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Clash of views at food summit
Martin Khor
The Food Security Summit brought together more than 30 heads of government and scores of Ministers in Rome last week to discuss the crisis of rising food prices.
At the same time, demonstrations and riots against high fuel and food prices were taking place in many countries around the world.
The presence of many political leaders, such as France's President Nicolas Sarkozy, Italy's Premier Silvio Berlusconi, Brazil's President Lula da Silva, Iranian President Mahmoud Ahmadinejad and Zimbabwe's President Robert Mugabe, added some glamour as well as some controversy to the event.
The United Nations was represented by Secretary-General Ban Ki-moon and the heads of many agencies. Diverse and often contradictory remarks on what is causing the food price crisis and how to resolve it were made.
At the end, because of these conflicting views, only a weak declaration was adopted, with no mention of the role of unfair trade such as high subsidies in rich countries, or financial speculation driving prices up, or the importance of changing agricultural systems in view of the climate change problem.
The most controversial issue throughout was bio-fuels and its role in restricting the growth of food supplies and in the rise in prices. Many leaders, including Ban, proposed the adoption of standards or criteria for the sustainable production of bio-fuels.
But because of an inability of the governments to agree on how to deal with the issue, the declaration only spoke of the challenges and opportunities of bio-fuels and called for in-depth studies and the need to exchange experiences.
Ban called for food aid to vulnerable countries in the short term, and increase in food production by small farmers in developing countries in the longer term.
The FAO director-general Jacques Diouf gave the most colourful speech, criticising developed countries for spending US$11-12billions subsidies on bio-fuels to "divert 100 million tonnes of cereals from human consumption to satisfy a thirst for fuel for vehicles".
He said nobody understands how the rich countries could distort world markets with US$372billion in 2006 on agricultural subsidies, or how a single country could have US$100billion of food wastage annually, and excess consumption by the world's obese costs US$20 billion annually, while the world spent US$1.2 trillion on arms purchase in 2002.
"How can we explain that it was not possible to find US$30billion a year to enable 862 million hungry people to enjoy the right to food?" he asked.
At the conference's end, Diouf announced that US$5 billion had been pledged by a few agencies and governments, mainly for emergency food aid. Whether more funds will come later for the more difficult task of helping farmers grow more food in developing countries remains to be seen.
At the conference, the leaders pointed to the factors causing the crisis, including the steep oil price increase, financial speculation in the commodities market, low food stocks, drought and effects of climate change.
The subject of bio-fuels, and the extent to which it caused the crisis by switching the use of crops from food to fuel, was the most controversial issue. Several countries, including Egypt, India and Madagascar warned against the expansion of wrong bio-fuels, while Brazil defended its ethanol and the United States said bio-fuels contributed only 3 per cent to food-price inflation.
Egyptian President Hosni Mubarak called for an international code of conduct to slow down bio-fuels production and to assess its environmental and social dimensions.
Slovenia's President Danilo Turk said the European Union wanted sustainability criteria on bio-fuels production and called for the swift transition to the so-called "second generation bio-fuels" that do not compete with food production.
On the other hand, Brazil's Lula said that "ethanol is not the villain" and referred to those governments that blamed ethanol production as having "fingers soiled with oil and coal" and "the same governments that extend trade-distorting subsidies".
Lula claimed that ethanol production in Brazil does not compete with food production nor does it encroach on the Amazon.
Malaysia highlighted the effects of bio-energy and climate change as causes of the food price crisis and spoke of the need to mitigate the risks of over-dependence on food imports. He announced Malaysia's initiatives to boost local food production, especially in rice.
The President of Argentina, Cristina Fernandez de Kirschner, spoke of the structural roots of the crisis - the protectionist policies of developed countries and the imposition of policies of the international financial institutions that prevented developing countries from producing food for themselves.
She also pointed to the oligopoly of the food systems and control over patents by multinational corporations that aggravate the problem, along with speculative investments in the global market.
Mubarak (whose country is one of those experiencing food riots) proposed an International Emergency Dialogue, where food exporters and importers can work out an international strategy to solve the food crisis in the short and long terms.
Japan's Prime Minister Yasuo Fukuda said his country has released tonnes of rice into the global market to help cool the pressure on the short supply, and urged other developed and net food producers to do the same.
- Third World Network Features
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Must commercial banks do merchant banking and brokerage?
Share Shah
Commercial bank is licensed by the Bangladesh Bank to take deposits for current and savings accounts from consumers. A typical commercial banking process is fairly straightforward; one deposits money in the bank, and the bank loans that money to consumers and companies in need of cash. One may borrow to buy a house, finance a car, or finance an addition to his home. Companies borrow finance for the growth of their company or meet working capital needs. Companies that borrow from commercial banks can range in size from very small to large business groups. The commercial bank generates a profit by paying depositors a lower interest rate than the bank charges on loans.
Loans from commercial banks are structured as private legally binding contracts between two parties - the bank and the customer. Albeit banks needed government control to ensure that defaulters payback. The loan law helps the bankers because there is an intrinsic weakness in commercial law. Banks work with their clients to individually determine the terms of the loans, including the time to maturity and the interest rate charged. Commercial banks earn interest anywhere from 17 to 25 per cent while they pay a fraction on savings account and somewhat more on short term and fixed deposits. Commercial banks thus make money by taking advantage of the large spread between their cost of funds and their return on funds loaned ranging from 9 to 18 per cent.
A merchant bank operates differently and does not have an inventory of cash deposits to lend as a commercial bank does. In essence, merchant bank or stock brokers act as an intermediary, and matches sellers of stocks with buyers of stocks. However when a company needs capital, it may get a loan from a bank, or it may ask a merchant bank to sell equity. Because commercial banks already have funds available from their depositors and a merchant bank typically does not, a merchant bank must spend considerable time finding investors in order to obtain capital for its clients. Generally because of their weak structure and knowledge they prefer the route of initial public offering. The merchant bankers guide the company through the SEC approval process, and then market the offering utilizing a written prospectus and its publication and processing. The merchant bank makes money by charging the client a small percentage of the transaction upon its completion. This called upfront fee. In contrast, a commercial bank making a loan actually receives the interest and simultaneously owns the debt.
Merchant banks may underwrite stock offerings along with commercial banks and insurance companies. In the stock offering process, a company sells a portion of the equity to the investing public. The very first time a company chooses to sell equity, this offering of equity is transacted through a process called an initial public offering of stock. Through the IPO process, stock in a company is created and sold to the public. After the deal, stock sold is traded on stock exchanges.
In the USA, Glass-Segal Law had bifurcated the two businesses in the 1930s. Today regulations have changed the businesses in which commercial and merchant banks may now participate, the core aspects of these different businesses remain intact. In other words, the difference between how a typical merchant bank and a typical commercial bank operate can be simplified: A commercial bank takes deposits for current and savings accounts from consumers while an investment bank does not.
The ground reality is that many commercial banks and non banking financial institutions in Bangladesh have heavily tilted towards the capital market. Many banks have setup merchant bank subsidiaries and many others are setting up brokerage businesses being attracted by commission earnings and fortified lending. Lending against shares is said to be fully secured as collateral securities are held in house and little litigation is required to settle the loan. All this may one day show the terrible expense to the clients who have been lured by easy credit. What is totally absent in these merchant banks is their ability to bring in new companies to the market.
An issue worth pursuing is why did our two investment/industrial funding companies fail? According to A K N Ahmed, former Governor of Bangladesh Bank who was interviewed on phone last week said that our 'monitoring capabilities are extremely weak'. Therefore banks which are looking towards capital market opportunities must 'look before they leap'. They have in fact crowded out the opportunities they already had in favour of easy pickings. The other danger is the 'recession all over the world'; any significant change in the economy of Bangladesh may result in the flight of foreign portfolio investors which in fact was the main reason for the crash of 1996.
Indeed scenario today is different from that of 12 years ago. Foreign investors in 1993-95 because of the weakness in SEC strategy were able to acquire large block of shares directly from issuer through rights and placement in IPO. Today SEC has not permitted such easy picking and foreign investors had to buy from the secondary market. The other fact is that we have far more institutional investors -banks, insurance and non banking companies etc. who usually do not operate as speculators. So this would be a hedge against any displacement that may takes place in the market. Nevertheless prices which are already high would start to decline and hurt only the small and medium investors. The other cushion is the rise of the mutual fund industry which would also capture such shares and thus contain prices at a future cost to their earning potential but that is another story.
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