The Social Trade-offs of Risk Management
by Jake Davis, Editor-in-Chief
Wewoka–The past couple of articles that I have written were about the Risk Management process. To recap the importance of Risk Management, here are a few key points:
1. Taking on risks is necessary to pursue opportunities for development. The risk of inaction may well be the worst option of all.
2. To confront risk successfully, it is essential to shift from unplanned responses when crises occur to proactive, systematic, and integrated risk management.
3. Identifying risks is not enough: the trade-offs and obstacles to risk management must also be identified, prioritized, and addressed through private and public action.
4. Risk management requires shared action and responsibility at different levels of society.
5. Governments have a critical role in managing systemicrisks, enabling an environment for shared action, shared responsibility, and channeling direct support to vulnerable areas.
As I promised in my last article, I am going to discuss the trade-offs in the Risk Management process.
To begin, there are 5 levels of Risk Management:
Each of these levels have a responsibility to the others. On that same token each is dependent on the others as well.
For example individuals’ own efforts, initiative, and responsibility are essential for managing risk, their success will be limited without a supportive external environment.
People can successfully confront risks that are beyond their means by sharing their risk management with others.
By pooling risk collectively through various overlapping social and economic systems, the ability to maintain a safe and advantageous environment can be attainable.
There still are rules that the individual must abide by in order to maintain a functional relationship with these systems.
This is what it means to have Risk Management trade-offs.
The household is no different in possessing the primary instance of support, pooling resources, protecting its members—especially the vulnerable (young, elderly, ill).
Still there are certain rules within the community that must be adhered to, while the community, businesses, and government provide such support as water, sewage, jobs, and morale to help maintain the household.
Communities provide informal networks of insurance and protection, helping people deal with pandemic risks and pooling resources to confront common risks.
Businesses can help absorb shocks and exploit the opportunity side of risk, contributing to more stable employment, growing income, and greater innovation and productivity.
An example of this in an indirect way is how the water filter station on 8th and Mekesukey helped everyone with fresh water to drink while the city said water that was darker than the lake water was “drinkable.” And for that I believe that we are all thankful.
The government has the scale and tools to manage systemic risks at the international, national and regional levels, to provide an enabling environment for the other systems to function, and to provide direct support to vulnerable people in trade for taxes and support for ventures and ideas.
These systems have mutual interactions, often complementing and sometimes substituting for each other’s risk management functions.
The importance of these systems changes with the level of the development of their relationships. In less advanced systems, informal mechanisms tend to be more prevalent and the relative roles of the household and the community are larger.
As countries advance—and informal mechanisms give way to formal ones—the importance of the contributions from the business sector and the government systems grow.
No matter what level of Risk Management the crisis hits (usually all of them simultaneously, but sometimes just a few) there are some guidelines that stand the test, and these are:
1. Do not generate uncertainty or unnecessary risks
2. Provide the right incentives for people and institutions to do their own planning and preparation, while taking care not to impose risks or losses on others
3. Keep a long-run perspective for risk management by building institutional mechanisms that transcend political cycles
4. Promote flexibility within a clear and predictable institutional framework
5. Protect the vulnerable, while encouraging self-reliance and preserving fiscal sustainability
When Risk Management fails it can be catastrophic, such as in the case of Picher, Oklahoma.
Picher, now a ghost town, was called by the Environmental Protection Agency (EPA) the most toxic place in America.
Once the most productive lead and zinc mining area in the world, today stands empty with enormous piles of lead-laced mine waste.
The mining ceased in 1967 due to contaminated water from the mines turning the local creek red.
levels of lead were found in blood and tissue of residents, cancer levels skyrocketed, and three quarters of the Picher’s elementary school students were reading below grade level.
The area was declared the Tar Creek Superfund site in 1981 by the EPA.
Here is where Risk Management failed. The mine shut down, the EPA gave the residents money to move, but most of the residents didn’t leave until 2006 when studies found that most of the town was in eminent danger of collapsing into the mines further adding to the aforementioned negative effects of lead poisoning.
Furthermore the town was deemed too toxic to clean up, and a federal buyout program paid people to leave.
The city’s post office closed in July 2009, and the city ceased operations as a municipality on Sept. 1, 2009.
The only thing that was left was 6 lived in homes and a pharmacist (who passed away in 2010 due to lead-induced illness).
All of the illnesses could have been avoided with a proper risk management system and a little common sense. But nothing was done with any urgency. Decades of just letting the crisis fester killed thousands and hurt thousands more.
With the problems that Wewoka is having with water, the same thing could happen.
Unless we initiate a common sense approach to Risk Management.
There will be more articles on Risk Management in the future, but don’t be afraid to go back and read the other ones or The World Development Report 2014 & 2015 to find more information about Risk Management.