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Managing Risk to Save the Poor

The G-8 finance ministers have agreed to cancel $40 billion of debt owed by eighteen of the world’s poorest countries. This is a triumph for common sense. But, at only $238 per person in the eighteen countries, debt relief alone is hardly enough to help the poor.

Fortunately, other efforts will complement the developed countries’ increased generosity. The most notable is a significant movement towards providing finely focused risk-management services to the poor, which could ultimately prove to be worth far more than $40 billion.

We tend to think that new risk-management products, such as novel types of insurance or financial derivatives, will primarily interest the rich, or at least relatively wealthy people. In fact, new risk-management products are being developed for some of the poorest people in Africa, Asia, and Latin America.

It is important to recognize that the world’s poorest people are not the same people from year to year. Good fortune and bad fortune alternate randomly, and the poorest people are particularly vulnerable when misfortune – like a hurricane in a fishing village – strikes. So risk management, by smoothing out bumps in income, can be extremely important in alleviating the effects of poverty.