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Fate and Fear: Risk and its consequences in Africa
February 2007
Stefan Dercon
Global Poverty Research Group (GPRG)

Acknowledgements: FANRPAN acknowledges the GPRG website as the source of this report: http://www.gprg.org/pubs/workingpapers/pdfs/gprg-wps-074.pdf


Introduction

This paper revisits some recent micro-level research on risk and its implications for growth and poverty in Africa. There is no area in the world as much identified with risk and shocks, such as largely covariate risks related drought, natural disasters, as well as conflict and political instability, and high levels of child and adult mortality and morbidity. It is only in the last decade or so that a more systematic analysis has begun on the implications of this high-risk environment on economic behaviour and performance. This paper revisits some of this work.

Nevertheless, this is not meant to be a review article. In recent years, there are have been quite of few literature reviews that are worth consulting, for example Morduch (1995), Townsend (1995), Fafchamps (2003), or Dercon (2002). Even though some of this evidence will be discussed, the focus in this paper is different, focusing on the gaps in this research. One central issue addressed is to identify avenues for further research, not least in Africa.

The paper makes six points. First, much of the academic research has its balance wrong, focusing too much on admittedly fascinating issues related to risk management and coping mechanisms, but not enough on its implications and the scope for interventions. Second, much of the empirical work on risk in developing countries has focused largely on short-run implications, and has ignored the long-run. Thirdly, and related, the policy interest in this academic research has been driven largely by a narrow social protection agenda, reducing it to a ‘soft’, peripheral and almost irrelevant topic, far removed from concerns with growth and fighting poverty. Fourth, research has often failed to distinguish the implications of risk and shocks, failing to distinguish fate and fear, conflating the consequences of serious negative events (‘shocks’) with the implications for economic behaviour related to living in a highly insecure environment (‘risk’). Fifth, much of the microeconomic research on risk has limited itself to work on risks that are ‘easy’ to analyze, such as weather shocks. These risks are still dominating the life of many of the poor, dependent on agricultural production, but these risks are not necessarily central to the growth and poverty tragedy in Africa: which is driven by the lack of African and foreign investment in Africa. In particular, the risks related to poorly functioning markets and economic and political institutions have been underresearched by microeconomists, often leaving the initiative to macroeconomic research. Six, the research on risk and its implications has to embrace more seriously the experimental and behavioural literature. The research frameworks used in most work on risk and its implications are based on shaky behavioural foundations, building on the expected utility framework – but testing these foundations in the environments were risk really matters, such as the poorest settings of Africa, has largely been lacking, limiting our understanding of whether they matter.

All these points will be gradually developed in this paper. However, the next section will first revisit a simple conceptual framework structuring our economic understanding of risk and its consequences. It will also involve a discussion of the strategies used to cope with risk and shocks. Section 3 looks at the implications of shocks, in terms of its short run effects on poverty. Section 4 focuses on the long-term effects on poverty and growth. Section 5 focuses on missing links in the analysis of risk and its consequences and section 6 introduces some of the evidence from behavioural economics into the analysis. Section 7 concludes.

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