Threats and Opportunities from the
Financialization of Development: The
Case of Agriculture and Microcredit
Jerry Buckland, PhD
University of Winnipeg affiliate / 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
Table 1: Selected Indicators of Financialisation (1995-2007)
(a)
(b)
(c)
US
343.45 63.35
114.02
Western Europe 530.23 242.64 225.04
Japan
532.54 597.90
13.46
New Zealand
23.49 268.47 44.68
Australia
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.
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1. Financialization of Development
Source: Bain and Co. 2012. A World Awash in Money: Capital Trends to 2020,
Boston: Bain and Co.
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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
Financialization
Financial
Institutions, Third
Party Investors &Commodity Traders:
Financialized
The ‘ABCDs’
Traders
Complex &
Varied
Farmers
Diversified
Consumers
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2. Financialization of Agriculture
Source: Murphy, Sophia, David Burch, and Jennifer Clapp 2012. Cereal Secrets:
The world's largest grain traders and global agriculture,” Oxfam Research
Reports, Oxfam.
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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
• 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)
Source: Murphy, Sophia, David Burch, and Jennifer Clapp 2012. Cereal Secrets:
The world's largest grain traders and global agriculture,” Oxfam Research
Reports, Oxfam.
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2. Agricultural Financialization
• New / Re-invigorated Actors in Ag Fin’tion: ABCD
• 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.
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2. Agricultural Financialization
• New / Re-invigorated Actors in Ag Fin’tion: ABCD
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
Source: Murphy, Sophia, David Burch, and Jennifer Clapp 2012. Cereal Secrets:
The world's largest grain traders and global agriculture,” Oxfam Research
Reports, Oxfam.
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2. Agricultural Financialization
• New / Re-invigorated Actors in Ag Fin’tion: ABCD
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
Source: Murphy, Sophia, David Burch, and Jennifer Clapp 2012. Cereal Secrets:
The world's largest grain traders and global agriculture,” Oxfam Research
Reports, Oxfam.
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3. Financialization and Micro-credit
Source: 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 peerdisciplined 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
Financialization
Financial
Institutions & Third
Party Investors &NGOs, Bilateral and
Multilateral Donor
Agencies
Savers
Micro-loan
Borrowers
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3. Financialization and Micro-credit
Source: 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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3. Financialization and Micro-credit
Source: Rob Aitken, 2013. ‘The Financialization of Micro-Credit,’ Development and
Change, 44(3): 473-499.
•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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3. Financialization and Micro-credit
Source: Rob Aitken, 2013. ‘The Financialization of Micro-Credit,’ Development and
Change, 44(3): 473-499.
•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 via
1) 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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3. Financialization and Micro-credit
Source: Rob Aitken, 2013. ‘The Financialization of Micro-Credit,’ Development and
Change, 44(3): 473-499.
•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 assessment
•
Identify 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
Hypothetical Set of Indicators on Commodity Trader
Performance
Hypothetical Set of Indicators on MFI Performance
Capacity
building
Profitability
1
0.8
0.6
0.4
0.2
0
Gender
equity
Poverty
reach
MFI A
MFI B
Productivity
Profitability
1
0.8
0.6
0.4
0.2
0
Food
security
ABCD 1
ABCD 2
Gender
equity
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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 Cited
Rob 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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