While the essence of development work is to advance human well-being, the reality is that progress out of poverty is fragile: Poor people are constantly buffeted by blows that threaten to erode any gains they have made and throw their lives into disarray. Moreover, the world around them is inexorably changing — for instance, due to globalization, digitization or climate change — in ways that spawn new dangers and erode the viability of traditional strategies for life, livelihood and risk management. As those blows grow more frequent and the pace of change accelerates, global leaders are increasingly recognizing that poor people’s resilience should be a central objective — perhaps even the central objective — in development.
In recognition of its importance, CGAP has elevated the resilience of the poor as one of the main objectives for our work in financial inclusion, alongside our goal of helping poor people to capture opportunities that enhance their well-being. But what does that mean in practice? And how can we best employ the powerful levers of financial inclusion in service of this goal? Over the past several months, CGAP has researched these questions and the linkages between resilience and financial inclusion. In this essay, we will share our initial conclusions and what we think they mean for others working to advance financial inclusion.
The case for resilience building is increasingly clear
The deep dive made evident just how timely and urgent is a renewed focus on resilience. Climate change presents one obvious example. The fact that natural disasters are becoming more common — increasing fivefold over the last half century — is not just an academic fact but an obvious truth, thanks to news cycles filled with heatwaves, wildfires, hurricanes, floods and other forms of extreme weather.
These events are not just more common, but more severe and often more damaging: 3 of the top 10 disasters by economic cost have happened in the last five years. And while flooding in New York captures headlines, 97% of deaths from disasters are in developing economies, where individual and community capacities to deal with them are lower.
At the same time, climate change has slower-moving impacts that are likely to be even more damaging. Roughly 3.2 billion people live in agricultural areas with high or very high water scarcity, and 80% of the world’s cultivated land depends on rain-fed agriculture. Helping poor countries and communities manage these enormous challenges without falling backward — let alone making additional progress — will clearly require a major focus on resilience.
COVID-19 has also demonstrated not just the importance, but the complexity of resilience.
To date, the disease has infected over a quarter of a billion people and killed over 5 million. But the pandemic has also pushed an estimated 100 million people back into extreme poverty, reversing nearly a quarter century of consistently lower poverty and losing more than three years of global progress. It has shrunk the global economy by $3 trillion (or 3.5%), resulting in 250 million jobs lost and a quarter-billion people driven into acute hunger. It has also disrupted the education of over 1 billion people. The long-term economic impact of these disruptions on an entire generation is estimated to be a $10 trillion loss in cumulative earnings.
COVID-19 has shown that what starts as a health shock can trigger additional shocks across dimensions like livelihoods, nutrition, education, social cohesion and political stability. It has demonstrated how people’s resilience depends on a weave of interconnected elements that is only as strong as its weakest thread. These elements span everything from informal savings and insurance groups; to formal providers of health, schooling, and financial services; to public mechanisms like national health insurance and cash transfer programs.
The more mundane risks may be less spectacular, but they are no less damaging. Even outside of pandemics, health is among the clearest risks. Three billion people suffer some degree of malnutrition, costing the global economy an estimated $3.5 trillion annually. Meanwhile, 1.3 billion people struggle to finance health costs, which push 100 million people into extreme poverty each year. These issues are often compounded by knock-on effects — notably, the loss of income when breadwinners fall ill and the need to cover socially obligated funeral expenses, which are a source of major financial hardship in many countries. Building financial resilience to health shocks and their consequences are among the most important struggles that billions of low-income people face, day in and day out.
But resilience is also a broad and complex notion
The first challenge in any effort to build resilience is definitional, since resilience is a vast and amorphous concept. Perhaps thanks in part to its intuitive appeal, the term “resilience” is used with great variation across a vast range of thematic areas. This includes the development context — from economics to health to peacebuilding to disaster risk management — and other contexts, from biology to psychology to engineering. Most people have an instinctive sense of what resilience is, but the nuances of that intuition can be very different for different people. This creates challenges for defining and describing resilience in a way that is both concrete and resonates well with others.
Resilience building is a complicated undertaking that requires a broad lens. While many development agendas focus on just one dimension of a challenge, a focus on resilience often requires a comprehensive and systemic view of the challenges people face and the various elements that need to be addressed, often simultaneously, for people to be more resilient. That is not to say that single solutions are unimportant — they certainly are — but that they need to be seen as individual pieces in a wider mosaic of resilience gaps and opportunities. Being resilient is not as simple as whether you can raise a certain amount of money in an emergency, but about a far broader range of capabilities, resources and networks that enable you to anticipate, plan for, and respond to the most important risks in your life. There are a number of intersecting dimensions that are important to see and that shape how we build resilience:
- In responding to shocks, people often draw on numerous sources of resilience at the family, community, national and international levels. These may include formal and informal financial service providers that serve the poor. But they may also include things like national insurance systems, government-to-person (G2P) programs, health care delivery systems and global reinsurance schemes. Moreover, family and personal networks remain central to most people’s resilience. It is important for the development community to better understand these actors and resources and how strengthening them can, in turn, buttress the resilience of people and households.
- Resilience plays out over time. While large parts of the literature on resilience look at a single shock in isolation, this is not how resilience works in the real world. A series of consecutive smaller shocks can have more devastating effects on people than a single large one. The development community’s focus needs to be on helping people to sustain their resilience over time in the face of multiple crises and to avoid negative coping mechanisms that undermine their long-term fortitude and well-being.
- Building resilience is not just about mitigating the impact of crises but about empowering people to actively prepare for them. It is easy to think of resilience as being about how people respond to a crisis once it happens. But an equally important aspect of resilience is the ability to foresee a shock long before it happens and take appropriate measures. Indeed, many actors working on resilience focus on the capacities for absorption, adoption and transformation that people and systems need in order to be resilient. They see resilience not as a state but as a process of continual preparation for and adjustment to change.
- People experience risk and resilience differently. Not everyone has the same exposure and vulnerability to risks or the ability to pursue the same resilience strategies. This is true not least for women, who suffer risk and its consequences disproportionately. It also applies to minority populations that face unique dangers or have special needs, including children and the elderly; people living with mental or physical disabilities; and sexual, ethnic and religious minorities who often face varying degrees of discrimination, abuse and violence. This means we cannot simply solve for the resilience of a generic person — who tends to be thought of as a male, straight, able-bodied, cisgender member of the ethnic and religious majority — but for people across the full range of human experience.
The role of financial services in bolstering resilience is strong and well- documented but not fully understood
Many financial services originated as tools to help people manage risk, and we have some understanding of how poor people go about this challenge. Different types of risk require different financial instruments, depending on the nature and key characteristics of the risk in question. Poor people tend to use a broad mix of instruments that provides the range and flexibility to meet their needs across various shocks, stresses and life cycle events. This mix varies across different groups, not least between women and men. From our review of the evidence, a few high-level conclusions come across quite clearly:
- The evidence that financial services help poor people build resilience is at least as strong, and arguably more consistent, than the evidence that it helps them capture opportunities. The role of financial inclusion in promoting growth and poverty reduction is still debated, due to mixed evidence and complex causal chains. While the impact can be positive, more effort needs to be put into improving research methods to determine when, for whom, and over what time period financial services lead to greater opportunity. But there is an increasingly robust evidence base showing that financial services can help people better withstand shocks and stresses. Moreover, there are plenty of reasons, both theoretical and empirical, to believe that greater resilience directly enables people to seize more high-risk, high-reward opportunities. Hence CGAP believes we need to actively seek to deepen our understanding of the contribution that financial services can make to bolstering resilience as well as expanding opportunity.
- Informal services still play an important role in building resilience in many contexts, notably for women. This is not necessarily only due to a lack of supply or empowerment but can also have to do with the inherent features of the informal services that different people appreciate. Building resilience requires understanding both the strengths and weaknesses of informal services, without making assumptions or inadvertently disrupting well-functioning informal systems in the pursuit of formalization.
- The financial sector can also be a significant source of risk. This has been evident at the macro level, not least during the global financial crisis and the Asian financial crisis before that. At the micro level, financial services can directly undermine people’s resilience as a result of either negative coping strategies or weak consumer protections — for example, by leading to over-indebtedness.
Yet it is widely agreed that these linkages between resilience and financial services are still far from fully understood and leveraged. That is partly because stakeholders working outside the financial inclusion space quite understandably do not always see or fully appreciate the ways individuals and specific groups can use retail financial services to build resilience in the face of problems like flooding, malnutrition, violence and malaria. Where the role of financial services is recognized, many stakeholders lack the capacity to add financial inclusion on top of their core agendas. Even within the financial inclusion community, there is a sense that we as an industry still do not fully grasp how financial inclusion can contribute to — or undermine — resilience. One reason for this is that we lack a common understanding of and shared language for what resilience is, how it works and how to measure it.
If we are to be helpful in fostering such a common understanding and language, we must first articulate our own. We are therefore tentatively defining resilience in a financial inclusion context as: the ability of individuals and households to reduce and mitigate risks, as well as to cope with and recover from various shocks, stresses and life cycle events, so as to minimize any reduction in short-term consumption or long-term well-being.
This definition calls out several of the most central elements in our understanding of resilience. It reflects four distinct phases of resilience where we see financial services playing very different roles: risk reduction, impact mitigation, coping and recovery. It also distinguishes between three broad categories of adverse events — shocks, stresses, and life cycle events — which poor people manage with contrasting resilience strategies and financial instruments. Additionally, it clarifies that while the development community often focuses on short-term impact, we must have equal or greater concern for the longer-term effects of shocks as well as the coping and recovery strategies that people use to get through them.
There is a significant outstanding agenda for the financial inclusion community around bolstering the resilience of the poor
The main conclusion from this stocktaking is that the role of financial services in resilience building has only been partially explored. There is potentially a vast amount of work for the financial inclusion community to do across a wide range of topics. While the need to expand opportunity for the poor has historically animated the financial inclusion community, it is high time we recognize the equally critical role of resilience building and expend similar effort in service of that goal.
As we collectively embark on that effort, a few central tenets stand out to us as important to bear in mind. The first is the need to appreciate the layered, multi-dimensional and dynamic aspects of resilience (as outlined above) and to accept this complexity rather than take shortcuts in the name of expediency. The second is the importance of studying the differences in how resilience plays out across groups and having a strong focus on women, whose resilience is often systematically undermined by different exposure to risk and lower access to suitable resilience mechanisms. The third is the imperative to work with new sets of stakeholders in other domains, who possess deep knowledge around issues like health, climate change and disaster risk management but who may have a limited understanding of the role that financial services can play in building resilience.
While the need to expand opportunity for the poor has historically animated the financial inclusion community, it is high time we recognize the equally critical role of resilience building and expend similar effort in service of that goal.
In the months and years ahead, we look forward to engaging with the financial inclusion community, as well as with key actors in other spaces, to share our evolving understanding and to deepen it by listening and learning from the rich knowledge that already exists on resilience. But resilience is a broad topic. So where should we focus?
As the CGAP team delved into the literature on different types of risk, we tried to get a sense of which ones we should consider prioritizing. To be clear, comparing risks is far from straightforward, since they vary considerably in frequency, predictability, duration, scale, economic impact and human impact. Deciding which is “the most important” type of risk is therefore very much an apples and oranges exercise.
With those caveats in mind, however, three broad categories of risk stand out to us as being particularly detrimental for the poor: health, natural and economic risks. These all impact a large number of people globally but are particularly prevalent and devastating in low-income countries and for people living in or near poverty. Beyond those similarities, each of these risk categories has differences that shape what financial tools and resilience strategies are the most appropriate in coping with them.
- One of the most significant risks is health. In the academic literature, when poor people are themselves asked about the most important risks they face, health tends to fairly consistently feature at the top. Meanwhile, global health data show that these risks impact billions of people worldwide and take tens of millions of lives every year. Research has also demonstrated that they have major economic impacts, ranging from macroeconomic costs at the national level to the household-level financial hardship so often triggered by health issues in the family. Women suffer this risk disproportionately, whether due to unique risks like death in childbirth and gender-based violence; to being a lower priority in household health care decisions; or to male bias in diagnosis and treatment. COVID-19 has demonstrated the wide-ranging implications health shocks can have, including on jobs and incomes, schooling and psychosocial well-being.
- Another major concern is natural risk. Weather-related shocks are also a major concern to vast numbers of people, not least the 2 billion smallholder agricultural households. Natural disasters like floods and extreme weather wreak havoc on poor people’s lives and cause hundreds of billions of dollars in economic damage every year. Long-term stresses like water scarcity, land degradation, sea level rise and oceanic warming are posing significant medium-term threats to the homes, lives and livelihoods of billions. What is more, nearly all of these are growing both more frequent and more damaging as a result of climate change. Women are often more exposed as they make up the majority of smallholder farmers in many poor countries but have lower access to land, loans and equipment than male farmers do.
- The third significant risk is economic. Loss of income and assets are often cited as significant risks by poor people in qualitative research. Three billion people are informally employed, with uncertain incomes and few protections, while 750 million people live with the ongoing economic stress of extreme poverty. Again, women face greater challenges, as they are less likely to earn a cash income but more likely to lose their jobs in a downturn — all while doing more unpaid domestic work, facing greater social restrictions on their economic activity, and sometimes having weaker legal rights to assets and inheritance.
Over the next several years, CGAP will be exploring resilience and financial inclusion more deeply. We have already undertaken a rigorous initial effort to explore and define what we think resilience means in the context of financial services for the poor and which broad directions offer the most promising avenues for CGAP to contribute. Moreover, many of the topics we have worked on extensively over the years have a direct bearing on resilience, whether or not that label has been applied. That being said, we approach this complex topic with humility and an open mind. We are starting right away with a focus on natural risks, in particular those caused by climate change, into which we will be incorporating a strong resilience lens.
But we also want to hear from you. In embarking on this effort to make resilience a clearer and more effective focus of our work, we hope to collaborate closely with other members of the financial health and inclusion community. That starts today, as we ask you to leave us your thoughts and reflections in the comments field below. Please let us know whether our renewed effort around resilience resonates with you and where you think CGAP and its members would best focus their attention.
Dear Claudia and Peter,
Thank you for a great essay, that I strongly support. That said, let me raise two additional points to sharpen your discussion.
First, mutual understanding and cooperation between the financial inclusion and "social protection" communities should be strengthened.
Second, resilience building should include not only recovery but also "better" recovery with "resilience dividends" preparing for future bigger risks.
I know that you fully understand these issues, and I hope that these can be incorporated into your research ahead.
With warm regards,
Kazuto, a former Excom chair
Happy new year and many thanks for your encouraging response to the essay - we completely agree with your two points.
Social protection programs are a critical instrument in fostering the resilience of low-income people. As you know, CGAP has for many years been working on strengthening these programs through digitization to reduce leakage, cut costs, and increase responsiveness. That being said, social protection is only one among a broad range of resilience mechanisms that people use and that deserve bolstering. This includes not least ex ante measures to reduce risk and limit damage which could help avoid the need to rely on social protection in the first place. We need to have a comprehensive view of resilience building that starts long before the shock.
Pursuing a better recovery is indeed very important to help people adapt to changing conditions and reduce future risk. This underlines the second critical aspect of how we see resilience: responding not to isolated incidents, but to a continuum of overlapping and repeated shocks and stresses that people suffer all the time - and where their resilience to one can have major implications for their resilience to the next, and the next after that. Many coping strategies help people manage the immediate crisis, but undermine their future resilience, income, and wellbeing. It is imperative to see this full picture in building resilience mechanisms that truly help.
Resilience is key given the climate change potential damaging effects. Poor people use a great variety of risk-coping mechanisms (ex-ante and ex-post). Financial services have the capacity to increase and improve the risk coping mechanisms that the poor already use.
Many thanks for your comment. We quite agree that financial services should not be seen as a standalone tool, but as an instrument supporting their broader resilience strategies. Even as we work on the financial services piece, it is important to have this wider picture in mind.
We also see resilience to climate change as being an urgent priority for anyone working on resilience and financial services. You will be pleased to hear therefore that we are developing an effort dedicated to the question how financial inclusion can bolster climate resilience. More to come on this - stay tuned.
The interesting aspect of this essay is the recognition that informal services have an undeniable role to play in building resilience for poor individuals and communities, notably for women. Going forward it may be useful to develop metrics for measuring resilience beyond mere access, use and quality of financial services available to the unbanked and underbanked. There is a greater role and responsibility for healthcare and disaster management authorities within the National Financial inclusion Strategies (NFIS).