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Instruments  to  protect  farmers  from  exposure  to  climatic  disasters  Alain  de  Janvry,  University  of  California  at  Berkeley  and  FERDI  

 Farmer  inspecting  his  flooded  rice  field  in  Odisha,  India  

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Climate  change  adaptation:  How  to  design  and  implement  disaster  risk  financing  and  insurance?    Importance  of  reducing  exposure  to  weather  risks  for  the  world  poor  • Exposure  to  uninsured  climatic  disasters  has  very  high  costs  in  terms  of:  o Poverty  and  welfare:  ex-­‐post  losses  and  irreversibilities  o Reduced  investment  and  growth:  ex-­‐ante  disincentives  and  costly  self-­‐insurance  

• Climate  change  is  increasing  exposure  to  disasters,  with  lesser-­‐known  probabilistic  regularities,  and  will  likely  get  exponentially  worse  

• Weather  risks  cannot  be  reduced  through  local  risk  pooling  arrangements  due  to  covariate  nature:  need  broader  instruments  

• Wide  array  of  risk-­‐reducing  instruments  exist,  but  incompletely  designed  and  implemented  

• Offer  a  major  opportunity  for  investing  in  adaptation  to  private  sector,  governments,  and  donors  

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   How  to  protect  farmers  from  exposure  to  risk?  Four  instruments:  

(1)  Index-­‐based  weather  insurance  (2)  Flexible  financial  products:  pre-­‐approved  indexed  credit  lines  (3)  Risk-­‐reducing  technology:  resilient  crops  (4)  Insured  social  safety  nets:  indexed  and  targeted  transfers  

   

INSTRUMENTSTime

Low(frequencyHigh(risk Insured(social(safety(nets((4) Insurance(payouts

Index?based(insurance((1) Insurance(payouts

) Pre?approved(lines(of(credit((2) Post?disaster(liquidityRecurrent Invest(in(resilience:(technology((3) Avoided(losses(due(to(resilienceLow(risk

OUTCOMES Behavioral(responses: Disbursements:Less(self?insurance,(more(investment Relief,(recovery,(and(reconstruction

Risk)management disasters Shock:coping

Climate)changeEx:ante)instruments Clilmatic Ex:post)instruments

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1.  Progress  with  index-­‐based  weather  insurance  • What  it  is:  payouts  triggered  by  indicator  (e.g.,  rainfall  or  area  yield)  crossing  a  pre-­‐established  observable  threshold  for  a  pre-­‐determined  area.    

• Potential  for  millions  of  small  farmers/entrepreneurs  shut  out  of  the  insurance  market  

• Strong  presumed  advantages:  no  mis-­‐behavior,  low  transaction  costs,  no  delays,  cheap  

• Lessons  learned:  o It  works  where  applied:  better  coping  (less  reduction  of  consumption,  sale  of  assets),  more  investment  (fertilizer  Ghana),  more  high-­‐value  activities  (Pakistan,  India,  China)  

o But  low  uptake  at  market  price  and  need  for  high  subsidies  

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 Demand  for  index-­‐based  insurance  

(Based  on  Basis-­‐USAID  funded  research)  Take-­‐up  falls  sharply  as  price  rises;  40-­‐60%  subsidy  needed  for  40%  take-­‐up  

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How  to  solve  the  low  take-­‐up  problem?  Solutions  • Supply-­‐side  

o Improve  the  design:  reduce  basis  risk.  Better  weather  measurements,  area  yield  triggers,  satellite  observations  

o Lower  the  cost:  cheaper  re-­‐insurance  with  incomplete  data  • Demand-­‐side  

o Give  training  in  financial  literacy,  role  of  social  networks  (China  experience)  for  information  sharing  

o Use  smart  subsidies:  effective  but  expensive.  Define  optimum  subsidies  for  learning  based  on  past  subsidies  and  past  payouts  (China  experience)  

o Increase  trust  in  provider:  witness  payouts  to  oneself  and  to  others.  Use  initial  subsidies  to  broaden  social  learning  

o Insure  at  group/institutional  level:  Distribute  payouts  internally  to  members  based  on  observed  damage  

o Use  with  other  financial  products  as  an  element  of  a  comprehensive  risk  layering  strategy  (DRFI):  credit,  technology,  social  safety  nets  

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Conclude  • High  un-­‐captured  opportunity  for  investment  in  adaptation:  can  make  it  work  

• Role  of  foreign  aid  in  improving  design,  learning,  re-­‐insurance,  and  subsidies  for  40%  target  take-­‐up.  

   

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2.  Progress  with  flexible  financial  products  for  disaster  response:  index-­‐based,  pre-­‐approved  credit  lines  • BRAC  (NGO  Bangladesh):  microfinance  credit  declines  after  shocks  (floods),  savings  are  depleted,  and  missed  payments  and  defaults  rise  

• Microfinance  typically  very  rigid  and  concerned  with  repayment  due  to  lack  of  collateral  

• Innovation:  Introduce  pre-­‐approved  additional  credit  line  for  good  clients  (high  credit  score)  triggered  by  climatic  events  (like  index  insurance)  to  offer  post-­‐disaster  option  to  borrow  

• Observe  strong  uptake  of  new  financial  product  • Can  have  both  ex-­‐post  coping  value  (welfare)  and  ex-­‐ante  risk  management  (behavior)  effect  

Conclusion  • Huge  opportunity  to  introduce  new  microfinance  products  for  adaptation  to  climate  change  

• Role  of  foreign  aid  in  design  and  experimentation  • Important  component  of  private  sector  contribution  to  adaptation  

   

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3.  Progress  with  risk-­‐reducing  agricultural  technology  • Rice  crops  increasingly  exposed  to  weather  shocks:  floods,  droughts,  high  temperatures  

• SwarnaSub1,  a  new  rice  variety  developed  for  South  Asia  by  IRRI  and  national  partners,  with  capacity  to  survive  up  to  14  days  of  submergence,  compared  to  4-­‐5  days  for  normal  rice.  

Yields by days of flooding

(Based on CEGA/ATAI/Gates Foundation funded research)

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 Yield  advantage  of  SwarnaSub1  after  flooding,  Odisha,  India  

Double  gain:  Ex-­‐post:  helps  reduce  losses  in  flood  years  

Ex-­‐ante:  Induces  higher  yields  in  normal  years  through  risk  reduction  

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Story  told:                            Conclusion:  Shows  that  risk  reduction  can  have  high  payoffs  not  only  for  relief  but  also  for  growth  Role  for  foreign  aid:  large  returns  from  investing  in  international  public  goods  such  as  risk  reducing  agricultural  technology  

1531kg/ha

55%

Riskmanagement(behavior)

682kg/ha

Avoided 45%yieldloss 283kg/ha Shock

copingYieldCgain YieldCgain YieldCgain (agronomy)

Flood Expectedyear gain(1CinC4) (3CinC4) (overC4Cyears)

NormalCyears

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4.  Index-­‐based  insured  and  targeted  social  safety  nets    Publicly  provided  social  safety  nets  targeted  at  poor  Provider  can  use  index-­‐based  insurance  to  reduce  potentially  huge  

weather-­‐based  fiscal  risks    

Case  of  Cadena  in  Mexico  • State  governments  need  put  into  place  social  safety  nets  to  respond  to  catastrophic  weather  events,  such  as  drought  for  smallholder  farmers  

• But  social  safety  nets  are  highly  destabilizing  of  public  finances,  periodically  starving  planned  expenditures  in  health,  education,  infrastructure  

• Response:  introduce  weather  insurance  indexed  on  indicators  of  extreme  weather  events  

• Offer  free  insurance  to  targeted  populations:  Smallholder  farmers  with  less  than  20ha  of  rainfed  land  

   

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• Find  that  insurance  payouts  are  effective  in  helping  beneficiaries  cope  with  shocks  (ex-­‐post  response)  o Plant  more  insured  crops  relative  to  non-­‐beneficiaries  the  year  after  a  payout  

o Plant  more  of  all  crops  o Have  higher  post-­‐shock  income  and  consumption  expenditures  than  non-­‐beneficiaries  

o Reduce  dependence  on  remittances  (private  transfers  crowded  out  by  public)  

• Also  effective  in  inducing  higher  yields  through  risk  management  (ex-­‐ante  behavior)  

• Help  stabilize  government  relief  expenditures      Conclusion:  Index-­‐based  insured  social  safety  nets  can  work  both  ex-­‐post  (shelter  future  crops),  and  ex-­‐ante  (behavioral  responses)  Offer  good  opportunities  to  invest  in  adaptation,  though  expensive  if  high  insurance  loading      

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5.  Conclusion:  A  major  policy  and  research  agenda,  with  a  huge  potential  for  poverty  and  growth  in  adaptation  to  climate  change  1. Current  solutions  still  very  incomplete,  yet  instruments  exist.  2. Index-­‐based  insurance  not  commercially  viable  at  farmer  level  without  subsidies,  but  can  be  improved  and  more  demand  induced  

3. Flexible  financial  products  (pre-­‐approved  indexed  credit  lines)  generally  not  available  and  un-­‐tested,  but  can  be  designed  and  implemented  

4. Resilient  agricultural  technology  not  available  for  many  places  and  partially  adopted,  but  can  offer  large  gains  in  both  shock  coping  and  risk  management  

5. Insured  social  safety  nets  barely  explored,  but  can  be  effective  Recommendations  1. Countries  need  develop  comprehensive  ex-­‐ante  DRFI  strategies  that  combine  these  various  instruments    

2. Requires  more  design,  experimentation,  evaluation,  and  implementation  of  these  instruments  

End