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Symposium 2009

Solution for Fighting Against Poverty in the Crisis Aftermath

The Challenge

Poverty reduction has become the central objective of development policy, as reflected in the United Nations’ Millennium Development Goals (MDGs). While economic growth is seen as an important ing ...

Poverty reduction has become the central objective of development policy, as reflected in the United Nations’ Millennium Development Goals (MDGs). While economic growth is seen as an important ingredient in achieving sustainable poverty reduction, the emerging consensus is that growth has to be pro-poor to reach such ambitious targets as the MDGs.

Replace crop insurance with IOUs that require farmers to pay only when the harvest is good.

A major obstacle to the commercialization of small farmers is the increased uncertainty of the market place, compared with subsistence farming. The problem is exacerbated by the fact that small farmers have very little ability to absorb the risk of losses. Such risks are high as market volatility is an integral part of the world agricultural commodities market. High volatility, in turn, makes insurance an unworkable solution, as the premium rates, which depend on the probability of loss, to cover these risks appear to be too high.

Establish an agency that sells contingent claims on behalf of the household. Each claim promises to pay a specific amount if the farmer has a good crop and nothing if it is a bad year. This is like an IOU sold by the farmer to anyone who wants to buy it.

The major change from the insurance mechanism brought about by this proposed alternative is the sequence of cash transfers. With insurance, the farmer pays first and the company pays the farmer later and only if the farmer suffers a loss. Since premiums are high, this raises the problem of farmer liquidity or the inability to pay large premiums before the harvest when the farmer is cash-strapped.

In the proposed solution, the farmer pays only when the going is good or when the farmer has the ability to pay. This is brought about by simply making the buyer of the IOUs pay first and having the farmer pay after the good outcome has happened.

    Implemen- tations

    Implementation
    Symposium 2009

    IOU option as an alternative to crop insurance

    Polity, Academia, Business, Civil Society

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