)
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0415 Shocks and Coffee: Lessons from Nicaraguaby Renos Vakis, Diana Kruger and Andrew D. Mason, July 2004
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0413 Disability Employment Policyby Daniel Mont, July 2004
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0411 Challenges and Opportunities of International Migration for the EUMember States, Neighboring Countries and Regions: A Policy Noteby Robert Holzmann and Rainer Mnz, June 2004
0410 Evaluating Different Approaches to Estimating Vulnerability
by Ethan Ligon and Laura Schechter, June 2004
0409 Transferring Cash Benefits Through the Banking Sector in Colombiby Maria Teresa Lafaurie V. and Claudia A. Velasquez Leiva, May
0408 Mitigating Social Risks in Kyrgyz Republicby Emil Tesliuc, April 2004
0407 Toward a Reformed and Coordinated Pension System in Europe: Raand Potential Structureby Robert Holzmann, April, 2004
0406 Boosting Productivity Via Innovation and Adoption of New TechnoAny Role for Labor Market Institutions?by Stefano Scarpetta and Thierry Tressel, March 2004
0405 Mitigating the Social Impact of Privatization and Enterprise Restrucby David H. Fretwell, March 2004
0404 Risk and Vulnerability in Guatemala: A Quantitative and QualitativAssessment
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0402 Impacts of Active Labor Market Programs: New Evidence from Evawith Particular Attention to Developing and Transition Countriesby Gordon Betcherman, Karina Olivas and Amit Dar, January 2004
0401 Consumption Insurance and Vulnerability to Poverty: A Synthesis oEvidence from Bangladesh, Ethiopia, Mali, Mexico and Russiaby Emmanuel Skoufias and Agnes R. Quisumbing, January 2004
To view Social Protection Discussion papers published prior to 2004, plea
www.worldbank.org/sp.
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About this series...Social Protection Discussion Papers are published to communicate the results of The World Bank's workto the development community with the least possible delay. The typescript manuscript of this paper thereforehas not been prepared in accordance with the procedures appropriate to formally edited texts. The findings,interpretations, and conclusions expressed herein are those of the author(s), and do not necessarily reflectthe views of the International Bank for Reconstruction and Development / The World Bank and its affiliatedorganizations, or those of the Executive Directors of The World Bank or the governments they represent.
The World Bank does not guarantee the accuracy of the data included in this work. For free copies of thispaper, please contact the Social Protection Advisory Service, The World Bank, 1818 H Street, N.W., RoomG7-703, Washington, D.C. 20433-0001. Telephone: (202) 458-5267, Fax: (202) 614-0471, E-mail:socialprotection@worldbank.org or visi t the Social Protection website at www.worldbank.org/sp.
Summary Findings
In the recent past, growing attention has been devoted to the
attempt to correctly include considerations of exposure to risk in
the discussions on poverty reduction and, more generally, economic
and social development. The purpose of this article is to take
stock of all these efforts and to reconsider the relationship between
poverty and exposure to risk. We present a short review of current
practices of vulnerability measurement to discuss how none of
them is truly consistent with an ex-ante view of assessing the true
consequences of risk exposure. We argue that one way of
addressing this inconsistency is by adding an estimate of the
insurance cost needed to guarantee a socially accepted minimum
level of welfare to the level of consumption expenditure taken as
a benchmark to identify the poor. In other words, we define anaugmented poverty line where the traditional absolute poverty
benchmark level is marked up by the estimated cost of insuring
against what are considered socially unacceptable risks. We then
discuss the practical implications for implementing such a measure
and future research directions.
HUMAN DEVELOPMENT NETWORK
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