The Dynamics of Informal Responses to Covariate Shocks

Abstract

Microeconomic theory suggests differential resilience of formal and informal instruments to natural and man-made shocks. Informal risk instruments effective in managing idiosyncratic risks are predicted to collapse in the wake of covariate shocks. This position leads to two hypotheses:

The impact of effective management of natural disasters For Africa’s development

“…For instance endogenous norms of solidarity and reciprocity can be transformed into willful sharing of relief aid. This action can be strategically important to rapidly mitigate the primary impacts of a natural disaster such as a flood or drought (Balgah & Buchenrieder, 2010). In this line, this article suggests a multi-stakeholder approach to disaster management in Africa -one in which both formal and informal instruments are utilised in the process, based on availability and existence strengths and weaknesses of the different (formal and informal instruments) in the particular disaster context.…”

“…An over-dependence on state and market institutions does not seem to be appropriate for Africa, where state and market failures are rampant (Holzmann & Jorgensen, 2000;Makoba 2011). It is probably true that when the formal mechanisms are missing or deficient as is the case in many African countries, the informal mechanisms may occupy a much more important place in the proper management of disasters (Balgah & Buchenrieder, 2010). A proper mix of state, market and informal mechanisms seems better for managing disasters on the continent, as the strengths and weaknesses of each mechanism can be adequately taken into consideration in the management process.…”

“…While this is true to some extent, it represents only one side of the story. It has been argued elsewhere (for instance Balgah & Buchenrieder, 2010) that the dynamism of informal response mechanisms does not seem to have received the attention it deserves, and has not been fully explored in the economic and social literature on natural disasters. This situation might be responsible for the underestimation of the role of informal instruments in managing large shocks.…”

“…Failing hierarchical and market institutions often defect effective management of natural shocks to evade disasters, and disaster management through public transfers is beyond the fiscal capacity of most governments (Holzmann & Jorgensen, 2000). Most governments are generally deficient in scientific and socioeconomic data for effective risk prevention, reduction, mitigation or coping and the dynamic responses of informal instruments to hazards active in most African countries have not been fully integrated into disaster management (Balgah & Buchenrieder, 2010). Information asymmetry thus contributes to posing natural hazards as a serious threat to development especially in developing countries (Benson & Clay, 2004).…”

Can Strategies to Cope with Hazard Shocks be Explained by At-Risk Households’ Socioeconomic Asset Profile? Evidence from Tropical Cyclone-Prone Coastal Bangladesh

“…In coastal areas people at risk greatly depend on climate sensitive sectors, such as fishery, forestry, and tourism, for their livelihoods and very often need to adopt a number of strategies to cope with shocks inflicted by different climate hazards (Parvin et al 2009). A handful of empirical studies have addressed three types of strategies: informal coping strategies, such as borrowing from peer networks, adjustment in household consumption, asset deposition or adjustment, resource extraction, labor supply adjustment, and temporary migration Routray 2010, 2011;Kartiki 2011;Mallick and Vogt 2012;Mavhura et al 2013;Vincent et al 2013;Toufique and Islam 2014); formal strategies, such as market-oriented instruments (for example, private micro-insurance, microfinance, group loans, safety nets) (Balgah and Buchenrieder 2010;Akter et al 2011;Parvin and Shaw 2013;Zheng and Byg 2014); and farm household strategies that focus on agricultural issues in different countries Eriksen et al 2005;Below et al 2012). All these studies have largely focused on specific dimensions of coping strategies (that is, formal or informal; agricultural or nonagricultural) and lacked detailed accounts of diverse strategies and their connection to household asset profiles.…”