Between the state and the market: Can informal insurance patch the safety net?

Most households in low-income countries deal with economic hardships throug h informal insurance arrangements between individuals and communities rathe r than through publicly managed programs or market-provided insurance schem es. Households may, for example, draw on savings, sell physical assets, rel y on reciprocal gift exchanges, or diversity into alternative income-genera ting activities. These mechanisms can be highly effective in the right cir cumstances, but most recent studies show that informal insurance arrangemen ts are often weak. Poor households. in particular, have substantial difficu lties coping with even local idiosyncratic risks. Public policy can help re duce vulnerability by encouraging private, flexible coping mechanisms while discouraging those that are fragile or that hinder economic and social mob ility. Promising policies include creating self-regulating workfare program s and providing a supportive setting for institutions working to improve ac cess to credit, crop and health insurance, and safe and convenient saving o pportunities.