Threats and Opportunities from the Financialization of Development: The Case of Agriculture and Microcredit Jerry Buckland, PhD University of Winnipeg

Threats and Opportunities from the Financialization of

Development: The Case of Agriculture and Microcredit

Jerry Buckland, PhD

University of Winnipeg affi liate / Part of Canadian Mennonite University

28 October 2014

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1. Financialization of Development • What is it?

• Financialization is the growing integration of financial motives and the proliferation of financial devices in the socio-economy • Financialization is distinct from markets and trade which has to

do with producers directly with consumers

• It has to do with inserting finance –money, credit, investments– into market and trade transactions

• Development refers to a area of theory, policy and practice to improve human well-being including International Development (Africa, Asia, Middle East, & Latin America) and community development (applied universally at the local level)

• Financialization of development is where the role of financial motives and financial devices expand in theory, policy and practice of IDS and CD. Agriculture and micro-credit are two cases considered here

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1. Financialization of Development • What is it?

• The relationship between finances and development is multi-faceted. Some of the most important relationships are, • Neoliberalism: National and international economic policies that

privilege markets over state action required through, e.g., SAPs, WTO agreements and memberships, etc. • A consequence of this is national economic policies that restrict state

action and require it to become more market focused AND

• Boost the role of local and international businesses in the economy

• Post-industrial economy of the global North: expansion of the role of financial service companies, e.g., banks, and Information and Communications Technologies • Increasingly applied / embraced in the global South

• All of these processes affect how citizens / consumers and small producers (e.g., farmers) are affected by the expansion of markets and reduced state

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1. Financialization of Development• Is financialization an important issue for IDS?

• YES, because• It is a deep rooted change process

• It is a change process with a troubled history (e.g., US stock market crash in 1929; the sub-prime mortgage crisis of 2007-08)

• The principal proponents are large actors such as banks and corporations

• It encourages vulnerable people (e.g., small farmers) to integrate into increasingly financialized markets:• Increasing the distance between producer and consumer

• Expanding asymmetries between vulnerable and central decision-making

• Increasing probability that speculation enter into the production equation

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1. Financialization of Development

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Table 1: Selected Indicators of Financialisation (1995-2007) (a) (b) (c)

US 343.45 63.35 114.02Western Europe 530.23 242.64 225.04Japan 532.54 597.90 13.46New Zealand 23.49 268.47 44.68Australia 489.58 – –Canada 298.82 258.45 330.62

(a) Percentage increase in total value traded in stock market/GDP.(b) Percentage increase in bank income before taxes.(c) Percentage increase in securities under bank assets.Source: Kus, Basak 2007. “Financialisation and Income Inequality in OECD Nations: 1995-2007” The Economic and Social Review, Vol. 43, No. 4, Winter, 2012, pp. 477–495.

1. Financialization of Development

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Source: Bain and Co. 2012. A World Awash in Money: Capital Trends to 2020, Boston: Bain and Co.

2. Agricultural Financialization • An example of a macro-level financialization process: the

root pressures are stemming from the top of the global economy associated with state policy (liberalization) and corporate expansion (e.g., the ‘ABCDs’)

• Agricultural financialization is concerned with that part of financialization that affects the food and farm sectors

• In a very direct way corporations and banks are key actors in this process. Murphy et al 2012 define: “financialization refers to the growing involvement in agricultural production, processing, and distribution of a range of finance institutions which have never before invested in agriculture – asset management companies, private equity consortia, merchant banks, superannuation/pension funds, hedge funds, sovereign wealth funds, and others (Murphy et al. 2012).”

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2. Financialization of Agriculture: Macro-side

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Complex & Varied Farmers

Financial Institutions, Third Party Investors & Financialized Traders

Commodity Traders: The ‘ABCDs’

Diversified Consumers

Financialization

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Source: Murphy, Sophia, David Burch, and Jennifer Clapp 2012. Cereal Secrets: The world's largest grain traders and global agriculture,” Oxfam Research Reports, Oxfam.

2. Financialization of Agriculture

2. Agricultural Financialization• New / Re-invigorated Actors in Agriculture

Financialization• Commodity Traders

• The ‘ABCDs’: ADM, Bunge, Cargill, Louie Dreyfus

• New traders

• Financial Institutions• Banks• Third-party Investors

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2. Agricultural Financialization• New / Re-invigorated Actors in Ag Fin’tion:

ABCD

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• Cargill• On the basis of some indicators, is the biggest commodity trader

• The largest private company in the US, with sales and other revenues of $119.5bn in 2011.

• “Cargill operates across a wide range of commodities, products, and services around the globe. It is organized into five business segments: 1) agricultural services; 2) food ingredients and applications; 3) origination and processing; 4) risk management and financial; and 5) industrial; each business segment has several business units.”

• Record profits of $4 bn in 2008; in part related to its access to market information and its ability to bring it together for a more comprehensive understanding of market dynamics; can take advantage of price volatility (p.26)



ABCD

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• Cargill• Investments in biofuels: e.g., Virent Energy, financed by its

venture capital arm now called Black River Asset Management

• Cargill has a number of financial subsidiaries ranging from • Cargill Risk Management

• Risk management for commodities and derivatives:• OTCs for internal and external purposes

• Black Water Asset Management • Engages in proprietary trading for Cargill • Manages funds for third party investors: $4.5 billion in

assets

• Other fin.-oriented subsidiaries • Cargill Trade and Structured Finance• CarVal Investors• Cargill Energy and Risk Management Solutions Source: Murphy, Sophia, David Burch, and Jennifer Clapp 2012.

Cereal Secrets: The world's largest grain traders and global agriculture,” Oxfam Research Reports, Oxfam.


ABCD

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Archer Daniels Midland (ADM) • Much smaller than Cargill, with net sales of $80.7bn in 2011; Publicly

traded company and based in the USA

• The world’s third largest processor of oilseed, corn, wheat, and cocoa; processor of food products, manufactures food ingredients, animal feed, chemicals, and energy products; largest processor of cocoa beans

• Profits rose in 2007-08, related to increase in commodity prices

• Involvement in ethanol since the 1970s; large recipient of US government subsidies used to promote ethanol production



ABCD

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Archer Daniels Midland (ADM) • Financial Services

• ADM Investor Services• Manages ADM commodity risk• Offers investment services to external customers• Subsidiaries

• Archer Financial Services

• Balarie Capital Management


3. Financialization and Micro-creditSource: Rob Aitken, 2013. ‘The Financialization of Micro-Credit,’ Development

and Change, 44(3): 473-499.

Financialization has become intertwined in complex ways with development actions in the ‘developing world’ through activities such as microfinance,

mobile phone based banking, financial inclusion efforts and the ‘developed world’ through such programs as asset building, financial literacy programs

Much effort done under the auspices of development contains two key features or motives:

Helping, welfare, improved well-being

Production, competition, effort

Micro-credit (MC) is a prime example of these multiple motives, Micro-credit’s first impetus rooted in income-generation and gender-equity within peer-

disciplined loan scheme: Mohamed Yunus early 1970s with Grameen Bank, Bangladesh

Dramatic changes since then including proliferation of types of micro-credit, Some micro-credit programs continue in this IG-GE vein

But other micro-credit programs gone a different direction

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3. Financialization and Micro-credit

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Savers

Financial Institutions & Third Party Investors &NGOs, Bilateral and

Multilateral Donor Agencies

Micro-loan Borrowers

Financialization

3. Financialization and Micro-creditSource: Rob Aitken, 2013. ‘The Financialization of Micro-Credit,’

Development and Change, 44(3): 473-499.

Aitken identifies several powerful shifts in MC since the 1970s,

Official discourse shifted from IG-GE to financial inclusion: This process emphasizes commercialization, market expansion, and private

competition

Substantial growth of micro-financial institutions (MFIs), during a period when development assistance has been growing slowly or not at all

By 2008 there were 1,395 recognized MFIs with 86 million borrowers with gross loan portfolio of $US45 billion

Systematic removal of subsidies to MC with associated emphasis on financial self reliance for MFIs

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Aitken critiques this process,Shift from welfare promotion to shifting risk to individual borrower

Privatization of risk is consistent with neoliberal agenda

MC can assist in fostering financial sector commercialization

‘Local’ neoliberalism benefits a relatively well-off local group

Bateman’s argument that MC supports consumption not production

MC feeds into entrepreneurialism, a central feature of neoliberalism

Harvey argues MC leads to ‘accumulation by dispossession’ It targets the poor

Burdens them with debt

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Aitken argues that MC, via ‘accumulation by dispossession,’ “converts the poor into an asset stream”

Securitization involves “pooling of credit receivables into a financial securities which can be exchanged by investors in financial markets.”

This converts credit receivables into a financial asset stream

This has involved 3 components: Financial valuation / bureau via1) E.g., Standard and Poor & Initial Public Offering, IPO

2) Intermediation: micro-credit investment vehicles (MIVs): special instrument that link investors with opportunities

3) Securitization: allows the separation of loan receivables from the originating MFI

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Aitken finds that the risks of financialization of MC are substantial,

Financialization is about managing and commodifying risk

Commercialization of MC involves placing the risk onto the individual borrower

1) And it will expose vulnerable people to a risky dimension of the financial market, related to securitization

2) Expanding the distance between borrower and creditor

3) Rising interest rates

4) Stratification of credit markets

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4. Financialization of Agriculture and Micro-credit: Opportunities, Threats & Responses • Opportunities

• Improved access to capital for productive investment

• Threats• Greater distance between vulnerable people (farmers, borrowers)

and end users (consumers, savers)

• Probability of increased market concentration

• Shift from physical to financial portion of economy • Increased control by financial actors and less control for production

actors, and

• Increasingly directed by financial motives and less directed by physical motives, e.g., yield, weather, storage, transportation issues

• Probability of increased role for speculation

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4. Financialization of Agriculture and Micro-credit: Opportunities, Threats & Responses • Responses

A. Clarify the purpose of financialization: for what purpose?

• What does financialization contribute to farm/food?

• How are the benefits of financialization distributed?

• How can poor people / communities / nations benefit from financializatoin?

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4. Financialization of Agriculture and Micro-credit: Opportunities, Threats & Responses

B. Evidence-based assessmentIdentify appropriate indicators, measure outcomes, and evaluate

More complex than a ‘bottom-line’ capital market assessment; several dimensions including impact on poverty reduction,

gender equity and capacity building

Undertaken with and by vulnerable groups

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Profitability

Poverty reach

Gender equity

Capacity building 0

0.5

1

MFI AMFI B

Profitability

Food security

Gender equity

Productivity 0

0.5

1

ABCD 1ABCD 2

Hypothetical Set of Indicators on Commodity Trader PerformanceHypothetical Set of Indicators on MFI Performance

4. Financialization of Agriculture and Micro-credit: Opportunities, Threats & Responses

C. Regulate financial actors to minimize speculation

D. Identify and expand support for public and common pool goods

E.g., farmer-supported in situ biodiversity

E.g., financial organizations that are supported by and service vulnerable people, e.g., credit

unions

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References CitedRob Aitken, 2013. ‘The Financialization of Micro-Credit,’ Development and Change, 44(3): 473-499.

Bain and Co. 2012. A World Awash in Money: Capital Trends to 2020, Boston: Bain and Co.

Murphy, Sophia, David Burch, and Jennifer Clapp 2012. Cereal Secrets: The world's largest grain traders and global agriculture,” Oxfam Research Reports, Oxfam.

Kus, Basak 2007. “Financialisation and Income Inequality in OECD Nations: 1995-2007” The Economic and Social Review, Vol. 43, No. 4, Winter, 2012, pp. 477–495.

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Documents

Threats and Opportunities from the Financialization of Development: The Case of Agriculture and Microcredit Jerry Buckland, PhD University of Winnipeg