Food and the Domination of Finance
Jomo (UN Chief Economist): Speculation and lack of global cooperation are factors in creating global food crisis
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay at Bretton Woods, New Hampshire, at the INET conference. Now joining us to talk about the global economy is Jomo, chief economist at the United Nations. Thanks for joining us.
JOMO KWAME SUNDARAM, UN CHIEF ECONOMIST: My pleasure.
JAY: So when you look at the perspective of the global economy as you’re working at the United Nations, what do you see as the great challenges or the biggest threats to people’s well-being?
JOMO KS: One of the biggest problems from our perspective, of course, is the failure of international cooperation. Multilateral cooperation has basically not been developing for some time now. And in response to the crisis, multilateral cooperation had a huge potential, but that was not realized, most importantly for the attempt for the United Nations to respond to the crisis was basically shut out. Instead, we find that the leadership has basically been appropriated by the G-20, which has begun to meet at the leaders level since the end of 2008. Now, to be fair, the G-20 has had its share of successes. In early 2009, Gordon Brown succeeded in mobilizing over $1 trillion behind–for the IMF, basically, principally for the IMF. But this was an important boost to attempts to try to restore, to try to develop cooperation, to try to avoid protectionism, to ensure that there were resources available for kickstarting economies, and so on and so forth. And this continued into the Pittsburgh Summit in September 2009. But, unfortunately, since then there has not been significant progress in further cooperation. Instead, the G-20 has become a forum and arena for the G-7 countries to put pressure particularly on China to conform to a particular view of how global imbalances should be adjusted.
JAY: One of the things Brown said in his speech here at the conference was that there had been this initial cooperation to deal with the apocalyptic vision or moment, but since that seems to have been put off, at the very least, that nations are retreating to nation-state positions, very nationalist positions. What form is that taking? And what’s going to be the effect of that?
JOMO KS: Well, to some extent, ironically, the United States is isolated among the G-7, the most powerful economies of the world. The United States has continued its commitment to economic recovery, whereas in Europe, in Canada, in Japan, there has been in recent times a greater emphasis on fiscal consolidation, basically on fiscal austerity. And so the momentum to sustain the recovery now has basically been lost since the end of 2009.
JAY: And what’s driving this austerity some people call "austerity mania"? But the austerity regimes that are being pushed, with perhaps UK leading the way, what’s driving it?
JOMO KS: There’s a leading American political consultant, James Carville, who said that if he was to come back for another life, he would come back as the bond market. And, unfortunately, we’re living in an age where finance–which is now global finance, really–dominates. The real economy has been subordinated, Main Street to Wall Street, in a sense. And what we find is that the ability of firms, of organizations to undertake innovation, to continue to be competitive, and so on and so forth has been greatly undermined. Now, to be sure, there were other considerations as well. Many economies were encouraged to become much more export-oriented, Japan, for instance, and more latterly China. The whole idea at that time was to integrate them into a world economy which would be dominated, essentially, by the West. The situation, however, has changed, insofar as China has become so successful at producing competitively that it has resulted in a hollowing-out not only of the US economy but many of the other Western economies. And so you have as a consequence of this what are referred to as the global imbalances, where the US and some others are basically importing a great deal. Now, this is a privilege which the US can succeed at, because it is the main issuer of the preferred currency in the world, in the absence of some kind of globally agreed reserve currency system. But most other economies cannot afford that. And so this puts tremendous strains on the world economy. The continuing growth or the renewed growth of these deficits on the part of the US has–with economic recovery, has meant that there is a great deal of concern, particularly in markets in Europe. What we find is that Germany, dominant within the European community, has put pressure on much of the rest of Europe to undertake, firstly, to save the financial system by bailing out the financial system. So government resources have been deployed. And then the next thing is that those very same governments are being told that they have too much public debt and hence have to tighten up their belts, and so on and so forth.
JAY: So the point here is, if your business is making money out of bonds and otherwise loaning money to governments, your fundamental issue is you want to get repaid, and you don’t want governments to raise taxes as part of that repayment, ’cause there’s this anti-tax regime mania seems to be true in all of the countries we’re talking about. So it really has so much to do with not raising taxes. So the only other thing you can do to make sure that your bonds will always be repaid is have these austerity measures.
JOMO KS: Well, the anti-tax mania is peculiarly American in some sense. In Europe, the concern is really that taxes–tax levels are much, much higher in Europe, generally speaking. In Germany you pay more than 50 percent on average to the government, whereas in the US it’s somewhere around 20 percent on average. So the tax levels are much, much higher in Europe, and the pressure there is to cut public spending. So, basically, social services are being affected, the social safety net is being affected, schools, you know, all the areas of public provision, and those are far more extensive in Europe than they are in this country.
JAY: But why is it necessary? I mean, it’s necessary–.
JOMO KS: It’s necessary if you subscribe to an ideology where you basically take the view that what is very important in the present situation, where you’re constrained from taking any other measures, you’re constrained into saving the banking system because the banking system is considered so essential for the functioning of an economy, and you’re constrained from undertaking–from taking on huge public debt.
JAY: Now, let’s talk about the rest of the world. So what are the consequences now of the crisis? One of the things that we hear very little discussion about in the financial press, in the popular press, is what’s happening about the price of food around the world and what’s really becoming a food crisis, although you wouldn’t know it by reading the press here, as I said.
JOMO KS: Right. Well, this is the second food crisis in half a decade. Food prices began to go up at the end of 2006, and especially in 2007, into early 2008. So by early 2008, food prices, food price spikes had reached an all-time high. Then they came down with the crisis, they came down with the recession. But with economic recovery, we find that food prices are going up again. Now, there are many factors involved. There are demand factors, in the sense that more and more there is a growing population in the world, of course. But as people have higher and higher incomes, more and more people are switching to meat, for example, and eating more, and so on and so forth. So this has put a great deal of pressure on the demand side. Also you find that there’s a greater amount of foodstuffs being used for non-food purposes. And you find, for example, that in North America a great deal of maize or corn is used for bioethanol. And because of the subsidies which come from government, there is a great deal–that has pushed up the price of maize, not only in this country, but in much of the Americas and in Africa as well. And as far as Europe is concerned, there are similar pressures on vegetable oils. Vegetable oils are used to make biodiesel there, and this has put up a lot of pressure.
JAY: And what’s the role of speculation?
JOMO KS: Well, I think there are many other factors as well, long-term factors which have put some pressure on food prices. And food prices have been going up slightly. But more recently there has been–speculation has become a very important element. Basically, you had the flight of capital from Wall Street to Chicago or Minneapolis, if you will, and that was a very important factor, so from financial assets to what was seen to be safer, commodity assets.
JAY: Yeah, meaning Chicago, because that’s where the commodities and derivatives exchange.
JOMO KS: Right. So that pushed up food prices and contributed very significantly to the food price hike of 2007, early 2008. Now, there were other factors as well. The very nature of trading was such that the trading by commodity speculators tended to be procyclical. In other words, if you had an index fund, for example, let us say, of 24 commodities, the tendency would be to switch from one commodity to another, depending on which was going up faster or demonstrated a potential to go up faster. So all this basically contributed to increasing tendency for these prices to go up, and when they could come down, to come down. So volatility, as a consequence, increased very significantly because of this kind of index fund speculation. Now, more recently, there’s been a trend away from that kind of speculation towards much more specialized speculation. In other words, the same traders who were trading in–using, depending on computer models and so on and so forth are now using those different computer models to go in a very concerted fashion for certain commodities, and food commodities in particular seem to have been affected. So most of the commodity prices which are going up are actually for minerals–oil and other minerals, of course. But among agricultural commodities, food commodity prices have gone up. So financial speculation, although it has changed in character over the last half decade, has become a far more important factor than it used to be. The original purpose of having commodity futures and options markets was to smoothen the price volatility. And when you had a small number of buyers, and who are buying futures and options, for example, that worked out. But when you have this inordinate amount of money going into this sector for the purposes of speculative gain, you–that exacerbates the kind of volatility which you’ve seen in the food markets, with tremendous consequences. So [crosstalk]
JAY: Yeah. Talk a bit about the examples of the consequences.
JOMO KS: Well, one example, for example, would be the number of people who have either become hungry or are much more severely malnourished. And in 2007, 2008, it was estimated that over 100 million people in the world were adversely affected by that. So, you know, we are talking about a lot of people who are going to be either very hungry or severely malnourished. And particularly for children, of course, it has devastating consequences for their whole development and so on.
JAY: And if the trends continue and nothing changes in terms of regulations and the politics of this, we’re looking at a decade–who knows how long–of these high food prices, aren’t we? I don’t see any way it starts to come down again.
JOMO KS: Well, insofar as the principal markets are in this country, it is quite possible, through regulation or through selective interventions, for the regulatory authorities in this country to change the–.
JAY: But the politics of it seem to be going the other way. Like, the Republicans in Congress are trying to defund regulatory bodies. There’s–the fight at the level of regulations and who the regulators are seems to be succumbing to the pressure of those that have the money to lobby.
JOMO KS: Yeah. You see, the agricultural farmers themselves do not necessarily benefit a great deal from this, increased prices. They do benefit a little, but not–. The main beneficiaries are basically financial speculators and the brokers and so on and so forth. So there may be pressure insofar as food prices may be affected within this country. This comes on top of, for example, the increased price of corn, which I mentioned earlier. There could well be pressure from public interest groups, and if they are able to mobilize the farmers, because the farmers do not want a market which has run amok, which is no longer serving the original functions of these commodity futures and options markets–.
JAY: And what can countries, countries, for example, like India and others, what can they do to try to detach themselves or protect or have a more sovereign policy towards their food supply?
JOMO KS: Well, it’s very tough for India. Right now, for countries like India–. India is actually better off than many other poor countries, insofar as India has about 1,500 controlled food price items. Okay? So there is–there continues to be a mechanism which mitigates the impact of international prices. It’s very difficult to have that system working when prices are going all over the place, which they have been, so it’s very tough for India in that respect. But, you know, India has been able to insulate itself relatively well, you know, because of a system in place. For most of [snip] countries in the rest of South Asia, for most countries in sub-Saharan Africa, and for that matter in other parts of the developing world, you know, they have very few mechanisms to protect themselves from this, and this can be devastating. So there is the claim, which might be slightly exaggerated, for example, that the price of wheat contributed to the Arab uprising in North Africa and so on and so forth. I think there are many other factors going on–the high rates of unemployment, the high rates of youth unemployment, the fact that economic growth has not really generated many meaningful jobs, and so on and so forth. There are many other factors as well. But certainly one cannot discount the significance of the crisis.
JAY: So what do you think should be done?
JOMO KS: Well, I think–immediately, I think the US authorities could, for example, introduce limits to the kinds of speculative positions which are currently allowed. Many of these regulations have changed over time, so there’s no reason why they cannot continue to change. There are many interest groups, public interest groups, which would have an interest in seeing some degree of stability in these markets. I can imagine, for example, that religious groups as well would have a strong interest in ensuring that food prices–. Food is not just any other commodity. You know, it’s a very special item. And we all know that hunger doesn’t take place because there’s no food, but rather because of food prices being unaffordable to people who need food but cannot afford to buy the food they need.
JAY: So the fight over regulations and what the regulations will be, especially about derivatives trading and speculation in Chicago, there’s a lot at stake there. What should people be focusing on to see if there’s some progress being made?
JOMO KS: Well, there are two or three different authorities involved in this. I think the financial services authority in this country should be brought to bear in this regard. There is also concern that the subsidies for bioethanol in this country, particularly for maize or corn being used, has also resulted in a significantly increased price for cornmeal, which is very important in Central America, in parts of South America, as well as sub-Saharan Africa, as the main staple which people eat. So it’s–rice is not heavily traded internationally, so it’s not–it’s affected, but mainly due to other factors. As far as wheat is concerned, there have been a number of fires in Australia, in Russia, and all those things have also contributed. But I think it’s now generally acknowledged that the futures and options markets have really gone out of whack. And there’s a need, for a whole variety of reasons, to get back to the original purpose and function of these markets.
JAY: Thanks for joining us. And thank you for joining us on The Real News Network.
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