Risk Analysis What is it Social risk analysis responds to the by jackshepherd


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Risk Analysis

What is it? Social risk analysis responds to the question: what could possibly go wrong?
It is essentially a thought experiment, based on context-specific knowledge of a country
and the external environment in which it is situated, potential factors that could affect
policy effectiveness and people. To the extent that it involves country stakeholders
directly, social risk analysis incorporates local knowledge into policy design.

What is it used for? Social risk analysis can be used to: (a) avoid policy choices that are
likely to fail or have unacceptably high costs; and (b) change policy or design
complementary measures that respond to events not considered in initial assumptions
about country conditions, policy impact or exogenous shocks; (c) develop “contingency
plans” for events that could either derail reform or inflict high cost on vulnerable
stakeholders. Two approaches to social risk analysis are considered below.

(a) Social Risk assessment

What is it? Risk assessment is an explicit statement of assumptions that underlie
expected benefits of reform – what should happen for a policy to achieve its goals, 1 and a
context-based assessment of the validity of those assumptions. Finally, it explores the
likely effect of invalid assumptions on policy effectiveness or on specific stakeholders.

What can it be used for? Risk assessment is used to estimate the possibility that initial
assumptions of reform are invalid, and to consider the consequences of several kinds of
risk (see Risk Analysis section in the main report for a risk assessment matrix and a more
detailed description). Categories of risk include:

            ♦   Country risks: conflict and violence, political instability, ethnic or religious
            ♦   Political economy: capture of benefits, opposition or distortion of policy by
            ♦   Implementation: high complexity, weak governance, limited technical
            ♦   Exogenous risk : terms of trade, global market opportunities, competition
                with other producers, regional conflict, climate effects, etc.

Data requirements. While social risk analysis may begin as a conversation among
informed Bank staff and country officials, it is essential that findings be based on local
perspectives. The assessment is most effective when conducted with a stakeholder group,
which may be diverse or homogenous depending how well participants can communicate

  These assumptions occur at each stage in a Logical Framework: e.g., inputs-outputs, outputs -outcomes,
outcomes-objectives. In this analysis, risks are simply the obverse of assumptions. They represent the
likelihood that certain assumptions may prove to be incorrect. The degree to which an assumption is likely
to be invalid is another way of articulating the degree of risk.
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with one another. 2 Findings from focus groups, in turn, can be validated (or cast into
doubt) through interviews with informant observers, such as academics or journa lists.
Secondary sources include a diverse array or country risk rating surveys.

Opportunities and limitations. Risk assessment is a rapid and relatively low-cost way to
think “outside of the box.” Agreement among diverse stakeholders about likely and
serious risks should result in a fundamental rethinking of policy (e.g., design, timing,
sequence). At the same time, conducting risk analysis is not risk-free. The process itself,
if poorly facilitated or done with contentious stakeholders, can easily produce more heat
than light. Perceptions of risk that are based on dogma or political calculation, rather than
reflection and deliberation, will do little to inform decisions about policy design. In
addition, findings are necessarily based on subjective understanding of complex issues
and some speculation. This is why some kind of validation exercise is essential.

(b) Scenario analysis3

What is it? Scenario analysis is a process conducted with one or more focus groups
composed of key decision-makers and stakeholder representatives, that helps policy-
makers highlight and explore uncertainties. Several scenarios are created for a reform,
each of which is a “what if” story that is tailored to the specific goals of an intervention
and the forces that will have the most effect on the achievement of those goals. It asks
decision- makers to consider the results of their strategies in a variety of plausible futures.
Each of these futures is based on different social, economic, political or technological
outcomes that drive change in a country.

The scenario team first discusses, in broad terms, the intended goals of the operation and
the logic of how it might achieve those goals. They then work together to identify which
driving forces in a country are most relevant to the goals and current design of the
operation. Once these forces are determined, the team suggests ways in which they might
change. Changes that complement one another are unified into scenarios. The scenario
team then agrees on indicators for each of the driving forces that would signal a
movement towards one of the scenarios. Once scenarios are created, the scenario team
explores how those changes would affect the operation. Once these effects have been
determined, indicators for movement towards each scenario are developed. These
indicators might be as simple as the outcome of an election or as subtle as a change in the
relative strength of a neighboring currency

  In only homogeneous groups are possible, several rounds will be needed. When multiple groups are
involved, watch for major variation in perceptions of risk; a major disjuncture in opinion may signal risks
to ownership or social tensions that must be carefully managed.
  For an operational discussion with examples, see Jonathan Maack, “Scenario Analysis: A Tool for Task
Managers” in Social Analysis: Selected Tools and Technique, World Bank Social Development Papers,
Number 36 (June 2001); For in-depth case studies of applied scenario analysis, see:
www.gbn.org/public/gbnstory/downloads/gbn_mont_fleur.pdf (South Africa)
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                                              Driving Forces

The identification of driving forces for scenario analysis should begin with an open-ended brainstorming
session about everything that the scenario team can think of as relevant to the success of the operation. This
may range from specific events such as the passage of legislation to general trends such as a decline in
global commodity prices. These discrete elements can then be aggregated into four categories:
Ø Social: These forces may include gender relations, cultural and class tensions, disputes over access to
    resources such as land and water. They also include demographic trends such as age, family and
    household structure or regional and national distributions of poverty and wealth.
Ø Economic : These forces may include changes in: macroeconomic fundamentals (e.g. inflation and
    exchange rates, the balance of trade, current debt levels), microeconomic characteristics (e.g. size, type
    and ownership of firms, size of formal vs informal economy); market forces (distribution and efficiency
    of rural and urban markets, sources of competition, international demand for key exports).
Ø Political: These forces may include change in: support for an economic agenda among the elite and the
    general public, stability of government, stability of the current administration, popular support for
    specific long-term policies (e.g. privatization), type of political system (e.g. democracy faces a coup),
    rules for function and formation of political parties. At the international level, they may include changes
    in: regional and international relations, level of conflict, and ties to international trading blocs.
Ø Technological: These forces may include change in: level of technology in key industries, emerging
    technologies (national and international), capacity to manufacture technology for export, amount and
    nature of research carried out in the nation.

What can it be used for? Scenario analysis can help decision- makers perceive
vulnerabilities in current strategies. Considering different futures makes it possible to
“pre-test” economic reforms in a variety of future environments, rather than rely on
single forecast that may not come to pass. Decision-makers can respond by changing
strategies or developing responses to risk, including:

  (i) Increasing the flexibility of the operation. The creation of scenarios enables policy-
          makers to put in place preliminary contingency plans that respond to a variety of
  (ii) Enhancing the legitimacy of policies. Scenario creation can be used to increase the
          transparency of the policy-making process and give diverse stakeholders a role
          in the assessment of risk. It can help clarify to the public the underlying
          rationale for a policy. When carried out with the participation of different
          stakeholders and broadly disseminated, it can add credibility to the reform
          process itself.

Data requirements. Scenario analysis is driven by stakeholder perspectives. Relevant
information obtained from the focus group includes (i) a discussion of the intended goals
of the operation and the logic for achieving them through policy; (ii) identification of
driving forces in a country which are most relevant to the goals and current design of the
operation; (iii) how those forces might change (including indicators for observing the
change). Scenario analysis is meant to be logically rigorous and objective, and
information provided to the focus group should include: (i) relevant macro- and
microeconomic data; (ii) a summary of the past policy programs and their implications as
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well as the current thinking among policymakers; (iii) sector-specific information on
relevant technical issues

Opportunities and limitations. The principal value of scenario analysis is the flexibility
that it brings to the assessment of risks. Scenarios can aid in considerations of level of
initial commitment, the timing and sequence of interventions, and triggers for review and
exit strategies. As with any participatory technique, the quality of scenario analysis will
depend on the willingness of stakeholders to communicate in good faith and the skill of

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