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This chapter examines the different strategies used by households and individuals to avoid consumption shortfalls caused by risk. It focuses on income-based strategies, assets as self-insurance, and informal insurance arrangements. Income-based strategies are limited due to entry constraints into profitable activities. Self-insurance is limited by access to assets and poor functioning of asset markets. Informal insurance arrangements are hampered by sustainability constraints, which exclude the poor from these arrangements.

The risk-sharing and insurance strategies used by rural households to smooth consumption are investigated, using data from the ICRISAT (International Crops Research Institute for the Semi-Arid Tropics) Village Level Studies. Self-insurance is the most important risk coping mechanism. Limits in self-insurance and high costs of risk-coping strategies suggest opportunities for institutions that can help households save, work, and accumulate buffer stock to cope with risk.

The chapter by Carvalho explores the accumulation of international reserves as a defensive strategy, as well as the reasons and limitations of their “self‐insurance” function. Conceptually, countries demand reserves of foreign currencies for a similar set of reasons to those which explain why individuals demand liquidity. However, while individuals hold liquid assets primarily to effect transactions, countries do it mostly for precautionary reasons. Again, as in the case of individuals, the stronger the demand for money, the harder it is to obtain liquidity in public sources and money markets. The chapter notes that international liquidity provision remains as important now as it was in the recent past. Carvalho argues that the best alternative would clearly be an international monetary system where a new international currency could be created according to global liquidity needs, as well as for emergency liquidity facilities to protect countries from adverse temporary external shocks.

Ocampo argues that the current global reserve system exhibits three fundamental flaws. First, it shows the deflationary bias typical of any system in which all the burden of adjustment falls on deficit countries (the anti‐Keynesian bias). Second, it is inherently unstable due to two distinct features: the use of a national currency as the major reserve asset (the Triffin dilemma) and the high demand for “self‐protection” that developing countries face (the inequity‐instability link). The latter is related, in turn, to the mix of highly pro‐cyclical capital flows and the absence of adequate supply of “collective insurance” to manage balance of payments crises, which generate a high demand for foreign exchange reserves by developing countries. This implies, third, that the system is inequitable (the inequity bias), and that such inequities have grown as developing countries have accumulated large quantities of foreign exchange reserves. On the basis of this, it argues for a system based on the counter‐cyclical issues of Special Drawing Rights (SDRs) that finance IMF facilities, and some possible “development links” in SDR allocations.

This chapter presents the responses to some questions and/or comments raised during the panel on managing commodity price volatility. A participant commented that he had worked on the issue of systematic hedging for a Colombian fund, and they had discovered that systematic hedging was essentially useless. He suggested that self-insurance was the only option. Jukka Pihlman responded that systematic hedging works in many scenarios, but it is not a panacea, pointing to the airline industry as an example. Ignacio Briones agreed with the participant's views on systematic hedging. Patrick Bolton asked whether the consumer was missing from this discussion, which focused on producers. John Sfakianakis remarked that this was a problem for oil-exporting countries, which sought security of demand for their product.

Despite predictions that the dollar’s key currency status would be challenged by the 2008 financial crisis, there has in fact been very little change in the greenback’s international role. Expectations that the crisis would generate a massive crisis of foreign confidence in the dollar did not pan out; indeed, the dollar appreciated as the crisis intensified because of support from both private investors and foreign governments. The dollar’s international role was also not challenged in any significant way by post-crisis initiatives to strengthen the reserve function of the IMF’s Special Drawing Rights and encourage greater internationalization of other currencies. Rather than undermine the dollar’s status, the 2008 financial crisis provided new insights about the sources of the dollar’s international preeminence.

This chapter aims to analyse the strategies used by vulnerable inhabitants of South Kivu in the Democratic Republic of the Congo to cope with economic hardships. The analysis is based on exploratory qualitative research conducted in June 2011. Economic hardships are understood as financial pressures on the household that result from sudden emergencies or life-cycle events. We first describe commonly reported sources of economic hardships and then risk management and coping strategies. Strategies are grouped into three categories: individual strategies such as self-insurance and income diversification, collective informal, and collective formal strategies. The socio-economic logics underpinning these strategies are then examined through the lenses of the Polanyi framework, which distinguishes between four types of economic integration principles: market, redistribution, reciprocity, and householding. Our research results indicate a plurality of economic logics in strategies used by respondents as well as the predominance of reciprocity and householding principles.

There was a remarkable, positive transformation in government behavior in emerging markets after the crises of 1997–2001. These countries gravitated towards what I call comprehensive self-insurance with the government intertemporal budget constraint as the centerpiece. Their self-insurance package responded to the vulnerabilities identified in the three generations of crisis models developed in the literature. It included raising primary fiscal surpluses, building up foreign exchange reserves, shifting to flexible exchange rates, and minimizing contingent liabilities on private-sector balance sheets. The shift in policy is illustrated with the experiences of Brazil and Turkey. This is followed by the discussion of a fundamental question: to what extent developing countries will have to self-finance their growth (run smaller current account deficits and raise national savings rates), and what this means for growth policy. I show that self-financed growth is a logical extension of self-insurance coupled with the micropolicy trio.

This chapter which revisits the evidence on the incidence of financial dollarization (FD) on the propensity to suffer bank runs and documents the positive link between FD and accumulation of reserves, shows that FD has been a motive for this form of self-insurance—in addition to the capital account reversal often noted in the literature. It analyzes and compares available insurance options, and explores the incentive problems associated with centralized holdings of reserves at the central bank, when the latter, among other uses, are expected to provide dollar liquidity insurance to individual banks. The chapter argues in favor of a combined scheme of decentralized liquid asset requirement to limit moral hazard, and an ex ante suspension-of-convertibility clause or “circuit breaker” that mitigates the costs of belated action while limiting the need for costly self-insurance.

This chapter looks at the role of the public versus the private sector in the provision of insurance against social risks. After having discussed the evolution of the role of the family as support in the first place, the specificity of social insurance is emphasized in opposition to private insurance. Figures show the extent of spending on both private and public insurance and the chapter presents economic reasons to why the latter is more developed than the former. Issues related to moral hazard and adverse selection are addressed. The chapter also discusses somewhat more general arguments supporting social insurance such as population ageing, unemployment, fiscal competition and social dumping.

This chapter investigates the Mitsubishi Corporation’s risk management business in pre-war Japan. Mitsubishi self-insured from 1898 following the withdrawal of a special discount provided by its main insurance supplier, the Tokio Marine. In 1917, each department within Mitsubishi was reorganized into independent stock companies, but legislation prevented Mitsubishi from underwriting the risks of these subsidiaries. As a solution, despite opposition from the Tokio Marine, Mitsubishi established a captive insurer, the Mitsubishi Marine and Fire Insurance Company, in order to pool the risks faced by its subsidiaries. In consequence, antagonism grew between the two insurance companies, but this was eventually resolved with an exchange of top executives. Mitsubishi then abandoned this early experiment in captive insurance. Mitsubishi provides an interesting example of an industrial corporation managing risk through changes in the organizational vehicle by which its insurance cover was supplied.

This chapter examines the rationale for the existence of sovereign wealth funds (SWFs) from a developing country perspective and the implications thereof for the world economy. It first provides an overview of the evolution of foreign exchange reserves in the developing world, the relative importance of the current versus the capital accounts as the source of those assets, and the rise of SWFs as well as some of their categorizations. It then reviews the rapidly growing literature on the determinants of reserve accumulation in developing countries, with particular emphasis on competitiveness versus self-insurance motives for such accumulation, along with some of the literature on optimal reserves. It also considers the motives for the accumulation of foreign exchange assets, highlighting the distinction between the role played by the current and the capital accounts, and between the structural and cyclical determinants of such accounts. The chapter concludes by discussing some political economy issues associated with the nature and management of foreign exchange asset accumulation and the systemic implications of large reserves and SWFs.