When the invisible hand fails to catch the poor: the relationship between risk and poverty.

• Author: Gunitskiy, Vsevolod
• Position: Insurance Against Poverty - Book review

Insurance Against Poverty Stefan Dercon, ed. (Oxford: Oxford University Press, 2005), 484 pages.

In September 1993, Larry Summers, then under secretary of the Treasury in the Clinton administration, met with the Russian prime minister to walk him through the logic of IMF conditionality. When the prime minister protested that IMF measures impinged on his country's sovereignty, Summers responded that the rules governing lending were simply immutable principles of economics, operating in a way similar to the laws of physics. (1) This academic tendency to isolate the economic realm from its larger social implications, with unsurprisingly disappointing results, was later criticized by Joseph Stiglitz in his own account of the IMF, Globalization and Its Discontents. (2) Stiglitz's critique, however, is but part of a long tradition of castigating neoclassical economics for being unforgivably disembedded from social realities. Insurance Against Poverty, a study prepared by the United Nations University's World Institute for Development Economics Research from a collection of eighteen papers first presented at a 9.001 UN conference, tackles this criticism head on by putting the social implications of economic reforms at the center of its analysis. In doing this, as the editor proclaims at the outset, the authors do not seek to reject neoclassical economics, but to explore and extend its applications under conditions of risk, uncertainty and market failure.

The book examines the relationship between risk and poverty in developing countries, seeking effective policies to mitigate the risks that continue to contribute to widespread poverty. The poor in developing countries face a legion of risks, both natural and man-made-drought, flooding, frost, pests, policy shocks, livestock diseases, fire, war, crime and banditry, to name a few. A sad irony of this state of affairs is that people most in need of insurance markets to protect themselves and their livelihoods are those least likely to have access to such markets. The contributors to this volume examine the ways in which various risks affect the welfare of the poor and the strategies they use to cope with the resulting challenges.

Insurance markets for disasters face a number of additional challenges. In general, insurers are willing to distribute risks among a large group of people because their collective behavior can be predicted. But the goal of spreading risk does not work well with disasters...