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Economic Strengthening for the Very Poor (ES4VP)

Risk Reduction Strategies

Risk Reduction Strategies to Smooth Income in Case of a Shock

Selecting low-risk activities

Low-risk economic activities have a lower probability of loss or failure and tend to require a lower investment, which avoids competing with household consumption activities. However they are typically less profitable than higher-risk activities and contribute less to replenishing or growing the household’s asset base. Households with fewer assets tend to select lower-risk activities, which may be lead to a downward spiral.

Diversifying activities

Selecting multiple unrelated economic activities may reduce a household’s overall risk should any individual activity fail. Multiple activities may also help ensure a more continuous or even flow of income into the household throughout the year, especially when individual activities are seasonal in nature. Diversification is most effective in reducing risk when individual activities are unrelated, for instance combining agricultural activities, nonagricultural activities, and wage labor.

Building insurance mechanisms

If market-based insurance products are unavailable, accumulating savings and assets are important self-insurance strategies for a household to draw upon in the event of a loss. Moreover, households tend to actively seek and maintain social networks to access resources in case of loss or spread risk through sharing. Another potential insurance mechanisms is access to credit for consumption smoothing – in this case it is the access to rather than the use of credit which is the main risk reduction strategy.

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