Disaster Risk and Effect of Informal Insurance on Human Capital Formation in Rural Areas of Developing Countries

Shiyu ZHANG, Muneta YOKOMATSU

Abstract


”Disaster and poverty” has become one of the main topics of global development for decades.Nowadays, in the rural areas of many developing countries, farmers’ fate is still decided by natural conditions. They have little savings and little chance to finance from the banks. Obviously, they are extremely vulnerable to the natural disasters like droughts, floods, typhoons and earthquakes. Many methodologies dealing with poverties in developing countries have been investigated from a variety of aspects. However, few of these researches focus on human capital. Recognizing the importance of human capital in agricultural activity, this paper develops a methodology to analyze the human capital formation under disaster risk in rural areas of developing countries. Taking intergenerational externalities into consideration, this paper builds a three-period overlapping generations model. It is assumed that after
the occurrence of a disaster, farmers are forced to leave rural areas if they cannot get enough food from their harvest to survive. In the rural areas where no insurance is provided by financial sector, farmers try to keep staying in their village in various ways of what we call informal insurance. In order to figure out the effect of these informal insurance mechanism on the formation of human capital as well as emigration from rural areas, Quasi-Credit contracts and saving of livestock are considered in the latter part of the paper. Findings in this paper show that farmers are exposed to the risk of emigration without informal insurance and the existence of a vicious circle between low human capital and little human
capital investment is confirmed. Moreover, Quasi-Credit contract could prevent large-scale emigration but might bring down the incentive to invest in human capital at the same time. However, within a certain
range, saving of livestock might be effective to reduce emigration and raise the human capital investment as well.

Keywords


Disaster Risk; Informal Insurance; Human Capital; Developing Countries; Overlapping Generations Model

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