Efficient resource allocation can boost productivity: WorldBank

Citing the example of clogged drainage system of Mumbai, the World Bank in a report has said that managing risks effectively in countries like India and China can save lives, avert economic damages and unleash opportunities.

According to the World Development Report 2014, titled 'Risk and Opportunity: Managing Risk for Development,' adverse shocks - above all health, weather shocks, and economic crises - play a major role in pushing households below the poverty line and keeping them there.

Concluding that managing risks responsibly and effectively can save lives, avert economic damages, prevent development setbacks, and unleash opportunities, the report says risk management can be a powerful instrument for development, bringing security and the means of progress to people in developing countries and beyond.

It cites the clogged drainage system of Mumbai as an example.

"The drainage system in the Indian city of Mumbai, for example, heavily clogged by rubbish and over 100 years old, is hardly able to handle the annual monsoon rains," it said.

Over the years, multiple proposals to improve the system have been put forth, but the city has yet to fully adopt most of them, and Mumbai remains vulnerable to flooding, it said.

Effective risk management in cases such as this requires identifying and addressing the obstacles that prevent people, communities, and countries from taking necessary actions, the report said.

"Risk drives a wedge between outcomes and decisions. If a person puts all her savings on a roulette bet, and wins, the outcome is to be cheered but the decision to place the bet may, nevertheless, be regarded as faulty," said Kaushik Basu, World Bank Chief Economist and Sr Vice President.

"This World Development Report shows human decision- making falters most where risk is involved - for this reason, risk creates special challenges for development policy."

The report finds that, because most individuals remain ill-equipped to confront many shocks, they must depend on shared action and responsibility at different levels of society.

"Although people's own efforts, initiative, and responsibility are essential to manage risk, their success -in terms of resilience and prosperity - will be limited without a supportive environment," said the WDR Director Norman Loayza.

The report said effective risk management consists of combining the capacity to prepare for risk with the ability to cope afterwards, while pitting the upfront cost of preparation against the probable benefit, according to the report.