Financial liberalization, food security, and child malnutrition

1. Financial liberalization, food security, and child malnutrition Alberto GABRIELE UNCTAD, Geneva November 2009

2. What causes malnutrition and child malnutrition* in particular?Lack of food security on the part of some hhinadequate infra-hh food distribution, improper diets* Main cause of infant, child mortality

3. Food Insecurity (FI) and Poverty (P) • Mostly, insufficiency and volatility of the real income (monetary and non-monetary) of some hh (measured in PP terms) • I.e. FI mainly stems from (structural or sudden) poverty of some social groups in some countries • It is thus a phenomenon of relative, rather than absolute poverty* • Logistically-based famines where food is simply not available in a large area and people are immobile do exist, specially due to natural and man-made catastrophes, but are of minor and progressively decreasing impact *In the XXI century

4. The EG-P-FI linkage • Traditionally, economic growth (EG) is seen a the most important factor to reduce poverty (P) • Thereby improving income-based access to food • And reducing FI But the impact is highly non-linear, as other important factors intervene

5. Income distribution and distribution of time in the HH In most cases, sustained GDP growth leads to a generalized, albeit uneven, surge in all incomes, including those of the poor majority • However, some of the hh trapped in the lowest deciles often suffer • If the growth spurt proves non sustainable, the poor usually suffer the most and for a longer time • Crises tend to spur inequality There are risks even if growth is sustainable : • According to interdisciplinary studies, high inequality leads to high perceived relative poverty, and can adversely affect nutrition via fashion-biased dietary habits • If the price of achieving a higher monetary income is a major increase in the HH working hours, especially of women, children usually suffer due to weakened care ( in food preparation and othe areas) leading to worsening child malnutrition and mortality

6. The income distribution (ID) linkage First sub-linkage: via primary incomes • the structural distribution of wealth (productive and financial assets) • and the intended and non-intended impact on wealth, income distribution of growth pattern, policies • affect the share of total income (wealth) captured by the poor* * Barring exceptional circumstances, not all the poor are food insecure, but all the food insecure are poor

7.  2nd ID-related sub-linkage:public provision of basic services • Public provision of basic services and other hunger- relieving and pro-poor interventions (including food aid and subsidies, targeted nutrition, health, and educational programs, safety nets etc.) • Is an extremely powerful tool to reduce FI, hunger, malnutrition * History and common sense suggest that such public provision and distribution of crucial services shall be carried out via fully or largely non-market mechanisms • *See Gabriele& Schettino 2009, 2008a, 2008b

8. State intervention key • To shape growth and distribution patterns • According to a more or less market-oriented sustainabledevelopment strategy aimed at max national weath, min inequality, and respect the environment • To effectively show ability and propensity* to earmark resources towards non-market based provision of basic services • Both paramount factors affecting household food security and child malnutrition *See Gabriele& Schettino

9. THE INTERNATIONAL DIMENSION • MAJOR, STRUCTURAL AND POLICY CHANGES IN THE GLOBAL ECONOMY (including crises) • Affect worldwide FS • Through a complex web of causal patterns • Many are internationally transmitted along trade and financial flows • And/or changes in relative prices

10. FL and neoliberalism • Until recently, neoliberal orthodoxy was hegemonic worldwide • Leading to major structural economic, trade, and financial liberalization (FL) reform processes in most countries*

11. At a rather high level of abstraction The ultimate impact of FL on FI and malnutrition is complex and nonlinear • its positive or negative sign depends on a number of factors, only some of which can be seen as essentially policy-determined at national level • severity of previously-existing distortions • modalities of financial and regulatory reforms, scope, sequencing, and timing of their implementation • other essential features of the national economic landscape Actually, a limited and controlled degree of financial liberalization might help to overcome • inefficient and bureaucratic overregulation of financial markets • excessive financial repression in particular, • as well as to exploit the potential advantages of international trade in financial services Yet, there are strong theoretical arguments against pushing this process too far and too fast, especially in absence of proper regulation measures

12. According to the once-hegemonic intellectual paradigm (RE, EMH*) • FL was expected to accelerate and stabilize growth both in developed and developing countries, • thereby promoting poverty and hunger reduction and food security * Rational Expectations, Efficient Market Hypothesis

13. Different forms/ definitions of FL • - Liberalization of trade in financial services (i.e WTO, GATS) • - F deregulation domestically and reduction/elimination of FinancialRepression (FR)* • L of capital account and in general of F capital movements • The last form of FL is the most dangerous (see Ocampo and Stiglitz, Capital market liberalization and development, 2008)  • Domestic and WTO-mandated Fl can be moderately positive if moderate • But also very dangerous if extreme and too fast *There is a (nonzero) optimal degree of FR related also to each country's institutions, strength of the state, planning capacity, corruption etc (See Giovannini &DE Melo 1993)

14. Wanton Financial Liberalization (WFL) • L of K accounts, private international K movements • excessive and unregulated domestic FL • along with other new, risky and unwarranted forms of speculative F activities made possible by FL • new financial architecture • subprime lending • carry trade WFL • As it happened in many developing and developed countries in the 1990, early 2000s

15. Financial Development (FD) and FL • Especially in DCs, FD is good and represents a necessary condition for modern economic growth. • FL can be seen as just a specific, neo-liberal way to achieve this end • might not succeed and/or imply a series of other problems and drawbacks. In practice, WFL led to • Excessive and distorted over-FD • Hyperfinancialization • economically and socially disastrous • destabilizing even the most advanced countries

16. FD and FL (cont) • 2 styles of FD: • extensive (EFD) and intensive (IFD) Experience usually shows that with purely market-led WFL • IFD- rich disproportionally benefit Planned, regulated, subsidized financial reforms (see India’s past effort to expand rural bank branching) aimed at widening access to credit • might lead to EFD – poor benefit equally or even disproportionally

17. FL was expected to • accelerate and stabilize growth both in developed and developing countries • thereby fostering poverty and hunger reduction and food security

18. WFL probably worsened hunger • The impact of the historically determined, specific form of worldwide financial liberalization (WFL) • which took place in the 1990s and early 2000s on global hunger security and malnutrition has most likely been negative • a direct linkage with Fl can only be hinted at here, but malnutrition raised recently and now over 1bn suffer hunger

19. Hunger is on the rise • The number of undernourished people in the world increased by 75 million in 2007 and 40 million in 2008, largely due to higher food prices; (Source: FAO news release, 9 Dec 2008) • 1.02 billion people do not have enough to eat - more than the populations of USA, Canada and the European Union; (Source: FAO news release, 19 June 2009) • Asia and the Pacific region is home to over half the world’s population and nearly two thirds of the world’s hungry people; (Source: The State of Food Insecurity in the World, FAO, 2008) • 65 percent  of the world's hungry live in only seven countries: India, China, the Democratic Republic of Congo, Bangladesh, Indonesia, Pakistan and Ethiopia. (Source: The State of Food Insecurity in the World, FAO, 2008) • More than 70 percent of the world's 146 million underweight children under age five years live in just 10 countries, with more than 50 per cent located in South Asia alone; (Source: Progress for Children: A Report Card on Nutrition, UNICEF, 2006) • Every six seconds a child dies because of hunger and related causes; (Source: State of Food Insecurity in the World, FAO, 2004) • It is estimated that 684,000 child deaths worldwide could be prevented by increasing access to vitamin A and zinc(Source: WFP Annual Report 2007) • Undernutrition contributes to 53 percent of the 9.7 million deaths of children under five each year in developing countries. This means that one child dies every six seconds from malnutrition and related causes. (Source: Under five deaths by cause, UNICEF, 2006)

20. 4 main causal channels • Hunger and malnutrition are high and increasing mainly as a consequence of the theoretical and practical hegemony of the neoliberal model since the 1970s • FL was one of the most extreme manifestation of neoliberalism • but only one of the many neoliberal policies contributing to increasing hunger and malnutrition • Such an impact has been felt through several causal channels, the most important being the following four ( not mutually independent) • Crisis • Hyperfinancialization • Speculation • Weakening of the state and deteriorating income distribution

21. 1 Crisis • WFL has been the primary , proxy cause of the present global economic crisis • Global imbalances • Worsening ID • Skyrocketing leveraging • Sub-prime lending • New financial architecture • Bank crises leading in most countries to • reduction in average growth rates • increase in their volatility • the poor are more vulnerable to crises, take longer to recover • negative impact on malnutrition more severe and durable than on GDP

22. 2 Hyperfinancialization Even before the crisis, WFL has allowed for • an abnormal expansion of financial capital • its ability to capture increasing shares of national income in many countries • negatively affecting both income distribution and productive investment • negative impact on growth, distribution, nutrition

23. 3 Speculation • WFL has been instrumental in the boom of destabilizing speculation in commodities and food markets • contributing to undermine food security worldwide

24. 4 Rich private financial sectors, poor states WFL, along with other neo-liberal reforms (i.e. neoliberal trade reforms) • favoured tax evasion and elusion on the part of the rich • weakened the state’s ability to capture quasi-fiscal resources (fiscal repression, seignorage) • While trade reforms weakened fiscal incomes • jeopardizing states’ capacity to provide key social services • and to engage in other forms of direct and indirect malnutrition-reducing policy interventions

25. Uneven impact • The impact of the WFL vague on food insecurity and malnutrition has been uneven across developed and developing countries • Strongest in countries with • weaker economic fundamentals • highly dependent on international trade and financial flows • where FL had been implemented more thoroughly and recklessly

26. Conversely • Countries which successfully integrated in world globalization • without relinquishing fundamental control on their own financial system • fared better Two developing countries where hunger is* a significant phenomenon fared better than others** * or was until recently **again, at least until recently

27. Hunger in China and India 2007+ 2009++ India China India China GHI 25.3 8.37 23.9* 5.7** Ranks 94 47 65 5 * Alarming ** Moderate Source: IFPRI Global Hunger Index + Data from 2000-2005 ++ data up to 2007

28. China • Prudential reforms in the framework of a publicly-owned financial system • Enhanced and stabilized growth • Escaped (at least, so far) the world financial and economic crisis largely to its unique financial system, which was particularly crucial in • Retaining surplus, savings as public • Channelling rapidly the anti-crisis stimulus On-going improvements in FS, nutrition, health went on unabated

29. INDIA: strategic control on F, FR, EFD • Banks nationalization in 1969 • Efforts at state-led and subsidized extensive financial deepening via ruralbank branching • since then growth accelerated, thanks in part also to relatively judicious economic (not so much financial) liberalization, • the poor obtained some benefits and hunger (apparently) modestly declined • India escaped both the Asian crisis of the late 1990s and the present crisis • These factors help explaining in part India’s moderate and mainly relative (vis-à-vis other poor countries) improvement in hunger until recently* • YET • Excesses of liberalization in the 1990s, 2000s led to worsening ID and unclear trends in poverty, hunger • * IFPRI 2009 uses data from earlier years (up to 2007), not factoring in impact of crisis on the poor in India mainly via higher food prices

30. But partial FL increased inequality in the 1990s, 2000s • Major phase of FL in early 1990s • Objective: decrease FR, more opening, greater role for markets • Interest rates gradually liberalized • Reserve and liquidity ratios were reduced significantly • Equity market liberalized in 1992 • Partial change in the capital account regimeto a more open one • Entry restrictions relaxed in 1993, resulting in the establishment of • more private and foreign banks. • Regulations on portfolio and direct investment eased • Most restrictions on current account transactions eliminated in 1994. • FD good for the poor, but FL increased inequality(Ang J., 2008, Finance and inequality: the case of India)

31. Hunger in China and India 2007+ 2009++ India China India China GHI 25.3 8.37 23.9* 5.7** Ranks 94 47 65 5 * Alarming ** Moderate Source: IFPRI Global Hunger Index + Data from 2000-2005 ++ data up to 2007

32. A new (?) vision of financial services (FS) • Financial services are NOT like any other good or services sector • They are eminently strategic and crucial for the growth and stability nof national economy • Shall be seen as intrinsically public in nature • albeit not necessarily fully state-owned

33. The function of financial profits • Financial profits are intrinsically irrelevant • Yet can be seen as a signal of respect of the budget constraint • By themselves, not more relevant than profits of public hospitals, schools, police academies • Actually, for a given level of effectiveness of the financial system, the lower the better • Only a form of social transaction cost

34. A socially optimal financial system • Not a sector the dvt of which is a goal by itself • Shall be public in nature and subordinated to the State’swider economic and social dvt strategies • Largely or fully publicly-owned and carefully regulated with market and non-market tools • National economy’s degree of dependency upon atomized decision of profit-seeking private financial(and non-F) operatorsminimized The financial system to be seen as a purely instrumentalkey policy tool to achieve real human dvt goals, including better nutrition