World Bank, the (WB)
By Norman Loayza
2018: It has been 100 years since the Spanish flu pandemic and 10 years since the global financial crisis. The Spanish flu killed more than 50 million people, more than the two World Wars combined. It was so lethal because it occurred when people were at their weakest, suffering from the Great War: malnourished, living in conditions of poor hygiene, on the move as combatants or refugees, and lacking proper medical facilities. A decade ago, the global financial crisis struck, triggering not only a prolonged recession in the United States and other advanced countries but also a deepening distrust of globalization as a force for progress. And this had consequences well beyond the realm of economics. Lacking unity of purpose and grappling with their own domestic troubles, the nations of the West were unable to deal with the Arab uprisings and could not articulate a response to the Syrian crisis. Brexit, the rise of nationalism in Europe, the neo-isolationist policies in the United States, and the recent wave of trade protectionism have deep roots, but their triggers can be traced, in one way or another, to the global financial crisis of 2008.
Health and financial crises are, alas, only two of many perils facing the world. The incidence of natural disasters has been consistently rising across all regions in the last 50 years, with strong indications that the intensity and frequency of tropical storms and floods are related to global warming. Is this only a preamble of the future consequences of climate change? Some countries in Latin America and Sub-Saharan Africa are experiencing a new wave of violent crime, with record highs in Mexico and the Democratic Republic of Congo. And the civil wars in Afghanistan, Syria, and the Republic of Yemen are producing humanitarian crises of almost inconceivable proportions. Will violence, expressed as civil war, terrorism, or crime, intensify and spread to other communities?
It’s not alarmist to consider that a crisis, in any way, shape, or form, is lurking around the corner. How can we—as families, communities, and countries—become resilient to crises?
2018: It has been five years since the launch of the World Development Report (WDR) on Risk and Opportunity. It is an opportune moment to revisit some of its messages. The WDR argues that managing risks appropriately can be a powerful instrument for development. Taking some risks—such as the risks entailed in innovation, migration, starting a business, or searching for a job—is necessary for growth and development. Other risks—such as those related to financial crisis, war and conflict, climate change, and disease and pandemics—are best avoided. When they materialize, they cause social and economic havoc, especially harming fragile countries, weak communities, and vulnerable people.
While it is nearly impossible to eliminate some of these adverse events, it is possible to become stronger to resist them. The main objectives of crises management are, first, preventing crises from occurring or diminishing their frequency and intensity, and, second, mitigating their negative effects. To achieve these objectives, the general lesson from the Risk and Opportunity WDR is that the preparations for crisis management should be made during normal times and not when a crisis has already struck. Consider the following five recommendations.
First, the best way to manage crises is to prevent them altogether. While some risks depend on negative shocks that are hard to predict or prevent (such as earthquakes and international financial crises), the exposure and vulnerability to them can be improved by a risk prevention system. This includes information and knowledge of shocks and vulnerabilities, protection measures (such as vaccines for diseases, shelters for tornados, and macroprudential policies for banking crises), and insurance mechanisms (such as savings, health and property insurance, and contingency funds). Different risks require specific knowledge, protection, and insurance. Moreover, different risks require the action of different actors of society. Idiosyncratic risks are best managed at the family and community levels, while systemic risks are best handled at the national and international levels. The state can play a supportive role, creating the right incentives and mechanisms for preventing idiosyncratic risks and directly strengthening systemic risk management.
Second, if risks materialize, be prepared to confront them with a robust and adaptable crisis management plan. Confronting an emergency should not imply doing things in a rush. Preparation in normal times should include what to do when a crisis occurs. This requires considering a variety of scenarios, giving more emphasis to those that are more likely but not ignoring those that, though less probable, may have large negative effects. Scenario analysis is required to formulate a plan that is robust to a large range of possibilities. This applies to natural disasters, banking and financial crises, rapidly spreading contagious diseases, and escalation of terrorism. All follow similar patterns of crisis management, but each requires its own set of expertise and specific measures. When a crisis occurs, deploying the plan would guide the population, helping them take appropriate actions, calming them down, and creating an environment conducive to recovery. At the same time, crisis management plans should allow for flexibility and adaptation. No crisis is exactly the same as the previous one. All too often, they take unanticipated turns. Therefore, the capacity to adjust the emergency response should be embedded in crisis management plans and protocols.
Third, since no crisis mitigation measure is perfect, build complementary policies and redundancies that can cover one another’s vulnerabilities. There are many sides and intensities to a crisis, and its complexity and severity may test the best protection measures. A strong fire in a building might break through firewalls across units and floors, requiring several ways to exit that are especially available and protected. An international financial crisis might need a combination of measures in monetary policy, fiscal policy, and prudential regulations. Dealing with terrorist attacks might involve a mix of counterintelligence, police action, social integration of disenfranchised groups, and development policies, each applied at different times and for different time spans. A combination of measures is needed for two purposes. The first is to complement other measures so that as many as possible angles to a crisis are addressed. The second is to create redundancies so that if one measure fails, the others can mitigate the negative effects of a crisis. These redundancies may seem unnecessary before the crisis strikes, but in crisis situations they can be the difference between small and large losses. They should be regarded as insurance mechanisms, whose value as contingent options is real.
Fourth, formulate a comprehensive crisis management plan that accounts for the links across different risks. Crises often spread like a toppled stack of dominos. An earthquake might be followed by a tsunami, a tsunami might be followed by electrical fires and explosions, and all these could intensify the destruction of lives and infrastructure, forced migration, and disease. An international financial crisis might be followed by a drop in commodity prices, which might be followed by a contraction in government expenditures; and all these might cause an economic recession, unemployment, and a reduction in social services, at just the time when they are most needed. A crisis management plan should consider the links across risks and address them by formulating a comprehensive strategy. Although covering all losses is nearly impossible, an evaluation of most possible risks and their interconnection can lead to assigning resources and articulating reactions in an integrated way, avoiding silos in crisis response.
Fifth, avoid the next crisis by being aware of the unintended consequences and potentially wrong incentives that emergency measures might have. Although it is difficult to consider the long run when in the midst of a crisis, every attempt should be made to avoid sowing the seeds of the next crisis by taking myopic emergency measures. A banking bailout that does not make people and institutions accountable may be the most direct way out of a financial crisis, but it creates incentives for excessive risk taking in the future and, therefore, the vulnerabilities that will inevitably lead to the next crisis. A reconstruction program in the aftermath of a natural disaster that compensates all who suffered losses and rebuilds infrastructure in exposed places may be politically expedient, but it discourages people from obtaining insurance and from building in safe places. When emergency measures are part of a well-structured crisis management plan, they look beyond the short run and establish the incentives for self-protection, specific responsibility, and social accountability.
Nations, communities, and people often fail to have a crisis management plan, with dire consequences. Lack of information, lack of foresight, lack of coordination, and lack of political will are often the culprits. How can these failures be overcome? The Risk and Opportunity WDR insisted that both a change of perspective and institutional reforms are needed. For countries, the WDR advocated the creation of a national risk board, which could actively monitor the most relevant risks and propose a risk management strategy. This would necessarily include a crisis management plan. A national risk board could follow the model implemented in Singapore (where the board is part of government and has both strategic and implementation functions) or in the United Kingdom and the Netherlands (where the board is an independent agency with act-or-respond powers with respect to government). Likewise, communities, enterprises, and even families can monitor risks and devise their own crisis management strategies.
When Typhoon Mangkhut slammed into the Philippines in September 2018, CNN reported a resident's first impressions after returning to her fishing village: “It was so devastating to see that our house was destroyed. We were all crying. Seeing this damage for the first time, it was like losing our will to live.” Similar cries echo after every natural disaster, after every act of conflict, after every health epidemic, and after every deep recession. What families, communities, and countries build, over years of hard work, can be destroyed in weeks, days, hours, or even minutes of a poorly managed crisis. And this applies to the global community as well: At the recently concluded World Bank – IMF Annual Meetings, the international gathering underscored the importance of solidarity inherent in the multilateral system, noting that challenges can easily turn into crises in the face of discord.
The most important threats to development are the lack of growth and the incidence of crises. Prioritizing risk and crisis management in the development agenda has the potential to successfully address both threats. The winter is (always) coming, better be prepared.
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