Stress tests of social protection systems

Chantal is a beneficiary of the IDA-funded social safety net program in Madagascar. The money helps her buy food and invest in crops and small animals for extra income. Photo: Sarah Farhat/World Bank

Economic shocks pose a major threat to poverty reduction and shared prosperity. The 2020 Poverty and Shared Prosperity Report highlighted the negative impact of climate change, fragility and conflict on global efforts to reduce poverty and increase prosperity, noting that up to 132 million people could fall into poverty by 2030 due to the impacts of climate change. on their lives and livelihoods. The poor are most vulnerable to the negative impacts of shocks because of where they live and work and their inability to self-insure. Those affected often suffer losses that affect not only their current income but also their future productive capacity.

This is why we must tackle vulnerability to poverty if we are to make sustained progress in improving the standard of living of the less well-off. We must do this by creating mechanisms that enable the poor and vulnerable to build their resilience and by strengthening safety nets.

Tools to improve crisis response in the future

Technology can help make many shocks and crises, like the COVID-19 pandemic, and their impacts more predictable. For example, new data and technologies are increasingly able to model extreme weather events and track their impacts on households as they occur. Similarly, in recent years, methods for assessing risk and measuring household vulnerability and poverty have improved considerably. Vulnerability analysis tools, combined with satellite data, can be used to identify how many people will be in need during a crisis and where they are. Based on this information, local authorities will be able to assess whether vulnerable households and individuals have access to existing safety nets. So we can actually start to assess the readiness of available social protection systems before the crisis hits.

After the 2007-2008 financial crisis, it became common to “stress test” commercial banks to assess their ability to withstand systemic financial shocks. Using this approach, the World Bank assembled a multidisciplinary team that launched a tool to “stress test” social protection systems, comparing the extent and timing of needs following shocks, with scalability and adaptability of existing systems. Version 1 of the tool can be found here, with future updates based on lessons learned from national applications.

This rapid assessment tool offers a number of ways to simulate the magnitude of the potential impact on household well-being (and subsequent needs) of different shocks of varying intensities using household surveys. households and historical data on shocks. It helps identify those who have become poor or vulnerable to poverty as a result of a shock, as shown in Figure 1.

Figure 1: Identification of those who fall into poverty or become poor as a result of a specific event

The tool is also designed to help policymakers and practitioners assess how much government cash transfers need to be scaled up based on current capacities, and how to make them more flexible and adaptive in the future. It is built around the following core components of adaptive social protection: finance; programs and delivery systems; data and information; and institutions and partnerships. An example application of the tool is shown in Figure 2.

Figure 2: Example application of part 2 of the stress test tool for an illustrative country.

Financial readiness goes hand in hand with operational readiness

From a financial perspective, the goal of this effort is to identify existing measures already in place that can be used to provide immediate liquidity in a timely manner. Financial preparedness makes a difference – for example, having a pre-arranged source of funding as a disaster drawdown option has helped provide rapid support to many countries after the initial shock of the COVID-19 pandemic. 19. Without pre-arranged funding, it takes time to identify funding sources, often budget reallocation is required, and this results in a high opportunity cost as less money is available for key development projects.

Beyond finance

Financial readiness goes hand in hand with operational readiness. Having finances but no social registry with clearly identified and targeted beneficiaries will not go very far. Identifying who, when and how households should receive financial support is a critical part of building adaptive social protection.

In crisis scenarios, many people who are not part of social protection programs should be covered , so it is important that pre-arranged options through registered service providers and associated processes are available to those who do not have an account. This way, not only recipients with existing accounts can receive funds quickly.

The Social Protection Systems Stress Testing Tool shows how robust analyzes can provide important insights to build the resilience of poor and vulnerable households. By investing in their ability to prepare for, cope with and adapt to shocks, we can help keep them out of poverty – or deeper into poverty. We plan to update and improve the tool over time based on feedback as it rolls out to priority countries. This work can help inform a green, resilient and inclusive development approach for those who need it most.

Joel C. Hicks