Poverty reduction strategies have become increasingly concerned with tackling vulnerability among the poor. What methods have helped the poor minimise their exposure to the risks that prevent them climbing out of poverty? This World Bank paper examines how the poor cope with risks in South Asia, and suggests ways to alleviate their vulnerability.
In South Asia, most of the working poor are concentrated in the informal sector. This reduces their access to social protection through formal mechanisms, and leaves them with little cushion against temporary setbacks. Being vulnerable means that the poor must shape their behaviour to minimise exposure to risks, sometimes at the cost of economic efficiency and their long-term interests. Thus poverty and vulnerability are mutually reinforcing. In order to break this vicious circle, the poor must have access to the institutional means to insure against risk. But as developing this capacity will take time, short-term strategies should focus on existing programmes such as public works, as well as mechanisms offered by informal, community-based organisations.
Developing effective strategies to reduce vulnerability requires country-by-country analysis of vulnerable groups and the risks they face. The impact of existing anti-poverty programmes should also be evaluated, together with the potential of innovative approaches such as microfinance. With regard to South Asia, the paper finds that:
- Widows and working children are among the most vulnerable sectors of the population.
- Public works programmes are often used to boost the income of the poor through short-term employment. They can be designed to address vulnerability in the wake of shocks, but are not always well targeted.
- Social assistance schemes consisting of transfers in cash or in kind are available for those who cannot work. However, they have not always proved efficient, and do little to mitigate risk.
- A large proportion of the loans provided by microfinance institutions are used for smoothing consumption rather than productive investment. This limits the poverty-reduction impact of microfinance.
- Formal insurance options are either absent for the poor or ineffective.
- Formal pension schemes are estimated to cover less than ten per cent of the workforce in South Asia, and do little to reduce the vulnerability of the elderly poor.
As poverty and vulnerability are inter-dependent, a comprehensive social protection strategy must address both. It should outline measures that can be taken in the short-term, as well as plans for longer-term projects. While the optimal policy mix will vary from country to country, general recommendations are that:
- Governments should implement institutional reforms that promote the growth of formal risk-management mechanisms for the poor, including insurance and pensions.
- Informal initiatives like microfinance institutions should receive support to develop insurance and savings schemes.
- Governments should co-operate in launching index-based area insurance schemes to address community-wide risks.
- Proper disaster-management strategies must be put in place to help the poor cope with shocks, including immediate relief efforts and longer-term assistance to rebuild homes and livelihoods.
- The World Bank should integrate social protection objectives into its analytical and operational work. For example, it could provide assistance to community-based savings and insurance schemes.
- Country Poverty Reduction Strategy Papers should address vulnerability and social protection more extensively.
