Fate and Fear: Risk and its Consequences in Africa

We review the evidence on risk and its consequences in Africa. We argue that too much attention has been given to the risk management and coping mechanisms used by households, and not enough on its implications and the scope for interventions. Much of the empirical work on risk in developing countries has also focused largely on the short-run implications, and has ignored the long-run. Risk and shocks have important long-run implications for growth and poverty, and distinguishing risk from shocks adds further insights. A few key missing dimensions in the work on risk and its consequences in Africa are also explored. First, microeconomic research on risk has limited itself to work on risks that are ‘easy ’ to analyze, such as weather shocks. These risks are still dominating the life of many of the poor, dependent on agricultural production, but these risks are not necessarily central to the growth and poverty tragedy in Africa: which is driven by the lack of African and foreign investment in Africa. In particular, the risks related to poorly functioning markets and economic and political institutions have been underresearched by microeconomists, often leaving the initiative to macroeconomic research. A few examples are offered that appear to start tackling these questions. Finally, research on risk and its implications has to embrace more seriously the experimental and behavioural literature. The research frameworks used in most work on risk and its implications are based on shaky behavioural foundations, building on the expected utility framework – but testing these foundations in the environments were risk really matters, such as the poorest settings of Africa, has largely been lacking, limiting our understanding of whether they matter