Poor households with little or no wealth are particularly vulnerable to risks that reduce incomes and increase expenditures. This book addresses many of the risk-coping strategies for the rural poor, with a focus on micro level and household actions. Largely, these discussions concern risks that can be shared within a community or extended family. While effective for independent risks, these strategies are rather ineffective for covariate or systemic risks. This paper focuses on private and public mechanisms for managing such covariate risk for natural disasters. When many households within the same community face risks that create contemporaneous losses for all, the coping mechanisms discussed in other papers in this project are likely to fail. Such covariate risks are not uncommon in many developing countries, especially where farming remains a major source of income. The paper focuses on risks that are related to weather events (excess rain, droughts, freezes, high winds, etc.) that have a severe impact on rural incomes. Weather insurance could cover the covariate risk for a community of poor households through formal and informal risk-sharing arrangement among households that are purchasing these weather contracts. Given some recent Mexican innovations that are targeted at helping the poor cope with catastrophic weather events, we use Mexico as a case study to support some of our general concepts.
Market liberalization has increased the appeal of
Price Uncertaintycommodity derivative instruments (such as futures, Plantos Varangis options, swaps, and Dont Larson commodity-linked notes) as a means of managing price uncertainty. In many emerging countries both government and the private sector are increasingly using these instruments.
Liberalization of tropical agricultural markets has brought globalization, in the sense that all producers now face world rather than domestic prices. Producer prices have tended to rise as a share of fob prices as intermediation costs and tax has declined. However, in conjunction with inelastic demand, the downward shift of the aggregate supply curve results in lower world prices. Farmers therefore get a higher share of a lower price. Cocoa is the market where these changes have been most pronounced. The incidence of the liberalization benefits in cocoa is largely on developed country consumers at the expense of the governments of the exporting countries and farmers in nonliberalizing (non-African) countries. Farmers in liberalized African markets are broadly neither better nor worse off.
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