Safety Nets for the Poor : A Missing International Dimension?

Poor persons in poor countries are greatly exposed to the risk of adverse shocks, many of international origin, which can create long-lasting damage to individual well-being. There is a strong moral and prudential case for taking measures which reduce the extent to which such shocks arise and diminish their adverse effects. We develop a formal framework for representing the choice of an optimal set of policies to diminish both the occurrence of such shocks and their adverse effects. We survey existing mechanisms to insure poor countries against aggregate shocks from exogenous sources. We argue that these existing mechanisms do not sufficiently protect the poor, because of their focus on insuring countries only against particular types of risk and their focus only on aggregate income. We recommend the establishment of an international level mechanism (such as a global reinsurance scheme) to insure countries against the risk of increased demands for social protection from the poor and to subsidize the provision of such protection to the extent feasible and appropriate. A mechanism of this type would foster the widespread introduction in countries of standing national social safety nets (such as employment guarantee schemes) capable of rapidly securing the living standards of the poor against the impact of adverse shocks, whether of national or international origin