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Category: Development

The Third Pillar of Microfinance: Insurance for the Poor in Developing Countries

Over the last few years, index insurance has been receiving an increasing amount of attention from researchers and policy makers.

Whereas regular insurance pays out when a verifiable loss is incurred (e.g., flood insurance pays out when there has been a flood), whether an index insurance pays out depends on whether some index crosses a certain threshold. So for example, a rainfall index insurance for the agricultural producers in a given region would pay out when growing conditions in that region are too dry, i.e., when rainfall falls below a specific, predetermined threshold.

The beauty of index insurance is that it greatly reduces the scope for moral hazard. Indeed, if I insure your crop, you might well decide to neglect your field, do nothing for the entire season, and wait for me to give you a payout. Not so with index insurance, since the index (e.g., rainfall, temperature, etc.) is typically very difficult to manipulate.

(Lack of) State Power in Africa, Again

Political evolution on the continent’s western side is often a series of eruptions: order appears to be established, and then the volcano explodes again. In Togo and Gabon, the levers of power have long seemed immutable, dominated by the same families for decades. In Guinea and Ivory Coast, both on the mend after years of upheaval, democratic order seemed to arrive at last only recently. But all of these nations bubble with uncertainty beneath the surface. Western donors and officials who visit the West African capitals to offer congratulations on stability — the new World Bank president was in Abidjan, the Ivorian commercial capital, last week — should be warned: their compliments may be premature.

Legitimacy, it turns out, is not conferred from the outside.

From an article by Adam Nossiter in last Sunday’s New York Times.

For me, the last sentence of the excerpt above sums it all up: the amount of outside recognition a regime enjoys is not a sufficient condition for state power.

A regime also needs its legitimacy to be recognized internally in order to be legitimate, and many (West) African regimes simply are not recognized internally as legitimate widely enough.

Thus, it is only when a regime enjoys both external and internal legitimacy that we can truly talk of state power. In the limit, it is probably the case that internal legitimacy can be a sufficient condition. But not external legitimacy.

Imagine what would happen if the US government were recognized by the governments of France, Germany, the United Kingdom, etc., but had little legitimacy within its own borders except in the areas around Washington, DC. Chances are whatever policies would be adopted in Washington would have little traction, say, in California or in Texas.

In a post on state power last week, I discussed how the point made above (and by Nossiter in his Times article) is made very well in Herbst’s States and Power in Africa. Another good reading on the topic is Crawford Young’s The African Colonial State in Comparative Perspective.

Other books which seem interesting on the topic (but which I haven’t yet had a chance to read) are Besley and Persson’s (2011) Pillars of Prosperity (though note that there is a bit of microeconomic theory in there) and Migdal’s (1988) Strong Societies and Weak States.

That being said, I have not been trained as a political scientist, so I am not an expert on this literature. I hope a few political scientists will chime in with additional suggestions — in particular, suggestions for journal articles, which can be read more quickly than books.

Kaushik Basu Is the New Chief Economist of the World Bank

I had heard a very credible rumor about this a few weeks ago, but here is the official announcement on the World Bank’s website. If you don’t know who he is, here is the Wiki entry for Kaushik Basu, and here is his Cornell webpage.

I was lucky enough to take Kaushik’s graduate level development class in the early years of my Ph.D. As you might expect, the course was mostly about theory, and we used Kaushik’s Analytical Development Economics as our textbook. I also really liked his 2003 book on political economy.

Kaushik is one of the most interesting lecturers I have had a chance to learn from in the ten years I spent as a student at various universities doing my B.Sc., M.Sc., and Ph.D. degrees. He is also one of my favorite writers in economics because of his clear, congenial style.