Financialization Undermines Real Economy

By Jomo Kwame Sundaram and Michael Lim Mah Hui
KUALA LUMPUR and PENANG, Jul 2 2019 – The relationship between finance and the real economy is arguably at the root of the contemporary economic malaise. Unlike earlier acceptance of simple linear causation, recent recognition of a curvilinear relationship between finance and economic growth, implying ‘diminishing returns’, has important implications.

Undermining the real economy
Financialization undermines the real economy in the following ways. While finance may promote growth of the real economy ‘in the early stages’, ‘too much finance’ is bad for growth. The rise of market finance promises higher returns, i.e., more financial rents.

Jomo Kwame Sundaram

With finance increasingly used for speculation, debt-financed share buybacks, as well as both ‘brownfield’ direct and ‘portfolio’ investments, purchasing existing assets means not creating new economic capacities. Financialization has thus accelerated the ‘slow retreat’ from providing credit for productive investments to fund speculation for short term gain from unproductive investments. Meanwhile, smaller enterprises face higher interest rates and more difficult access to finance.

Second, ‘impatient’ capital increases asset prices and financial volatility. Surging capital inflows – driven by banks or asset managers seeking quick yields – raise the prices of securities, derivatives and other assets, to the delight of their owners.

Reversals of capital inflows trigger sharp drops in asset prices, typically triggering systemic problems, sometimes destabilizing the real economy via violent price fluctuations, or worse, cataclysmic financial crises that may take years to recover from.

Third, the overblown financial sector sucks financial resources and human talent away from the real economy. Nobel laureate James Tobin lamented that the US was drawing its best human resources into finance with remuneration unrelated to social productivity. On the eve of the 2008 financial crisis, almost 70% of Harvard seniors chose to work on Wall Street upon graduation.

Banking before financialization
Before financialization, finance was dominated by banks engaged in both short-term and long-term lending. The former mainly funded working capital and trade while the latter financed capital investments and projects – what Hyman Minsky called ‘hedged financing’.

Michael Lim Mah Hui

Hedged financing, mainly by banks, funded productive investments, with borrowers servicing both interest and principal repayment. Cross-border financial activity was constrained by the Bretton Woods system of fixed exchange rates and effective capital controls.

Besides bank-based financing, capital markets – mainly for securities, primarily equities and bonds – financed the long-term capital needs of corporations. Corporations issued securities to finance long-term capital investments, typically purchased by patient investors, such as insurance companies and pension funds.

Development banking needed
Investment banks, or ‘merchant banks’ in the erstwhile British empire, were the main financial intermediaries in capital markets. But commercial banks were often averse to financing the risky innovations necessary to accelerate economic and technological progress.

In response, governments in many countries stepped in to provide development banking. Most countries which have successfully industrialized – US, France, Japan, Korea, China, India, Brazil – have relied on public development banking as a critical tool.

Development banking has enabled states to provide subsidized long-term loans to ‘strategic’ industrial sectors to promote the international competitiveness of local firms, in turn enhancing what is termed national economic competitiveness.

With financial liberalization, international financial institutions have encouraged the development of market finance in many countries to reduce reliance on bank financing.

Capital markets key
Financial systems based on capital markets are more prone to financialization. It is easier, faster and more lucrative for speculative investors to ‘chase yield’ in such market-based financial systems.

The key is ensuring liquid secondary markets, especially with poorly regulated ‘repo’ arrangements generating profits from movements in the prices of securities, either by owning them, or by taking derivative positions on market price movements.

Market-making financial intermediaries quote prices at which they are prepared to buy – or sell – a security, securing profits from the buy-ask spread. Market makers meet demand for securities in secondary markets by either buying or borrowing them, using deregulated wholesale repo funding and derivative markets.

Central banks reluctantly foster liquidity illusion
The sine qua non of securities market-making is liquidity – the ability to buy and sell, in order to profit. For Keynes, the liquidity fetish is the most anti-social maxim of orthodox finance; as he warned, liquidity is only relevant to individual investors, not to the financial system as a whole.

This illusion of liquidity in securities-based financial systems became clear during the 2008 Global Financial Crisis when the money market – the most liquid of markets – froze when no party was willing to take on credit and counterparty risks.

The bond markets of many emerging market economies rely on foreign investors to move the prices of securities. They prefer liquid securities markets offering easy entry and exit, and demand market infrastructures conducive to short-term positions. These typically include liberalized ‘repo’ and derivative markets, to more easily finance and ‘short’ securities.

Despite central bank concerns about the illusory nature of securities market liquidity as such liquidity can easily disappear when the foreign investors pull out, most authorities in these countries have nonetheless catered to their demands by creating the desired market infrastructures.

When large highly leveraged financial institutions in these markets collapse, e.g., Lehman Brothers in September 2008, central banks are forced to step in to salvage the financial system. Thus, many central banks have little choice but to become securities market makers of last resort, providing safety nets for financialized universal banks and shadow banks.

Food From Thought

Ndomi Magareth, sows bean seeds on her small piece of land in Njombe a small town in the coastal Littoral Region of Cameroon. Pan-Africa Bean Research Alliance is a consortium of 30 bean-producing countries in Africa and its improved bean varieties has helped transition the legume from a subsistence crop to a modern commodity. Credit: Monde Kingsley Nfor/IPS

By Tharanga Yakupitiyage
UNITED NATIONS, Jul 2 2019 – As the weather continues to change and land becomes degraded, the socio-economic security implications are vast. In an effort to tackle these issues, climate-smart agriculture is quickly gaining traction around the world.

According to the United Nations Convention to Combat Desertification (UNCCD), 12 million hectares of productive land become barren every year due to desertification and drought alone representing a loss of production of 20 million tons of grain.

Not only is this an economic blow to almost 80 percent of the world’s poor people who rely on agriculture for their livelihoods, but hunger levels are also already rising globally.

Such challenges will only be compounded as we must increased food production by 70 percent by 2050 in order to feed the entire world population.

The need for sustainable, climate-smart agriculture is thus clear.

One practice that is gaining momentum is the development of improved, resilient crop varieties which help ensure both food and economic security.

In light of changing rainfall patterns where the old varieties which are drought-susceptible can no longer be produced under drought conditions, the new varieties which are developed for resilience have made a complete difference by bringing more beans on the table for food security as well as more beans for the market to bring income to the farmers,” one of Pan-Africa Bean Research Alliance (PABRA)’s bean breeders Rowland Chirwa told IPS.

Syngenta Foundation for Sustainable Agriculture’s Senior Scientific Advisor Vivienne Anthony spoke of the importance of connecting science to the realities on the ground.

“The community of scientists need to connect with the entrepreneurs and people that are investing in the future here in Africa and to work together to improve crops, create jobs, create markets and not sit back as scientists. They need to engage with the business,” she said.

From Theory to Practice

In collaboration with the University of Bern, the Syngenta Foundation has been working to improve Eragrostis tef, commonly known as teff—one of the most important cereals in Ethiopia where over 80 percent of the population live in rural areas.

The seeds have high protein levels and are much better adapted to drought conditions which is an increasingly common experience in the East African nation.

However, the teff plant produces low yields and harvests are not keeping pace with Ethiopia’s increasing population.

With modern genetics and improved farming methods, the project aims to increase yields, putting money into farmers’ pockets.

Demand and access to markets is also essential, Anthony noted.

“Designing a new variety is no different to designing anything somebody is going to buy. It involves understanding the marketplace, and who wants to grow it, use it, eat it,” she told IPS.

“The way to address some of the problems and challenges of agricultural sustainability in Africa is about encouraging markets to flourish that drive opportunity, innovation and entrepreneurship.  We fundamentally believe in market-based approaches as a way of trying to meet the Sustainable Goals, finding a business rationale where everybody wins and it keeps going,” Anthony added.

Similarly, PABRA is a consortium of 30 bean-producing countries in Africa and its improved bean varieties has helped transition the legume from a subsistence crop to a modern commodity.

Beans are among the most consumed and widely grown legume in Africa, taking up over 6 million hectares of land. Eastern Africa sees the highest consumption of beans with people eating as much as 50-60 kilograms every year.

However, one study found that without any adaptation strategies, the yields and nutritional value of common beans will dramatically decline by 2050.

We have been following more of a preemptive breeding approach where we know the climate is changing and at the same time the needs of the people we are trying to provide products with are also changing,” bean breeder Clare Mugisha Mukankusi told IPS.

Chirwa echoed similar sentiments, stating: “We look at regionally in Africa and see which are the major market classes we can focus on and look at the capacity of our national partners…and develop varieties that are responsive to the environmental needs, human consumption needs, and market demand needs using a Demand Led Breeding (DLB) approach.”

In Rwanda, improved bean varieties increased yields by 53 percent and household revenue by 50 dollars. Without the improved beans, 16 percent more households would have been food-insecure, PABRA found.

The International Center for Tropical Agriculture (CIAT), which coordinates PABRA, also helped develop drought-resistant beans which were provided to South Sudanese refugees in order to reduce their reliance on food aid and increase self-sufficiency.

From Sustainable Farms to Table

In addition to designing nutritional legumes that are heat-tolerant and disease-resistant, Mukankusi also highlighted the need to address the entire value chain to ensure there is productivity at the farm level.

This means promoting sustainable crop management practices such as intercropping, which involves growing two or more crops alongside each other, and crop rotation which can help increase soil fertility.

Anthony pointed to the importance of education in demand-led approaches and the business of plant breeding as the Syngenta Foundation in partnership with the Australian Centre for International Agriculture and the Crawford Fund work closely with African Centre for Crop Improvement in Ghana, South Africa, Kenya and Uganda so that local scientists can take the lead.

“Now we have a community of breeders who are trying to do this to really make an impact,” she said.

In light of environmental challenges, the world has already started to see a shift in consumption patterns as plant-based foods gain popularity. Crop breeding may therefore be more essential than ever.

If we are going to sustain the supply, we cannot sit back but we have to keep pace with the changes. The breeding has to be there and responsive to current and future demands,” Chirwa said.

U.S.-backed Kurds to Halt Child Soldier use in Syria

United Nations staff hold signs with photos of children stating they are not targets. The U.N. has struck a deal with the Syrian Democratic Forces (SDF) to stop using child soldiers and to release all youngsters from their ranks. Courtesy: UN Women/Ryan Brown

By James Reinl
UNITED NATIONS, Jul 2 2019 – The United States-backed Syrian Democratic Forces (SDF) have struck a deal with the United Nations to stop using child soldiers across swathes of eastern Syria under their control and to release all youngsters from their ranks, the U.N. announced Monday.

General Mazloum Abdi, the commander of the SDF, an alliance of armed groups that includes the Kurdish People’s Protection Unit (YPG), signed an accord over the weekend to halt recruitment of children under 18 years and to punish any officers who break the new rules.

The YPG has been identified as a recruiter of child soldiers in the U.N.’s annual “list of shame” since 2014. In its most recent annual study, the world body confirmed 224 cases of minors being recruited by the group in 2017.

“It is an important day for the protection of children in Syria and it marks the beginning of a process as it demonstrates a significant commitment by the SDF to ensure that no child is recruited and used by any entity operating under its umbrella,” said the U.N. Special Representative for Children and Armed Conflict, Virginia Gamba.

The deal was the result of months of talks between the U.N. and the SDF, which must now identify any boys and girls among its force and send them back to their families. The group must also discipline officers who break the new rules.

Conditions for children in Syria are among the “direst” on her agenda, Gamba said. In 2017, she confirmed at least 6,000 violations had been committed against youngsters by Syrian President Bashar al-Assad’s forces.

Worse still, the patchwork of rebels, terrorists and other armed militias fighting in Syria’s chaotic civil war committed more than 15,000 violations against children — ranging from recruitment to rapes, killings, maimings and the bombing of schools.

In addition to the YPG, the U.N. has named and shamed Syrian government forces, the rebel Free Syrian Army, the Islamic State (IS), the Islamist Ahrar al-Sham group, Jaish al-Islam and Tahrir al-Sham, the latest iteration of al-Qaeda’s former affiliate the al-Nusra Front.

After releasing all child soldiers and fulfilling the terms of its deal with the U.N. — known as an “action plan” — an armed group can be removed from the U.N.’s list of shame, as has happened with militias in Congo, Chad and Ivory Coast in recent years.

“Action plans represent an opportunity for parties to change their attitude and behaviour so that grave violations against children stop and are prevented to durably improve the protection of children affected by armed conflict,” Gamba said.

The SDF controls the quarter of Syria east of the Euphrates river after driving back IS in a series of advances from 2015 that culminated in March with the group’s defeat at its last holdout in Baghouz, near the Iraqi border.

Washington’s support for the SDF has been problematic, as Turkey views the Kurdish-led force as a branch of the Kurdistan Workers’ Party, a domestic independence group that Ankara sees as a terrorist organisation.

Children are among the victims of a recent spike in fighting in Syria’s Idlib Province, the last remaining bastion for anti-government rebels and where a shaky truce brokered by Russia and Turkey appears to be falling apart.

Thousands of pregnant women, vulnerable infants and young children are among the estimated 330,000 people fleeing conflict in the northwestern area, the Christian aid group World Vision said in a statement Monday. 

“It’s hard to imagine the trauma, distress and physical toll that the flight from air strikes and bombs has on families in Idlib. And it’s even worse for pregnant women and those with babies and young children,” said Mays Nawayseh, a World Vision aid worker.

The war in Syria, now in its 9th year, has killed hundreds of thousands of people and displaced millions since it started with the violent repression of anti-government protests in March 2011.

Unseen and Unsafe: Violence Against Women within Migrant Families

By Caley Pigliucci
UNITED NATIONS, Jul 2 2019 – Refugee and migrant women often face inescapable violence in the home. And the potential for intimate forms of violence is exacerbated by humanitarian crises and job insecurity.

On June 25th, UN Women released its report on the Progress of the World’s Women 2019-2020: Families in a Changing World, which focuses on women in the family.

According to the report, one factor that contributes to increased violence in the home is decreased opportunities in work, especially for migrants.

The report states that in Cambodia, when “men struggled to find work, [this] was linked to increased prevalence of violence against women by intimate partners.”

Not only do migrant women face increased violence at home, they are often unable to escape this violence. Women who rely on their male counter-parts to remain in a country do not have the independence afforded to their companions.

This is “particularly dangerous when women are facing, for example, violence against them, domestic violence, in the family,” Shahra Razavi, the Chief of Research and Data at UN Women, told IPS during a press briefing on June 25.

“So, it’s very important that they have the right to stay independent of that particular relationship,” she added.

The report recommends, among others, that there should be a focus on policies and regulations which support migrant families and women’s rights within those families.

The report also points out that “states can make regulatory and policy choices that strengthen women’s bargaining power.”

This can take various forms. Women registered separately from men in their household, or granted residency independent of the men they migrate with through marriage or family ties are less likely to remain in violent relationships in order to remain in a country.

Making Progress

The report cites Indonesia’s recent policies as a step forward in protections for migrant women.

In 2017, the government of Indonesia passed legislation which states that “for the first time, guaranteed some basic rights to workers migrating through official channels,” according to the report.

The new law adds protections like social security programs, protections against trafficking and violence, and gender equality.

Of around 9 million estimated Indonesians working abroad in 2016, about half were women.

Migrant Care, an organization cooperating with UN Women, added that 10 countries (Brunei Darussalam, the Kingdom of Cambodia, the Republic of Indonesia, the Lao People’s Democratic Republic, Malaysia, the Republic of the Union of Myanmar, the Republic of the Philippines, the Republic of Singapore, the Kingdom of Thailand, and the Socialist Republic of Viet Nam) across the Association of Southeast Asian Nations (ASEAN) added protections to migrant workers through the signing of the Consensus on the protection and Promotion of the Rights of migrant Workers (2017).

One of the principles in the consensus aims to “Uphold fair treatment with respect to gender and nationality, and protect and promote the rights of migrant workers, particularly women.”

But progress has not been seen everywhere.

Dr. Nicole Behnam, Senior Technical Director at the Violence Prevention and Response Unit of the International Rescue Committee (IRC) told IPS that “rates of gender-based violence (GBV) are shockingly high in all contexts,” but that this “increases during and because of crisis.”

According to a report on child brides from the IRC, in Lebanon, 41% of young displaced Syrian women are married before 18.

In Syrian refugee communities in Jordan, rates of child marriages nearly tripled between 2011 and 2014, going from 12% to 32%.

Scenes from Zaatari Refugee Camp, Jordan” Al Mafraq, Jordan, 27 March 2016, UN Archives

This happens despite laws being in place to protect women in the home.

In Jordan, it is illegal to marry before 18, but the IRC states that “the complex process to register a marriage, and the fact that many refugees lack official identification, means that girls who can’t prove their age are even more vulnerable.”

Another concern for many countries comes with the rapid repeals of protections for women in families.

While the UN Women’s report aims at establishing policies not even seen in many developed countries, like paid parental leave, Razavi told IPS of her worries in sliding backwards.

“I think that some of the issues obviously are going to be different for the developed countries,” Razavi said.

But it appears that these differences are in scale, and not in kind.

“Many countries where some of these systems have been built up, at the moment, since 2008, in the context of austerity, these policies are being rolled back,” Razavi said.

She specified that “In particular, violence against women services have had to be cut back in some countries.”

Behnam thinks that for both developing and developed countries, there needs to be “clear acknowledgement of how serious and pervasive the problem is and a matched urgency to both preventing and responding to GBV.”

The IRC sees the need for: continued and increased participation of women’s organizations to address local issues, improving in tracking and reporting of investments for increased transparency in funding to combat GBV, and increasing the number of specialists focused on GBV.

Behnam sees these improvements as necessary for women in migrant and refugee families, but also for women in all contexts.

“Violence is pervasive in women’s lives – it’s the reality of their every day – and it is not just strangers who commit violence against women. Often, it is the people who they should be able to trust the most – their family members,” Behnam said.

She added that “We cannot ignore violence because it happens out of view; in fact, that is the violence we must fight most to name and respond to because it is so hidden.”

Paraguay Moves Towards Sustainable Commodities

By Silvia Morimoto
ASUNCION, Paraguay, Jul 2 2019 – The statistics are alarming. By 2050, the world will require an estimated 60 percent growth in agricultural production to meet the food demand of a population of close to 9 billion people.

While we ramp up production to ensure food security, it is crucial that this increase has minimal impact on the environment and forests. This is vital to preserve tropical forests and to meet the climate objectives of the Paris Agreement.

The recent Intergovernmental Panel on Science and Policy on Biodiversity and Ecosystems (IPBES) reports that between 1980 and 2000 more than 100 million hectares of tropical forests were devastated globally. More than 40 percent of this loss occurred in Latin America mainly due to the expansion of livestock.

So, what we do in one sector will without a doubt affect another. About 24 percent of Greenhouse Gas (GHG) emissions are now are caused by agriculture and deforestation, and about 33 percent of efforts to mitigate climate change depend on forest conservation and ecosystem restoration.

Paraguay is at the heart of this story. It is home to large swaths of wetlands and forests. The country is the world’s fourth largest exporter of soy and the eight largest exporter of beef. Both sectors contribute to more than 30 percent of Paraguay’s Gross Domestic Product (GDP).

Silvia Morimoto

Now, in an effort to confront those challenges, Paraguay is leading the way in the region to address the causes of deforestation. It is convening a “Forests for Sustainable Growth” strategy, and it is promoting new alternatives for the sustainable production of soy and beef that have been designed jointly with stakeholders.

The overarching goal is to help achieve Sustainable Development Goal (SDGs) 12 Responsible Consumption and Production, and Goal 15 Life on Land. To make headway on this front, the Ministry of Environment and Sustainable Development (known as MADES) has been implementing since 2015 the Green Production Landscapes Project.

The project is in partnership with the United Nations Development Programme (UNDP) through its Green Commodities Programme and aims to protect the Atlantic Forest of Alto Parana in the Oriental Region of the country by promoting sustainability in the soy and beef commodities supply chain.

This initiative funded by the Global Environmental Facility (GEF), co-financed by the Ministry of Agriculture and Livestock, the National Forestry Institute, the Sustainable Finance Roundtable, ADM Paraguay SRL, Louis Dreyfus Company, and Cargill, is aimed at supporting farmers like Juan Antonio Secchia.

In 1990, Secchia received 600 hectares of land from his grandfather in Caazapa, a department located in the Oriental Region, where the Atlantic Forest of Alto Paraná is allocated.

When Secchia started farming on his San Isidro ranch, he had about 300 head of cattle that produced milk. In 2012 in an effort to increase productivity, Juan Antonio decided to innovate, to optimize the use of his land by investing in the silvopastoral system. This alternative production system combines trees, pasture, and animals, to preserve the environment.

Credit: UNDP Paraguay

In 2018, the private sector and the National Government supported him so he could expand the silvopastoral system, to another 40 hectares of his farm. Now, he has doubled his cattle herd from 300 to 600, increasing milk production by 100 liters a day.

Besides Secchia, other 3 farms have received support to adopt the silvopastoral system. More than 133,000 seedlings were donated to plant trees, to protect the soil, and to provide a better environment for raising cattle.

The success of the system has led to a new goal: to double the area of silvopasture to 400 hectares, this year, to advance the conservation of natural resources, and improve beef production.

The government along with UNDP has created a National Platform for Sustainable Commodities, a space for dialogue that reunites stakeholders for the first time to discuss needs and actions to achieve sustainability in the commodities supply chain and to protect the environment.

Such efforts were expanded to the Occidental Region through the Green Chaco Project. The Chaco is the second-largest forest ecosystem in Latin America, with rich biodiversity, that accounts for about 60 percent of Paraguayan territory, where less than three percent of the population lives. Yet, it is home to 45 percent of the national dairy production, and a vast portion of the nation’s cattle farms.

These initiatives have led to the dissemination of best practices, and discussions on the platform are resulting in new ideas. Suggestions for concrete solutions are going to be included in a National Action Plan for sustainable soy and a Regional Action Plan for Sustainable Beef.

For the Paraguayan Government, addressing deforestation promises multiple wins for climate change, for inclusive sustainable development, for economic growth, and for farmers. But success will come only if we all act together, now.