# **Box 2.7 Risks and Risk Management**

“Small farmers are particularly vulnerable. Many reside on the margins of fragile ecosystems where weather risks are high. Few small farmers have the financial reserves needed to protect their incomes and welfare in bad years. A number of measures could mitigate farmers’ risks: insurance markets; forward pricing contracts; diversifying productive activities and employment outside the farm sector; provision of early warning information; applied research on sustainable management of natural resources; and policies aimed at improving access to public services in general (health, education, technical assistance) and the operation of markets for key inputs” (IFPRI 2002, p.1).

Despite the low asset-based of many rural poor households, there is still potential to assist them by: increasing the efficiency and use of their existing assets, increasing the productivity of their existing assets, providing them with additional assets, by protecting the assets, and different combinations of these options. This requires investments, policy and institutional reforms, and significant capacity building. It also requires time. The temporal dimensions and dynamics of asset enhancement and expansion need to be carefully considered in project planning.<sup>17</sup> A critical part of this process includes enhancing and expanding human and social capital, whereby individuals, households and communities learn entrepreneurial and management skills to become empowered in the newly liberalized and decentralized markets and institutions (Siegel and Alwang 1999; de Janvry and Sadoulet 2001; Attanasio and Szekely 2001). See box 2.8.

# **Box 2.8 Why the poor are poor:  Lack of assets and low asset productivity**

Explaining why the poor are poor in Central America, Valdes and Mistiaen (2001, p.12) cite another study that states: “Most basically it is because they have few assets (both human and physical, including social capital) and also because the productivity of their assets is low. The assets are meager not only in quantity but also in quality (for example, low levels of schooling are usually combined with poor quality of schooling). The low productivity of assets results from a combination of government failures and imperfect of incomplete markets.” Valdes and Mistiaen (2001) claim that: “This taxonomy helps in guiding the analysis of rural poverty determinants by distinguishing those factors that contribute or constrain the building of the assets of the poor (education, demographics, land, and others) from those influencing the productivity of such assets (the incentive framework, financial policies, overall economic growth, and others). Traditionally the bulk of the literature on agricultural development and poverty in Latin America has emphasized control over assets (land in particular) as the key factor in explaining rural poverty. Why the “low productivity of assets” effect on rural poverty has been practically ignored in a region with such a history of poor policies is puzzling.” (emphasis by author) The “opportunity set” (options) for households to achieve different levels of well-being depends on the interface between a household’s assets and the prevailing context. Strategic management by a household of its asset portfolio to achieve preferred wellbeing outcomes defines its **behavior** or **livelihood strategy** (Ellis 1998; Carney and

> 17 For example, it is important to consider the short-term cash flow needs for projects that include investments in assets because returns can take time to materialize.  Such is the case with investments in fruit orchards and livestock, for example.

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