Financial capital and development, where’s the problem?

February 2nd, 2018

When Fritz Schumacher wrote “Small is Beautiful” he used the book to highlight two key challenges. The first that traditional development wasn’t working, he highlighted that it was failing to overcome pervasive and underlying challenges and second, that the economic assumptions guiding this development were flawed. He argued eloquently for a new approach to development, an economic development model in which finite resources were recognised and that the aim wasn’t capital accumulation but human wellbeing. Development in which people not money mattered.

For the last five years, Practical Action have been working with Zurich insurance foundation on a global flood alliance programme. One of the aims of this programme has been an attempt to measure flood resilience. The degree to which flood resilience can be enhanced at the community level, through wise development choices, choices that enhance flood resilience, that reverse vulnerabilities and reduce risk. These efforts to measure community flood resilience are built upon the sustainable livelihoods framework, and outline an approach to resilience measurement that takes a holistic view across the five development capitals (Figure 1). The framework measures the contribution of components, or resilience sources from each of the five capitals and measures how they perform to either forewarn, mitigate or allow communities to live and thrive in spite of the flood event.

Sustainable Livelihood Framework (DFID 2001)

One of the questions we are hoping to answer is what is the role of financial capital? Or more importantly in the rush to generate wealth as the solution to poverty, how critical is capital formation to resilience building? In the context of the 5-capitals approach we are finding that, insurance schemes, microcredit and inadequately financed cash transfer programmes in general do not allow for financial capital formation – at best they enable consumption smoothing. So we want to explore sustainable capital formation, and explore this at multiple levels from the community up to national governments? If by using the tool we can identify measures to build flood resilience, this may allow enough people to be generating profits that allows a capital to accumulate. Is this capital accumulation sufficient to be used to pool risk? To create a proper capital buffer will be very hard, indeed methods currently being trailed in the development community use some form of micro-credit or similar process to enhance local capital accumulation. Preliminary results indicate that this may not be a good way of promoting capital formation.

Converting the risk into an economic value and then paying this amount into a common pool thereby attempting to share the risk evenly among a large number of people.

A recent and sobering study of Indian agricultural insurance schemes indicates they were ineffective from a financial perspective. It was found that regardless of their dubious impacts on the formation of the other capitals, they are not even useful for financial capital formation. The job of social insurance must be to smooth consumption shocks enough to allow capital formation, not to extract so much surplus that no new capital formation is possible. Perhaps the real problems are around distribution and redistribution?  Economics as if people mattered, this and other challenges await us as we try to explore the links between wealth creation and development. What we do know is that we need to be looking outside the box and exploring innovative options, not just rolling out business as usual, failed solutions.

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