Between the State And the Market, Can Informal Insurance Patch the Safety Net?

The author examines how public policy can help reduce vulnerability by encouraging private, flexible coping mechanisms while discouraging those that are fragile or that hinder economic and social mobility.

States that most households in low-income countries deal with economic hardships through informal insurance arrangements between individuals and communities rather than through publicly managed programmes or market-provided insurance schemes. Households:

• Draw on savings;
• Sell physical assets;
• Rely on reciprocal gift exchanges or;
• diversify into alternative income-generating activities.

These mechanisms can be highly effective in the right circumstances, but most recent studies show that informal insurance arrangements are often weak. Poor households, in particular, have substantial difficulties coping with even local, idiosyncratic risks. Concludes that promising policies include:

• Creating self-regulating workfare programmes;
• Providing a supportive setting for institutions working to improve access to credit, crop and health insurance and;
• Safe and convenient saving opportunities.