Safety nets , savings and informal social security systems in crisis - prone economies 1 Stefan Dercon

The need for effective safety nets and social security has been highlighted by the recent crisis in East-Asia. In other parts of the developing world or in transition economies, the large economic fluctuations, climatic shocks and natural disasters also demand further development of support systems during crises. In this paper, we discuss the role played by self-insurance (via savings) in the presence of informal social security systems and suggest that too little attention has been paid to asset markets as a means of providing protection to shocks. We argue that better functioning asset markets and more attractive savings instruments for the poor could make self-insurance much more effective. Finally, publicly provided safety nets should take into account their crowding-out effects on informal risk-sharing or selfinsurance. We argue that minimising crowding-out may be difficult with standard safety nets such as targeted employment schemes. Asset market support to encourage group-based savings schemes may provide a useful alternative.