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Financing aid

Stefan Dercon: how insurance could make humanitarian response faster and cheaper

We can make disasters dull — as dull as auto insurance

Chief Innovation Officer, International Rescue Committee
Director of Innovation Strategy, International Rescue Committee

In 2014, as the Ebola crisis in West Africa ramped up, Western donors dithered. Eventually, the virus would kill 7,000 people. It took the WHO four months to declare a state of emergency, and even then, it had trouble raising enough money to fight the epidemic from donors. Stefan Dercon was the chief economist at the UK’s Department for International Development at the time. “I do remember the scramble for money,” he tells Grant and Ravi on today’s episode.

The slow response to Ebola isn’t unique. Responding to disasters after the fact generates inefficiencies and political infighting, and it can mean that not enough money gets to where it’s needed. “It's essentially financing as if we're still in the 11th century,” Dercon says, “where the only financial instrument we have to deal with disasters is going around with a begging bowl … If we crash our car, we don't simply quickly go and talk to our neighbours and say, ‘It would be really nice if you all chipped in a little bit.’ ”

Today, we don’t need to call our neighbors — we have auto insurance. So why don’t countries have disaster insurance? Dercon, the co-author of Dull Disasters and a professor at Oxford’s Blavatnik School of Government, says they should — and that ultimately, encouraging countries to take out disaster insurance will save money and time. Humanitarian aid can be reactive, plagued by politics and often insufficient. That’s why we should help developing countries insure themselves against disasters instead.

Stefan Dercon, Professor of Economic Policy at the Blavatnik School of Government and the Economics Department

There is, however, an important distinction between Dercon’s argument and auto insurance. Instead of, say, the government of Sierra Leone buying an Ebola policy from State Farm, “this is about arranging your finances. Either you set some money aside — you basically have a little money under the mattress — or you retain a risk on your balance sheet,” so a country can call in a debt quickly. Or, he says, developing nations and donors could work together on pre-agreed financing for disasters. Insurance won’t work for every country, but it could be particularly effective for fragile states, where one poorly-managed disaster could be a flash point into protracted conflict.

The way international donors interact with fragile states is a particular bugbear for Dercon. As DfID’s chief economist between 2011-2017, he monitored just how effective the roughly $14 billion that the agency disburses every year is at helping people in need. The most important lesson he learned in that role, he tells Grant and Ravi, is that “there is no such thing as neutral advice.”

Dercon’s point is that international donors’ investments in developing countries’ infrastructure may enable the bad behavior of rentier states — places where governments decline to tax wealthy citizens because they can rely on international aid rather than domestic revenue to fund things like economic development, healthcare and education. By flooding those places with aid dollars, he wonders, “Are you giving incentives for this to continue?”

If we crash our car, we don't … quickly go and talk to our neighbours and say, ‘It would be really nice if you all chipped in a little bit.’

The fact that donors may not always think through the incentives for political elites in fragile states to request aid dollars is, he says, the crux of the “case against aid.” And Dercon notes increasingly, poverty and conflict are concentrated in places with the weakest governance. That means that donors will need to think even more carefully about whether aid programs are actually helping the neediest people escape from long-term poverty — or whether aid is a band-aid propping up kleptocracies. Not all aid programs have been ineffective — but we need more careful assessments of when aid might help and when it might hurt.

Related Resources

Insurance Hits Peak Hype In the Aid & Development Biz — But What Do We Really Know? — Oxfam Blog, Debbie Hiller

Payouts for Perils — Center for Global Development, Owen Barder

Counting Catastrophe’s Costs — The Economist

The Case for Aid — Foreign Policy, Jeffrey Sachs

How Can We Help The World’s Poor? — The New York Times, Nicholas Kristof

Review of Dambisa Moyo’s book Dead Aid — William Easterly

Opinions and views expressed by guests are their own and do not reflect those of the International Rescue Committee.