PSD Blog - The World Bank Group

Consumer protection meets financial literacy

Yesterday saw an interesting day-long event that brought together the paired topics of financial literacy and consumer protection. (Many of the day's presentations are available here.) Although I only managed to attend the first couple of sessions, I caught a lot of interesting material.

After welcoming remarks, Martin Gruenberg, the Vice Chairman of the US Federal Deposit Insurance Corporation, started off with the keynote address. Gruenberg gave a play-by-play of the subprime meltdown in the US; I think it was good to start off on a note of humility. If the US has managed to muck it up this badly, then it might be good to approach the issue of consumer protection with a bit of caution.

Private health insurance in developing countries

A new paper from the National Bureau of Economic Research suggests that there may be a viable market for voluntary private health insurance in developing countries. The authors draw primarily on data from the 2002 World Health Survey, limiting their analysis to 14 countries with "per capita incomes that are low compared to developed countries but above subsistence levels, and generally high values for real economic growth." The question they want to answer is whether risk aversion would be high enough and administrative expenses low enough to permit the introduction of voluntary unsubsidized private health insurance.

The business of small deposit accounts

In a dispute reminiscent of the Compartamos controversy, the Sahara India Financial Corporation has been ordered by the Indian Central Bank to stop taking deposits. Sahara provides a range of financial services, most prominent among them deposit accounts for the poor. If savers get behind on their deposits, Sahara penalizes them by reducing the interest they receive. According to a report in the Wall Street Journal (subscription required), more than 70 percent of Sahara ’s customers are currently being penalized.

Risky Business

For a handful of countries, the rise in oil prices has proven a boon to economic development. Russia is perhaps the most notable example. Bucking the trend in much of the rest of the world, the sale of new cars in 2007 in Russia jumped by 36 percent as a result of large increases in income, according to the latest edition of the Economist. But net oil importers are increasingly faced with a hard set of decisions about how to respond to this difficult environment. A new note in the journal Public Policy for the Private Sector provides guidance on exactly this conundrum.

Subprime lessons for emerging markets

In the July/August edition of the Atlantic, Professor Robert Shiller of Yale University discusses the Infectious Exuberance that spawned the subprime crisis in the U.S. housing market. In Shiller’s view, financial bubbles “are primarily social phenomena.” He compares a bubble to an epidemic, arguing that when the “transmission rate” of irrational exuberance exceeds the “removal rate” of that exuberance, we then have a bubble on our hands. Investors - many of them novices in the case of the U.S. housing market - become overly enthusiastic.

Going green as an strategic risk

A new report by Ernst & Yong ranks a growing "greening" concern as one of the top 10 strategic risks businesses face. The top three risks are: regulatory and compliance risk, global financial shocks, and aging consumers and workforce.

The report calls this increasing concern about the enviroment "radical greening" and states that going green is expensive at first, but it could be worthwhile if consumer tastes and the regulatory enviroment start to demand it; ok, perhaps that wasn't a jaw-dropping discovery, but the entire report still makes for a good reading.

Cooking at the bottom of the pyramid

The World Health Organization estimates that 1.6 million people die each year from toxic indoor air. The main culprit is carbon monoxide released with smoke as a byproduct of incomplete combustion, when using traditional stoves.

Given that nearly half of the world population and 80 percent of rural households cook with traditional stoves, Environfit - a Colorado-based organization - saw a commercial opportunity and created a line of clean-burning ceramic stoves. Their first target demographics are Indian women. Prices will range from $10 to $200.

The missing extinguisher

Imagine yourself shopping for a simple product such as a fire-extinguisher. Would you check, before buying it, whether it is certified? Most people I polled said "no"; if it is on the shelf, it means that it satisfies the (sophisticated) rules and regulations set for its production.

Well, this assumption has been challenged during our recent work with the Tajikistan Fire Fighting Service.

While drafting together fire safety checklists to be used during inspections of small and medium enterprises, we came across this requirement: "the fire extinguisher needs to be certified."

No problem, at first we agreed with the need to provide consumers with the highest possible safety standards. But after digging a bit more into the issue, we discovered a couple of interesting facts:

• Unfortunately no existing company in Tajikistan produces or sells "certified" extinguishers; and
• None of those on the market have the required certificate.

Experiments in malaria prevention

Does raising the price of long lasting anti-malarial insecticide-treated nets (ITNs) from $0 to a $0.75 kill the demand? At least in theory, cost sharing can help reduce wastefulness and save money without serious adverse effects of healthcare of most people.

Based on a field experiment in Kenya, a new paper explores the effects that cost sharing of the price of ITNs charged to pregnant women had on infant mortality.

Depression babies

Does the personal experience of economic and financial fluctuations shape individuals' risk choices? A recent paper, using U.S. consumer survey data suggests it does.

Take these examples: the average stock market participation rate for the generation that experienced the Great Depression as teenagers or adults is less than half that of all other age groups. The 1931-40 age group, on the other hand, that experienced the post-war boom years as young adults has a stock market participation rate almost twice the average.

Both recent and past experience counts.  Young households in the early 1980s - having experienced the dismal stock returns of the 1970s - had lower rates of stock market participation than older households for whom the negative experience of the 1970s was moderated by the high-return experience of the 1950s and 1960s.

Microinsurance

Less than 2 percent of Indonesians are insured. 120 million, nearly half of the population, survive on less than $2 per day.

A short, promotional video shows how some poor Indonesians are warming up to the idea of insurance priced at $0.40.

Youth and prosperity in the Middle East

At the time when European societies are rapidly aging, 30 percent of the population in the Middle East is between ages 15 and 29 – the largest proportion of youth in the region's history.

On January 7, 2008 at the Brookings Institution, experts will discuss whether this 100 million of young men and women are a demographic gift or a potential for social and economic problems.

A public/private partnership to the moon

The technologies are available, the savings obvious, yet consumers are slow in adopting energy efficient products. Speaking at the Bali Global Business day on the margins of the UN Climate Change conference, a Philips official wondered why two thirds of the world still uses old lighting technologies when switching to existing modern technology would represent a 40% saving in total lighting energy consumption.

The private sector is asking for a public/private partnership where governments implement stronger energy efficiency standards, including labeling, adopt greener public procurement requirements, and grant financial incentives.

In developing countries, investors' appetite for clean technology investment is also growing but private companies are facing additional obstacles: the risk perception, the lack of market research, the need to adapt technologies to the requirements of these markets. Again, a public/private partnership makes sense.

GEF and IFC launched today the Earth Fund which aims to give those businesses keen to invest in environmental technologies in developing countries that extra support they need to take the leap. The most exciting feature of the fund: a prize! The very same company that stimulated with a prize the launch of the first private rocketship in outer space, will manage the Earth Fund's prizes for innovative environmental technology.

Windstorm bonds breeze through markets

Following a successful placement of flood and earthquake cat bonds in April, a new tranche, this time covering windstorm risks in seven European countries, is launched. By transferring the risks from insurance companies to willing market investors, these bonds provide an additional instrument for risk management.

The parametric index trigger in those bonds is linked to objective measurements of wind speed at various locations rather than an estimate of losses, which helps speed up disbursement and lower costs of damage assessment.

AIDS day 2007

Two days before December 1, the World Bank observes the World Aids Day – this year Magic Johnson will give the keynote address. 

Earlier last week, in a new report the UN revised down, by 6.3 million, the number of people that the agency estimates are infected worldwide from 39.5 to 33.2 million.  This 16 percent decline has more to do an improvement of the quality of data - previously high-risk groups in India and five Sub-Saharan African countires (Angola, Kenya, Mozambique, Nigeria, and Zimbabwe) were overrepresented - than in overall health.

Cost of malaria in India

Seeking a causal link between health and development, a new paper compares literacy and primary school completion rates for those born before and after the nationwide malaria eradication program in the 1950s in India.

The authors estimate that the disease reduces income by nearly 10 percent.

World Bank at annual meetings

At the boards of governors of the World Bank and the IMF meet between October 20th and 22nd in Washington to discuss the work of both institutions, it is a good time to reflect on the evolution of the World Bank Group.

Ray Suarez, from the Public Radio International, looks at the lessons learned from the past 60 years and the bank's work today. The 50-minute program features Francois Bourguignon, the bank's chief economist, and William Easterly, its chief critic. And speaking of the direction for the future, don't miss the article describing Robert Zoellick's efforts to extend financial risk management services to poor countries.

ATM: the latest in money laundering

Smurfing is a money laundering method where individuals make multiple, under $10,000, bank deposits and withdrawals in cash hoping to avoid the detection by authorities. According to the IMF, every year between 2 to 5 percent of the world's GDP or $962 billion to $2.4 trillion is laundered.

In 1986 the U.S. Congress outlawed this practice. Also known as microstructuring, the routine is hard to distinguish from ordinary ATM transactions.

The Wall Street Journal [subscription required] reports on the latest scheme involving $2 million a month "smurfed" to Columbia. "To evade suspicion by banks, [the suspects] always made small deposits. In Colombia, getting at that money was as easy as pushing buttons on an ATM."

Credit growth in emerging Europe: a cause for stability concern?

Asked about the location of the next financial crisis, many economists and analysts point to emerging Europe, i.e. the countries east of Germany that have experienced rapid credit growth and increasing macroeconomic imbalances.

A recent paper suggests that risks are more likely to arise from macroeconomic imbalances rather than from bank fragility. But supervisors, do not relax and better be ready!

The U.S. subprime mortgage market - do we need more restrictions?

It is certainly too early to assess the extent of the mortgage crisis in the U.S., but perhaps we can turn to history to see which policies have worked to protect subprime borrowers from loan sharks.

A recent paper compares states and counties with different anti-predatory lending laws. While a more generous definition of what constitutes a sub-prime borrower seems to help, more restrictions on lending terms appear to have an opposite effect. Bottom line, the devil is in the details. Food for thought for today's policy makers.

Partial credit guarantee schemes - experiences and lessons

The answer to all SME Financing problems or risky schemes with large contingent fiscal liabilities?

The World Bank, jointly with the Journal of Financial Stability and the Rensselaer Polytechnic Institute, is organizing a conference on this topic on March 13 and 14, 2008 here in Washington, D.C. to take a closer look. Researchers are invited to submit papers by October 15.

Vaccines not immune from markets

The disinterest in vaccine development throughout the 1990s led many to call for government intervention.

But things seem to be changing. Since the beginning of 2007 alone, Merck, a major pharmaceutical maker, earned $2 billion on vaccines - a figure that prodded a long-awaited uptick in research outlays in the industry. Though research traditionally has been biased toward servicing of western maladies, companies are beginning to recognize the profit potential at the bottom of the pyramid. "The size of the market is incredible, both in America and around the world" says Adel Mahmoud, a former president of Merck's vaccines unit.

While individual spending on health care is low – only $183 a year for a typical rural household in Uganda, the measured BOP health market in 35 countries in Africa, Asia, Eastern Europe, Latin American and the Caribbean represents 2.1 billion people who annually spend $87.7 billion.

Though it may be too early to talk about research fever, it is starting to look like a rush.

More Wall Street-like World Bank

From moving meetings with top managers to 8:30am, expanding the trading floor – which manages $65 billion portfolio - to providing risk-reducing derivative products, such as swaps, President Zoellick wants the bank to adopt more private sector practices.

Does malaria cause poverty?

A new paper links low-income levels with incidence of malaria – an illness that claims over one million lives annually, 90 percent of which occur in sub-Saharan Africa.

Though not in itself revolutionary, the paper quantifies why – the moral imperative aside – the outlays on control and prevention of malaria ought to be an obvious economic choice.  Every year the disease accounts for an estimated $12 billion in lost GDP.

Extra: Kenya cuts by nearly half the death rate among children - read the WHO's first global guidance on mosquito nets. Test your knowledge: take a five-question malaria quiz.

Google Earth for risk management

Allianz, a global insurance company, will use Google Earth to more effectively manage risk. This is just one of many examples where mixing-and-mashing of available data creates new useful information.

By looking at the broad picture (literally), Allianz and other insurers can recognize overexposure to risk and through reinsurance, for example, avoid excessive losses in a case of a catastrophe.

Causes and consequences of migration

Currently, 180 million people, or three percent of the world population, live outside the country of their birth.

A new World Bank publication presents the most extensive international migration database to date, including new data on South-South migration and another crucial development issue - return migration.

Does migration spur investment in origin communities? What are the effects on the host country? A sample of the book is here.

Conservation gets a second life

If, like most of us, you didn't have a chance to see a panda in the wild, you might want to try this: WWF's Conservation Island - a virtual presence in Second Life. It doesn't quite beat the real thing, but it's fun to walk around the island surrounded by pandas and an (seemingly oversized?) orangutan.

WWF hopes that "Second Life residents will become a community that helps [them] build and develop the island and at the same time learn about conservation in a fun, engaging and interactive way." It's yet another example of the development world adopting web 2.0 technologies.

Perhaps not as engaging, though very useful, is the recently launched World Water tool from the WBCSD. Based on Google Earth, it allows companies to mash water use in their operations and supply chains with datasets of water-stressed areas to estimate their "water risk." It's a useful reminder that water scarcity is an important risk factor for private sector investments.

DDT scores a new victory as a malaria fighter

Brand new research shifts the jury in favor of dichloro-diphenyl-trichloroethane (DDT) spraying:

There has been no failure in understanding that DDT is by far the most cost-effective chemical yet discovered for sustained use in malaria control programs.

Given that spatial repellent action is the first order action of DDT residues, resistance to a toxic action may not signify that DDT will no longer exert control over malaria transmission.

Environmental poverty penalty

People in poor countries will suffer disproportionately more from climate change. The Rockefeller Foundation's new initiative hopes to turn World Bank's development projects "climateproof."

It's a robbery - SMEs and crime

Crime against businesses disproportionately impacts SMEs. Nearly 80 percent of firms affected by a major accident and without a proper contingency plan cease to exist within two years.

In the UK alone, where break-ins and burglaries are the two most common crimes, the economy loses an estimated £19 billion - approximately £5000 per business.

Using Do Your Own Analysis, find security costs such as payments to mafia, for example, that firms in over 100 countries have reported. The graph below shows losses to theft and robbery as a percentage of sales in Burundi, DRC, Guinea-Bissau and India.

SOX shows unique governance benefits

The critics of the Sarbanes-Oxley Act (SOX) say that the regulation has made the U.S. less competitive, causing an exodus of companies to less-regulated stock exchanges in London and Hong Kong. The authors of a new paper defy this common wisdom. They find that when firms' characteristics such as size and type are factored in, the listing gap disappears.

"Before you jump to the conclusion that this is evidence of New York losing market share, remember most of those firms wouldn't qualify for the listing in New York. It's apples and oranges" says George Karolyi, one of the co-authors.

In general, whether they list on the NYSE or NASDAQ, firms are subject to SEC oversight, they are exposed to class action lawsuits, and face additional monitoring by market participants, such as analysts and institutional investors.

Although there is a common belief that listing in London provides a certain level of good governance, firms […] in London generally need only comply with the governance rules of their home country [and] are subject to a "light touch" approach to regulation.

Got game?

Can video and computer games help people manage their health? The Changemakers at the Ashoka Foundation think so. "Why Games Matter: A Prescription to Improve Health and Health Care" seeks innovation, along with a potential for social impact, and sustainability.

The rules are simple and the deadline is on September 26, 2007, coinciding with the release of the 2008 Doing Business report which will focus on gender.

Dirty business on the rise

Money-laundering flows exceed $1 trillion per year, finds a new KPMG survey. Forty-one banks, out of 224, said they were unable to track cross-border transactions.

The report estimates that the cost of compliance with anti-money-laundering (AML) requirements has risen by nearly 60 percent since 2004 – that's 20 percent more than banks had expected. As the expansion into emerging markets and transnational mergers continue, these costs are likely to grow.

Ted Truman estimates that the probability of conviction for money-laundering in the U.S. is at 6.5 percent. The AML veteran adds that even at 10 percent conviction rate, the returns to money launderers are high relative to the risk.

Microinsurance in Mumbai

Between November 13 and 15, 2007 in Mumbai, India, CGAP and Munich Re will sponsor the third international Microinsurance Conference.

Traditionally, large, commercial insurers have been deterred by high costs and small premiums leaving the poor to rely on informal or mutual schemes for risk management. Responding to the challenge, the conference will focus on new, cost-effective products for low-income groups.

See also last year's report focusing on social vulnerability.

New Europe is growing old

A new World Bank study warns about severe economic consequences of aging in countries in Eastern Europe and the former Soviet Union. According to the co-author Arup Banerji:

No aging country anywhere is as poor as Georgia. With a per capital gross national income of just over $1000, it is set to lose almost a fifth of its population over the next two decades. […] It is this interaction of the three transitions – demographic, economic, and political – that makes the region, and its challenges, unique.

With a poignant title "From Red to Grey," the report paints a dark picture. Between 2000 and 2025 Ukraine’s population will shrink by a quarter; in the same period the number of people aged over 65 will double in Bosnia and, except in Tajikistan, the number of school-age population will decline.

There is hope, but the prescription is unequivocal: more flexible labor laws, lower rates of labor taxation, and an increase of labor participation rates.

Hedging climate change bets

The recent G8 summit failed to reach agreement on proposals for even a voluntary code of conduct for the world's 9000 "locust" hedge funds with an estimated value of $16 billion as reported on Spiegel Online. However, while there may remain disagreement over transparency issues, it seems G8 leaders might applaud hedge funds for taking the initiative on another key G8 theme - climate change.

Hedge funds are jumping on the green investment bandwagon. As reported in the UK's Observer, Schroders are launching a climate change fund, adding to a number of green investment products already on the market. Even Man Group, the largest listed hedge fund worldwide, has announced plans to get in on the act. As reported on thisismoney, Man's Chairman Harvey McGrath sees "significant further developments" around carbon trading and the "green space."

Smoking is bad for your... pocket

The adverse health effects of smoking are old news. Michael Lokshin and Zurab Sajaia (on page 18) examine the habit's less obvious effect on your paycheck. The data comes from the Tomsk region in Russia – a country with the fourth highest rate of smoking:

On average, non-smoking men earn more than smokers [$400 vs. $330], respectively, thus enjoying about a 19% unadjusted wage premium over smokers. The wage premium of non-smoking women was quite a bit lower at 6%, which translated into an approximately $15 'bonus'.

There is also the economic cost, which in Tomsk amounts to nearly 2 percent of the region's GDP. The loss is not remedied by revenues from cigarette consumption, where, according to the research, tobacco companies pay only 65 rubles per 1000 cigarettes and 8 percent on the sale price of cigarettes.

Russia aside, as the rest of the world is curbing the habit, private sector insurers ponder the consequences.

Lighting the bottom of the pyramid

A new solar rechargeable flashlight - backed up by three AA batteries that last up to three years (costing $0.80) - gives up to 7 hours of light. In a market where nearly 2 billion people have no affordable access to light, light is a big deal:

If you're an environmentalist you think about [the problem] in terms of discarded batteries and coal and wood burning and kerosene smoke; if you’re a feminist you think of it in terms of security for women and preventing sexual abuse and violence; if you're an educator you think about it in terms of helping children and adults study at night.

BOP households spend an average of 7% percent of this income on energy. In Africa, where 250 million poor spend an estimated $12 billion, energy ranks third in households' expenditure. In Asia, mainly due to India’s share, it ranks second.

To learn more or participate in the initiative click here.

Gates funds global health monitor

Bill & Melinda Gates donate $105 million to evaluate which public health programs have the greatest impact and hence deserve more funding.

The Institute for Health Metrics and Evaluation at the University of Washington – the recipient of the grant – promises to collect and analyze global health data that have traditionally been neglected or difficult to evaluate, such as child mortality, and turn it into a high-quality comprehensive and comparable product.

SOX in India

Not everything that works in developed countries works in developing countries, but here is an example of the reverse – while the Sarbanes–Oxley (SOX) Act might not have had the expected impact in the U.S., similar reforms have had a positive impact in India, including on the share prices of Indian companies.

These governance reforms could have net benefits in a poor-governance country, like India, but net costs for companies that are already well-governed, like the U.S.

Asian financial crisis 10 years after

Since 1997, East Asia's aggregate output doubled to $5 billion and more than 200 million people transcended the $2 a day poverty line. Looking ahead, 9 out of 10 Asians may be living in a middle income economy by the end of the decade.

Don't rest on your laurels, warns a new World Bank report. The region could fall into the 'middle income trap.' Find out more this Monday when the authors answer your questions live.

Insurance for the poor

Only 10 million out of 2 billion poor have access to insurance. Inadequate financial instruments, difficult regulatory environments for providers and the lack of information for customers are the key obstacles to reducing health, life and non-life risks for poor individuals and communities.

Together with CGAP, insurance regulators, associations and private companies, the Financial Markets and Social Safety Net group will launch a series of learning events on how microinsurance can work for poor and risk-exposed clients.

The first workshop will take place on May 7-8 in Rio de Janeiro and will focus on: improving service delivery of insurance, particularly those in the informal sector; alternative delivery channels, beyond MFIs and commercial banks; and the role for international institutions like the World Bank.

Cat bonds storm capital markets

The first ever bonds to cover flood risk, debuting in a $150 million tranche, were oversubscribed.

Unlike the traditional schemes with the payout based on estimated losses, these cat bonds have indexed-based triggers, which when linked to an objective benchmark such as, in this case, water level, eliminate the costly assessment process, increase transparency and speed up disbursement.

The 2,400 liter hamburger

Did you know that it takes 2,400 liters of water to produce a hamburger? This is revealed in a new initiative from the International Business Leaders Forum to address the emerging global water crisis. It focuses on firms' "water footprint" and claims managing water is part and parcel of managing business risks. There is reputational risk, of not being a good local partner, and the parallel risk of simply running out of water due to poor demand-side management generally.

Business should be a catalyst for adopting water-saving technologies, or processes, not only for good profit-sense but for good neighbor-sense.

Market for rain insurance

Weather-based index insurance - an insurance product with payouts linked to a verifiable, public weather-based index - has the potential to protect even the poorest farmers against income fluctuations caused by devastating weather shocks.

But how do you get farmers who have never come across this kind of shock-absorber before to use it? A conference paper being discussed today, based on experience from India's state of Andhra Pradesh, provides some answers.

Getting ready for hurricane season

Limited capacity to borrow funds, lengthy aid disbursement procedures and limited access to insurance are the main setbacks faced in the immediate aftermath of a catastrophe by low-income disaster-prone countries. From the World Bank:

Caribbean States are highly vulnerable to natural disasters--on average, one major hurricane affects a country in the region every 2 years--and have only limited options available to respond. Most recently, losses resulting from Hurricane Ivan in Grenada amounted to 200% of Grenada's gross domestic product (GDP) and were significant in Jamaica and the Cayman Islands

This week, donors announced pledges of $47 million to a Regional Catastrophe Risk Insurance Pool for the Caribbean. This Caribbean-owned, regional institution is the first regional disaster insurance facility in the world. Pooling their risk will save the eighteen participating countries approximately 40% in individual premium payments. For more on cat risk see past conferences.

Did you celebrate Microinsurance Month?

Today marks the end of the first-ever Microinsurance Month in the Philippines. The country is already out in front on mobile banking. Here's hoping that they'll generate the same kind of enthusiasm for microinsurance.

For the nitty-gritty, see a dated but extensive report on microinsurance in the Philippines from the International Labour Organization. Published in 2002, it calls for policies to meet the huge unmet demand for insurance against natural disaster.

2007: The year of microinsurance?

Mexican insurance companies are ahead of the curve on microinsurance. They've built new delivery mechanisms to provide the working poor with life insurance. From BusinessWeek:

"The issue isn't that the population doesn't have the economic capacity, disposable income, or an insurance culture, rather we as insurance companies need to adapt to their means," said Alfredo Honsberg, chief executive of insurance company Seguros Azteca, in an interview.

Honsberg hits the nail on the head. No wonder he reports selling 50,000 policies a week.

I think this could be the year that we wake up to the possibilities of microinsurance. Not only life insurance, but also health, crop, livestock and other insurance policies are a classic win-win for the poor and the companies who serve them. Microinsurance is every bit as powerful as microcredit. Even better, insurance products can prevent people from falling into poverty in the first place.

See our microinsurance reading list for more.

Read up on annuities and microinsurance

We've just launched two new reading lists:

• Microinsurance. Credit isn't the only financial service to go micro. Poor people face more risks than most of us, with more devastating consequences. Microinsurance products help them handle extreme weather, illness, and loss of livestock. It can also be a crucial way to keep people from falling into poverty in the first place.
• Annuities. With the greying of the population in many parts of the world, lots of people approaching retirement age. Thanks to reformed pension systems, many will receive a lump sum instead of monthly payments. Annuities solve the problem by offering a lifetime steady stream of income.

See Pienso for more microinsurance links.

Reassurance

Some might call the talks on Climate Change a little schizophrenic - one arm is trying to mitigate climate change, while the other is busy thinking of ways to adapt to climate change's impact. Now add a third layer: insurance, a precaution in case adaptation to climate change proves impossible.

UNEPFI, in partnership with the World Food Program and a reinsurance company, yesterday gave the conference a foretaste of its report on "Adaptation and Vulnerability to Climate Change: The Role of the Finance Sector." The report advocates for the establishment of public-private partnerships to enable countries like Ethiopia – the first test case – to insure itself against drought induced by climate change.

One panelist commented that this could be a way to maintain the viability of the insurance sector - by providing it with a good business opportunity. In fact, reinsurance was one of the first business sectors to take climate change seriously and balk at its predicted cost. For sure, it is reassuring to find out that the insurance sector might actually find a business case for climate change.

Capturing Value contest winners

Through this seed funding we are hoping to break a chicken-and-egg situation where investors will not invest in emerging markets for lack of information, and research providers will not enter the market for lack of demand. The object of the competition is to lead the market and to provide tools to a mainstream investment audience.

That's PSD Blogger Rachel Kyte on the IFC's research competition Capturing Value. Winners were announced last night in Zurich. Congratulations to both winning teams - CRISIL, Standard & Poor's and KLD; and Trucost and CLSA - who will split a $500,000 grant to study environmental, social and corporate governance data for emerging market equity investors. For details, see the press release.

CSR stirrings in the Middle Kingdom

Recent reporting suggests that corporate environmental and social issues are increasingly debated in China. Government officials are showing growing interest in CSR, including initiatives by the State Environmental Protection Agency and the Ministry of Commerce. National CSR organizations are appearing with government support, such as the Chinese Enterprise Social Responsibility Research Institute. This in part reflects growing pressures resulting from fast growth.

Just in the past few weeks, Victor Fung, chairman of the Greater Pearl River Delta Business Council called for the 90,000 Hong Kong-owned factories operating in the Pearl River Delta to adopt socially responsible manufacturing and sourcing - as he highlighted the problem of air pollution in the region. As reported in the Financial Times on August 28th, this follows a recent American Chamber of Commerce report in which 60% of surveyed senior executives of Hong Kong-based multinationals were “very worried” about pollution impacts on their health.

Consequences go beyond the risk of asthma, raising concerns over attracting and retaining top talent.

Banking on ethical performance

The recent public tribulations of firms such as BP serve as a further reminder of the importance of business ethics and how lapses can seriously impact corporate operations and reputations. (See Richard's post on BP and brand.) The case for business ethics is reiterated strongly by John Plender and Avinash D. Persaud in their recent failure of business ethics series in the Financial Times and their new book All You Need To Know About Ethics and Finance. As such examples as Enron and Parmalat highlighted, good governance remains very much a shared global challenge – not one limited to emerging economies.

This point was emphasized by private sector representatives in a global dialogue last Wednesday, organized by the World Bank Institute to discuss coverage of private sector roles in the World Bank draft paper on governance and anti-corruption. The discussants also considered the role of the banking sector in promoting good governance and anti-corruption measures.

Plender and Persaud use the case of Citigroup in their book. In addition to ensuring high standards among their own staff, one can argue that banks should urge similar standards from their clients. Is it viable to build on the success of the Equator Principles model for handling environmental and social risks, to have a similar commitment to demand good governance and anti-corruption frameworks to minimize ethical risks?

10 lessons on business-NGO partnerships

Interesting piece by Peter Asmus in Ethical Corporation. 10 years on, he looks back to an early example of “stakeholder engagement” when Mitsubishi executives sat down with the environmentalist Rainforest Action Network, who were threatening a boycott. In NGO engagement and partnerships – Ten lessons for corporations Asmus talks to the players and draws out a set of lessons for corporations with the benefit of a decade's perspective. Although some may seem obvious, the lessons do help structure the details of a process that produced ground breaking results and helped catalyze broader moves towards sustainable forestry. Billed as lessons for corporations, most are equally important reading for NGOs, such as #7 to resist the urge to demonize the other side. Basic instincts are not always best.

Recycling – from Big Macs to ecomats

Companies are increasingly savvy at heading off their critics and the blogging trend is now part of the process. McDonalds now have an interesting corporate social responsibility blog. This in turn is highlighted on the triplepundit blog of MBA students in San Francisco. They pick up on an entry on McDonald’s achievements in improving environmental policies on their packaging and raise some good questions on whether enough is being done by the firm and whether their consumers even care. Demonstrating our own commitment to recycling, we are picking up the story here.

Continuing the recycling theme, it is good to read in the Star Online that China has agreed to use Malaysian eco-friendly mats made from discarded oil palm fronds for landscaping and beautification projects in Beijing for the 2008 Olympic Games. Tests in desert regions around the Chinese capital found that the “ecomats” successfully halted encroachment of sand into agricultural land.

Brands drive action on tough global issues

Sebastian Mallaby (of “The World’s Banker" fame) suggests that today’s big corporate players are tackling pressing global challenges without waiting for government to take a lead. In Monday’s op-ed “A New Brand of Power” in the Washington Post, Mallaby suggests that firms are driven by the need to protect their brands, prompting action in response to public concerns from everything from junk food to climate change.

No regulation compels Nike to pay more than the prevailing wage in the poor countries it works in. But the value of Nike’s brand dwarfs its costs of manufacturing, so it wisely chooses to do so.

Winning support is crucial in the board room as in the legislature. In terms of gaining commitments to ambitious social and environmental targets, Mallaby suggests corporate leaders are proving more successful than their political counterparts.

South-South foreign bank entry

Banks from London and New York are not the only players getting into developing country banking markets. A little-known fact is that banks from 48 developing countries have already invested in the banking sector of other developing countries. Good news, because these banks are well-suited to offer inclusive financial services to the poor.

In a recent paper on Foreign banking in developing countries, Neeltje van Horen shows that 27% of foreign banks in developing countries are owned by a bank from another developing country. She finds the South-South foreign banking trend to be especially pronounced in low-income countries.

Role of non-state actors in regulation

There is growing recognition that regulation is not the exclusive domain of the state. The regulatory capacities of non-government actors are increasingly recognized and on occasions formally co-opted by the state. This paper examines the ways in which a variety of economic and civil society actors contribute to the information gathering, standard setting and behavior modification aspects of regulatory control. Particular attention is paid to the international aspects of this contribution and the limitations and advantages of different forms of non-state regulation.

That’s a new working paper by Bridget Hitter on ‘The Role of Non-State Actors in Regulation’ from LSE’s Centre for Analysis of Risk and Regulation (CARR). Also see ‘Business Risk Management Practices: The Influence of State Regulatory Agencies and Non-State Sources.’

Or if you like more provocative titles, another paper from CARR: 'Government by Elicitation: Engaging Stakeholders or Listening to the Idiots?'

UNEP's "Show Me The Money" report

The United Nations Environment Program's Finance Initiative launched last Friday the new report: “Show Me The Money: Linking Environmental, Social and Governance Issues to Company Value.” Their key conclusion:

The material contained in this document provides strong independent support for the view that effective attention to environmental, social and governance issues will enhance shareholder value. Investors who do not pay attention to environmental, social and governance issues are taking unnecessary risks with their portfolios. Investors who do pay attention are probably improving the risk/return relationship.

The report was pulled together with the support of 14 leading international financial institutions and is a summary of 1000+ pages of analyst research. See the table of content’s for commentary on issue and industry-specific research. Via Risky Business.

Financing firms in emerging markets

The 5th Annual Conference on the Financing of Corporations in Emerging Countries was recently held. To highlight some of the papers:

• Does Campaign Finance Imply Political Favors?: The Case of the 1998 Brazilian Elections
• The Influence of Domestic Firms on Foreign Direct Investment Liberalization
• Financing Firms in India
• Do local analysts know more? A Cross-Country Study of the Performance of Local Analysts and Foreign Analysts
• Do Foreigners Invest Less in Poorly Governed Firms?

...and to quote an email I received about the event:

So if institutional development is good for access to finance, why do not all countries adopt "good” institutions? “It’s politics, stupid!” is the expected answer.

Update: Also see Deloitte's leveraging emerging markets for commercial success. Via IEM.

Foreign investment in fragile states

There has been a tendency to conclude that the difficulties for poorer countries to join the ranks of countries able to attract and use nonextractive foreign direct investment for development must be staggering and in the case of tropical countries—including most of sub-Saharan Africa, Central America, and the Caribbean—may be almost impossible to overcome. But the evidence indicates otherwise. Two of the most prominent success stories in the literature on foreign direct investment and development are Mauritius and the Dominican Republic. Their accomplishments required straightforward policy reforms, which are readily duplicable.

From Ted Moran’s ‘Toward Best Outcomes from Foreign Direct Investment in Poorly Performing States’ – chapter 11 from the new book, 'Short of the Goal: U.S. Policy and Poorly Performing States.'

Management consultants discover social issues

There is growing literature on how social issues are increasingly impacting business environments and decision making. However, it is a sign of the times to see the latest edition of the McKinsey Quarterly include a clarion call for business leaders to pay attention to social issues. Sheila Bonini, Lenny Mendonca and Jeremy Oppenheim make the case for companies to adjust to rising expectations from the range of stakeholders, and develop better radar to spot and act on new trends, such as obesity. They stress the benefits of engaging on the issues, not merely reacting.

Looking to a positive Wal-Mart effect

It was only last October that Wal-Mart CEO Lee Scott announced that the company was committing itself to social and environmental sustainability, but the first analyses are already appearing. Sustainability and Systems Change – Wal-Mart’s Pioneering Strategy by Frank Dixon, just published on CSRwire is an interesting example. Dixon suggests that Wal-Mart’s long term success in terms of profitability and sustainability will depend on its ability to push “system change” within the economic, political and social systems that mandate the how business operates. Although perhaps a little overly generous re corporate intentions (Dixon is an advisor to Wal-Mart on sustainability issues), the paper rightly notes that Wal-Mart, given its market power, is one of the few firms capable of forcing broader change.

Also see a previous post of Pablo's on the possible impact of Wal-Mart.

Index-based livestock insurance

The latest issue of Access Finance has a short note on an innovative index-based livestock insurance pilot in Mongolia.

An index-based insurance product to indemnify herders based on the mortality rate of adult animals in a given area was recommended. The index-based livestock insurance (IBLI) policy pays indemnities whenever the adult mortality rate exceeds a specific threshold for a localized region...

The proposed insurance program… combines self-insurance, market-based insurance and social insurance. Herders retain small losses that do not affect the viability of their business, while larger losses are transferred to the private insurance industry and only the final layer of catastrophic losses is borne by the government.

Update: a previous post on index-based humanitarian disaster insurance.

Tainted by association?

Partnering with a well-known NGO can be one of the most successful ways for a business to win over the public and reinforce a positive reputation – more effective than careful audits or compliance. So says recent research by Globescan, as presented by Doug Miller, President of the research firm at last week’s Business, NGOs and Development conference. While such partnerships work well for firm reputations, surveys suggest that, inversely, the NGO in the partnership typically suffers a negative hit in public opinion as a result of the link with the corporate world. Perhaps it is time to more formally incorporate such reputational factors into partnership cost/benefit analysis, and ensure suitable incentives to compensate NGOs?

Update: also see the conference's virtual resource center.

IMF on the economic impact of Avian flu

A new report from the IMF, ‘The Global Economic and Financial Impact of an Avian Flu Pandemic and the Role of the IMF,’ was released yesterday. A snapshot:

Once the pandemic has run its course, economic activity should recover relatively quickly…While it is most likely that a pandemic will be followed by a rapid recovery, resulting in limited overall economic effects, it is possible that a severe pandemic will have a more disruptive impact… A severe pandemic may also lead to a significant but temporary reduction in net capital flows to emerging markets… Aside from sharp changes in asset prices, operational risks constitute the greatest challenge to the global financial system in the event of a severe pandemic.

See a related conference call. Nesbitt Burns also released yesterday their economic update of a potential pandemic outbreak.

Humanitarian disaster insurance?

The UN World Food Program has announced the world’s first insurance contract for humanitarian emergencies. Specifically, the contract hedges the risk of an extreme drought during Ethiopia’s next agricultural season.

The policy, which costs $930,000, is designed to create a way of financing natural disaster aid. Instead of waiting for drought to hit and for people to suffer and then pursuing money from donors to respond, the World Food Program has crunched the numbers from past droughts and taken out insurance on the income losses that Ethiopian farmers would face should the rains fail. If the rainfall measured at 26 weather stations around Ethiopia falls below a certain level between March and October, AXA Re, a large French insurer, will pay up to $7.1 million.

The hope is that such mechanisms would ensure that disaster aid gets mobilized faster, stimulate some creative thinking on how to improve emergency aid, shift risks from farmers to financiers, and allow insurers to diversify their portfolios. More via ReliefWeb.

Update: Felix Salmon and Owen Barder sound in.

Mapping the global future

‘Mapping the Global Future' is the latest unclassified report from the US National Intelligence Council. This forward-looking scenario based report focuses on the contradictions of globalization, the impact of the rise of China and India, and new security risks. More on specific topics below the fold.

More avian flu scenarios

An impressive collection of risk scenarios and business continuity resources from the Global Business Network. Many I had seen before. Some of the best new ones include:

• Bob Horn’s scary worst-case scenario timeline
• Bob's mess-map of interactions between systematic actors
• Maplecroft’s pandemic risk map and movie

Update: A GBN Webconference, Birds, Bugs, and Business: Preparing for Crisis.

Avian flu: what to expect, how to prepare?

The avian flu that is steadily making its way around the globe will develop into a pandemic that will kill tens of millions, create chaos in companies and send the world economy into a tailspin... Or it won't. That uncertainty represents a huge challenge for governments, corporations and citizens worldwide.

That's Wharton on what companies should expect and how they can prepare for Avian Flu. A good summary of ideas.

Also see: 'An Economist's View of Pandemic Flu', 'An Investor's Guide to Avian Flu', this CBO Report or an economic outlook from the World Bank. For more, the Avian Flu Blog.

Update 1: Also see 'Global Macroeconomic Consequences of Pandemic Influenza' from the Lowy Institute for International Policy.

Update 2: Aon's Avian Influenza Pandemic Resource Guide: Business Preparedness and Recovery Planning.

Global risks in 2006

The World Economic Forum has released the ‘Global Risks 2006’ report. The four key scenarios they model are a severe oil price shock, influenza pandemic, terrorism and climate change. Notably, see these visual risk matrixes.

They have also set up a free prediction market! I just signed up. And on Friday I will be attending this prediction markets summit.

Private health insurance in Africa

The New York Times offers us 'Neglected poor in Africa make their own safety nets':

Plans in which neighbors come together and create their own makeshift health coverage are the rage in Africa, particularly in the continent's west. Here, the plans now have a significant presence in 11 countries and membership has grown beyond 200,000 people.

Some of these mutual health organizations, as they are known, include fewer than 100 beneficiaries. The tiny group negotiates with a local clinic and forges a better price for care. Others have linked dozens of community groups to produce sophisticated plans that cover 10,000 or more people and offer an array of services.

The article highlights the difficulty of getting government-run funds to pay out, and while the community 'microinsurance' funds are not without fraud either,

...the funds tend to regulate themselves. One requires members to visit fellow members who are hospitalized, in both a measure of solidarity and a double check that the person in the hospital bed is the one on the insurance card.

No word on how effective these funds really are, but of course they are passing a market test. HT to Marginal Revolution; the full piece is well worth a read. Here is Pablo's earlier post.

Private health insurance for the poor

Development countries bear over 90% of the world’s disease burden. The OECD DevCentre offer’s their policy insight on how private health insurance can help lighten this oppressive weight:

Private for-profit and not-for profit schemes are emerging… [as] a potential improvement in risk sharing for a larger part of the population… In particular non-profit group-based insurance schemes could become an important pillar of the health-financing system.

The demand is definitely there. As Tyler Cowen points out, some of Africa’s neglected poor have resorted to developing their own safety nets.

For more, see the new PSP-One site or this World Bank reading list.