Risk management in tough times

Published: Wednesday | December 4, 2013 Comments 0
Dr André Haughton
Dr André Haughton

Why risk and opportunity?

AS THE world economy recovers from turbulence and more people anticipate increased standards of living and better social conditions for 2014, the World Bank's World Develop-ment Report (WDR) 2014 explains why it is important to turn risk into opportunity.

It examines why risk management is important for development, how risk management should be conducted by various economic agents, including the household, the community, financial institutions, the business community, government, as well as international institutions, and discusses possible obstacles to risk management that these economic agents might face.

The WDR 2014 explains that risk management will allow people to take advantage of opportunities for improvement, as well as build their resilience to soften the blow of adverse events such as future job losses, natural disasters, or other unforeseen negative events.

Can risk lead to opportunity?

The WDR 2014 explains that the adverse effects of systematic risks arising from financial crises or natural disasters, for example, the recent upsurge in tsunamis, typhoons, earthquakes, hurricanes and other natural disasters around the world, expose the vulnerability of people, especially in developing countries.

This along with idiosyncratic risks associated with job losses, or not finding jobs due to inadequate skills, or falling victims to crime, or the potential of a family break-up due to sickness or forced migration highlight the importance of transforming these risks into opportunities.

Regardless of whether or not risk is systematic or idiosyncratic, developing countries must pursue opportunities associated with risks and prepare for them accordingly. Most times, good opportunities are missed due to insufficient risk management and preparation.

What are the key concepts of risk?

There are many risks, and we are normally burdened by the obstacles to manage them. To overcome risk, people must first confront them. To overcome and reduce the burdens associated with risks, people must share risks with others.

By sharing risks with the family, the community, other enterprises, the banks, the government and the rest of the world, we reduce the volume of the burden on ourselves, thereby making risks easier to manage. By increasing knowledge, protection via insurance, we can cope better with risk through collective actions and the right institutions.

What does effective risk management entail?

Faced with uncertainty about the future, people, businesses and the government must make choices. Proper analysis of these choices is the key to successful decision making. The analysis of choices under uncertainty and scarce resources has to be at the forefront of economic and public policies. In this case, collective rational choices are important, as decisions must benefit everyone.

What is the analytical framework for risk management?

The WDR 2014 proposes that the framework is derived from insights garnered from the economics of decision under uncertainty. The following elements are to be considered:

1. Jamaica must assess and understand the goals of risk management and the motivation for it. Learn how to develop resilience in the face of adversity and how to increase prosperity through the pursuit of opportunities.

2. People should understand the environment upon which opportunity takes place, i.e., understand the risk chain.

3. We all must consider what is entailed in risk management, understand, i.e., preparing for and coping with both positive and adverse events.

4. Assess the major issues that individuals and society face in managing risks; these include resource constraints, incentive constraints, and information constraints.

5. We must introduce the potential role of collective group action at different levels of society to overcome the obstacles that people might face when attempting to manage risk.

How is risk management in Jamaica?

Jamaica is not exempt from risk management. We, too, are faced with the possibility of increased risk if any unforeseen events should occur. The hurricane season is over, but we still are faced with other idiosyncratic risks, such a family break-up due to migration, and the negative circumstances arising from crime and violence.

As mentioned before, the household, community, the enterprise sector, financial institutions, the government and the international community should come together to make the country more resilient and prepare to combat all risks that the country might face for 2014.

Dr André Haughton is a lecturer in the Department of Economics on the Mona campus of the University of the West Indies. Follow him on twitter @DrAndreHaughton; or email editorial@gleanerjm.com.

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