Measuring different dimensions of food security

food-security1Food security in terms of the prevalence of undernourishment indicator is a measure of dietary energy deprivation. As a standalone indicator, the prevalence of undernourishment indicator is not able to capture the complexity and multidimensionality of food security, as defined by the 2009 Declaration of the World Summit on Food Security: “Food security exists when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food, which meets their dietary needs and food preferences for an active and healthy life.”

Based on this definition, four food security dimensions can be identified: food availability, economic and physical access to food, food utilization and stability (vulnerability and shocks) over time. Each food security dimension is described by specific indicators. Measuring the complexity of food security is part of a broader debate that currently takes place in the preparation process of the post-2015 development agenda.

Food security and its four dimensions

Stability: exposure to short-term risks may endanger long-term progress

Two types of indicator have been identified to measure the extent and exposure to risk. Key indicators for exposure to risk include the area equipped for irrigation, which provides a measure of the extent of exposure to climatic shocks such as droughts, and the share of food imports in total merchandise exports, which captures the adequacy of foreign exchange reserves to pay for food imports. A second group of indicators captures risks or shocks that directly affect food security, such as swings in food and input prices, production and supply. The suite of indicators covers a number of stability measures, including an indicator of political instability available from the World Bank.

A thorough and comprehensive review of stability measures is not possible here because of space constraints.

The content that follows takes a limited and more focused look at two important aspects of stability, namely those that pertain to food supply and food price stability.

The recent vagaries of international food markets have moved vulnerability to food insecurity to the forefront of the food policy debate. However, newly available data on changes in consumer prices for food suggest that the changes in prices on international commodity markets may have had less impact on consumer prices than initially expected. Where world price shocks induced high domestic volatility, food producers risked losing the inputs and capital they had invested. The low capacity of small-scale producers, such as smallholder farmers, to cope with large swings in input and output prices makes them risk-averse, lowers their propensity to adopt and invest in new technologies and ultimately results in lower overall production.

Together with swings in prices, food supplies have seen larger-than-normal variability in recent years. However, there is also evidence that production variability is lower than price variability, and that consumption variability is smaller than both production and price variability. Among the main regions, Africa and Latin America and the Caribbean have experienced the widest fluctuation in food supply since 1990, while variability has been smaller in Asia. Variability in food production per capita was greatest in Africa and Latin America and the Caribbean.

The vulnerability dimension of food security is increasingly cast in the context of climate change. The number of extreme events such as droughts, floods and hurricanes has increased in recent years, as has the unpredictability of weather patterns, leading to substantial losses in production and lower incomes in vulnerable areas. Changeable weather patterns have played a part in increasing food price levels and variability. Smallholder farmers, cotters and poor consumers have been particularly badly affected by these sudden changes.

Climate change may play an even more prominent role in the coming decades. Mitigating its impacts and preserving natural resources will be major objectives, especially in connection with the management of land, water, soil nutrients and genetic resources. Improved management of natural resources should focus on reducing variability in agricultural outputs and increasing resilience to shocks and long-term climate change.

The pressing need to improve natural resources management extends well beyond agriculture. Forests and trees outside forests play a large part in protecting soil and water resources. They promote soil fertility, regulate climate and provide habitat for wild pollinators and the predators of agricultural pests. They can help stabilize agricultural output and provide protection from extreme weather events.

According to FAO’s Global Forest Resources Assessment 2010, 48 percent of the world’s forests (330 million hectares) are managed specifically to address soil and water conservation objectives. They not only provide a wide range of nutritious foods on a regular basis, but they also help protect access to food in the form of dietary supplements during times of poor yields, natural calamities and economic hardships.

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Read the full report at this link http://www.fao.org/docrep/018/i3434e/i3434e.pdf

Negative externalities and taxes: a contribution to the debate on “junk food”

First published Aug 16, 2009. Updated June 13, 2013

>> Haga clic aquí para la versión en castellano

Alcohol and cigarette products are usually subject to high taxes. This occurs because the economic theory acknowledges that the price of these products does not reflect the true social cost of consumption.

Thus, a Pigovian tax [1] is applied to neutralize the externalities [2] caused by these products in both consumers and society.

Barcelona · Mercat de la Boqueria [Sant Josep]

Barcelona · Array of fruits and vegetables at La Boqueria Market

In this regard, developed countries have begun to consider the option of raising the tax burden of the food low in nutrients and high in saturated fats and carbohydrates, also called junk food as a way to lighten the deficit and in turn combat obesity [3]. If implemented successfully in the case of tobacco or alcohol, why do not tax the junk food and improve the way consumers make decisions about their diet?

In return, during the first half of 2009, interesting reports have been published focused on discussing the aspects of the issue. Thus, Engelhard, Garson and Dorn (July 2009) [4] put the junk food as a major cause of obesity, with direct consequences for the economy through a decline in productivity per worker and increased costs for medical care. United States estimates that medical costs of obesity are $ 700 higher than the costs of a thin person.

However, Yaniv, Tobol and Rosin [5] argue that the implementation of taxes on junk food has technical shortcomings. For example, there are too many possibilities of interpretation to decide what products should be considered within that tax. A hamburger has high levels of fat, protein and calories but these are also necessary for metabolism. In addition, unlike the case of cigarette or alcohol, consumption of junk food does not produce a direct negative externality on the welfare of someone other than the individual’s. Therefore, we must ponder the results of these surveys further to soon begin the implementation of tax measures that directly affect the purchasing decision of consumers.

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[1] A Pigouvian tax is a duty charged on a market activity to correct the market outcome, if there are negative externalities associated with the market activity.
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[2] In economics, an externality or spillover of an economic transaction is an impact on a party that is not directly involved in the transaction. In such a case, prices do not reflect the full costs or benefits in production or consumption of a product or service.  A negative externality occurs when an individual or firm making a decision does not have to pay the full cost of the decision. If a good has a negative externality, then the cost to society is greater than the cost consumer is paying for it. Since consumers make a decision based on where their marginal cost equals their marginal benefit, and since they don’t take into account the cost of the negative externality, negative externalities result in market inefficiencies unless proper action is taken.
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[3] An individual is classified as obese based on his body mass index (BMI), which shows the relationship between weight and height as an indicator of body fat. An adult is classified as “overweight” if his BMI is between 25 and 25.9. If his BMI is greater than 30 he’s classified as obese.
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[4] ENGELHARD, Carolin; GARSON Arthur; DORN Stan “Reducing obesity: Policy strategies from the tobacco wars”, Urban Institute. July 2009.
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[5] YANIV, Gideon; ROSIN Odelia; TOBOL Yossef. “Junk-food, home cooking, physical activity and obesity: The effect of the fat tax and the thin subsidy”. Journal of Public Economics. June 2009.

Spanish fear

Developments in Portugal and Spain, like those in Greece, are part of a much wider crisis of the European economy.

The crisis in Europe spirals downwards. Political uncertainty over Greece now marches in lockstep with creeping financial failure in Spain. Credit rating agency Moody’s last May downgraded 16 Spanish banks in the belief that they are at an increased danger of collapse should a serious run on the banks begin. The Spanish government denied at that time that Bankia was suffering from just such run. In Greece, around €700m has been taken daily from the banking system since the inconclusive election on May 6.

Bank runs are an inherent problem for the banking system. Banks create long-term loans, but take deposits on a short-term basis. This is how credit is created – banks, in effect, lend out more money than they actually have available. There’s nothing greatly mysterious about this process, and under normal conditions, the difference between the two does not matter greatly. At any point in time the bank can usually access sufficient reserves to cover all the day-to-day demands made by depositors for their cash. For as long as depositors believe that their depositors are safe, the bank is also safe. A bank run occurs when this confidence evaporates. Depositors descend on the bank in a panic, demanding the withdrawal of savings for safer locations – another bank, abroad, or simply shoved under the mattress. But while rational for the individual depositors, this panic – a run on the bank – can bring about the very collapse of the bank they are trying to avoid. Worse yet, panic can spread rapidly throughout the system.

« Over the past 12 months, some $425 billion in deposits have been pulled from banks in Greece, Italy, Portugal and Spain. And about $390 billion in deposits have piled up in core euro countries, particularly France and Germany » (1)

The last public run on an EU bank was in May 2012, with queues forming outside Bankia as worried depositors attempted to withdraw whatever cash they had access to. To avoid this prospect, governments have developed over the years a number of ways to insulate their banking systems from their inherent instability. Governments offer to act as a lender of last resort, promising to ensure banks always have sufficient liquidity – cash at hand – to meet the demands of their customers. Or they may offer deposit insurance, promising to pay out to depositors in the event of a collapse. On May 2007, faced with a run on Northern Rock, Alastair Darling, Labour Chancellor of the Exchequer at the time, made a public statement promising the government’s support for the bank. This restored confidence in the bank’s stability, and broke the run. Governments put these backstops in place to try and preserve confidence in the banking system as a whole. If confidence is maintained, banks are less liable to collapse.

Bank runs can be catastrophic. They heightened the Great Depression of the 1930s, exacerbating the collapse, and possibly were a primary factor in its cause. The European economy was devastated by the collapse of Austria’s largest bank, Creditanstalt, in May 1931. Creditanstalt had spent the preceding years gobbling up smaller, failing banks, while weakening bank regulation hid its bad loans. When a director finally refused to sign off on the bank’s annual accounts, depositors, believing the bank to be insolvent, rushed to remove their savings. The Austrian government stepped in to guarantee bank deposits, hoping to break the panic. But this guarantee merely undermined confidence in the Austrian state itself. Depositors did not believe the country could afford to both stand behind its banks and maintain Austria’s place in the Gold Standard fixed-currency system. The panic spread beyond Austria’s borders: banks in the Netherlands and Poland collapsed in June, in Germany in July. The fear reached the US and UK by mid-summer. The Great Depression was dragged onwards.

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(1)    The slow bank run that could still doom Europe, The Washington Post, September 20, 2012

The corporate capture of governments

The G20 — the most powerful summit of world governments — meets tomorrow to discuss the global economic crisis, and who is sponsoring the meeting? Banks and corporations.

No wonder the site of the meeting — the French city of Cannes — is completely locked down to any ordinary citizens, while banks and large corporate CEOs have all access passes to tell our governments what to do.

Corporations and banks have captured our governments, winning vast bailouts after helping to create the crisis. Now they are buying their way into the very meeting that could decide the world’s financial future.

The line between corporate power and responsible government has steadily blurred, undermining our democracies and our economy. Politicians take money from corporations for their campaigns, make policies that reward them when in office, and then take high-paid jobs with them after they leave. It’s venality, plain and simple.

Now Société Générale, a French bank that received a public bailout and has a vested interest in Europe’s financial policy, is an official sponsor of the summit. This bank and 20 other corporations have paid large sums of money in sponsorship for a seat at the table of our governments.

The only way to get policies that protect jobs, tackle speculators and guarantee a fair future for us all is to kick back against the lobbies and prise our leaders away from corporate interests.  The global economic crisis resulted in large part from reckless banks that were no longer regulated effectively by governments because of the control banks stress over our leaders. This corporate capture of government is the major threat today, both to democracy, and to an efficient and fair economy.

The Need for Radical Change

THE FUTURE OF MONEY (4/4)

Proposed solutions to the financial crisis tend to involve more regulation and the break up or separation of banking activities, but these merely scratch the surface. The financial sector is not only too big; it embodies massive contradictions. In particular, the social role of finance makes it impossible for monetary authorities to let the system fail. This creates moral hazard on an epic scale, ‘Wall Street socialism’ with massive benefits for the financial elite and costs and liability for the many.

Given that the public nature of money makes the financial system a public liability, there is no case for its private ownership and control. As bank credit issue is the main engine of money creation in modern societies, how that money is issued and circulated is a crucial question. The allocation of that credit determines economic priorities.

Under free enterprise system the only priority is private profit. On this basis global speculative ventures are supported while local, particularly social, businesses are marginalised.

The allocation of credit is only part of the problem, however. The main question must be why the private banking system should have control of the monetary system at all. Historically this was developed through the link between trading money, promissory notes and bills of exchange, which were exchanged for bank credit notes designated in the national currency (legal tender). More recently the system has shifted to ‘sight accounts’, money records rather than cash in hand. The question that needs to be asked is: why is the private issue of notes and coin (counterfeiting) punished by law while the private creation of sight accounts is seen as a natural function of banking?

Capitalistic control of the financial system has played a major trick on the public. Given that bank credit is created out of fresh air, like fresh air it should be a public resource, not a private horn of plenty. Decisions about the allocation of that credit should be made democratically. Private profit should not be the only criterion for money issue.

Nor should all money be issued as debt with the interest charged accruing to the issuing financial institution. Debt-based money builds in a growth dynamic that prevents the emergence of a more socially and ecologically sustainable economic system. Instead money could be issued without debt as grants or interest-free loans. The only reason this is not done is that capitalism has ideologically captured economic reasoning. The right of banks to issue money for profit is not challenged.

If people demand to issue money themselves or demand that social and ecological priorities come first they will be told that ‘this cannot be afforded’. The trick is that the market puts some kind of brake on money creation and allocates it most efficiently. The recent crisis shows that neither of these claims is true. Any money creation by the public is decried as inflationary, while massive inflation of the capitalist financial system was given the euphemism ‘capital growth’. The public were to be grateful for the few portions of taxes that were reluctantly extracted from the financial sector.

In fact, there is no reason why money should be issued through the private banking system. It may be that with money under democratic control the public would vote to give financial resources back to the private sector, but it is more likely that social expenditure would be prioritized. The private sector would then have to re-orient its activities to serving public needs. This could form the basis of an economy in which growth would occur in response to social need, rather than the demand for ever expanding profits. Money circulation would return to the production of goods and services and not the never never land of perpetual financial growth. The idea that the whole of society could secure itself on constantly inflating financial assets is a total illusion.

The financial crisis has revealed the financial system’s enormous power and lack of democratic control. Money and finance, nationally and internationally, must be socially and politically re-embedded to enable socially just and ecologically sustainable economies to emerge. Rather than asking ‘can the financial crisis be the basis of radical change?’ the crisis must be the basis of radical change if we are not to continue on the capitalist financial merry-go-round until we all fall off.

The Contradictions of Privatised Finance

THE FUTURE OF MONEY (3/4)

Financialized capitalism rests on its capacity to create credit to lend to itself to inflate its speculative profits and financial assets. But financial asset inflation is always a pyramid scheme, whose value will collapse as soon as there are no new investors.

Traditionally states had a concentration of financial power through their ability to issue money as currency and tax it back. Capitalism has similar power through its control of financial resources. It creates money and calls it back with interest. This puts a growth dynamic into the economy. More money must come back than has been issued; this in turn demands that more money be created.

The neoliberal rationale for private control of money issue is that the market is more ‘efficient’. This is despite the endemic tendency to crisis in financialized capitalism. People have been encouraged to trust their future security in terms of pensions and savings to the financial markets, which in itself creates the conditions for a boom.

While hedge speculators can make money on rising or falling assets, for most people money can only be made on inflating financial assets such as housing or equities. This requires constant creation of credit to fuel the new buyers, a phenomenon that was clearly seen in the mortgage market. When the market has peaked and no one is willing to take on more credit, or the borrowers can no longer pay, the value of the financial assets must fall. Even in the case of hedge speculators, winners will be balanced by losers.

Why were the banks so desperate to lend money recklessly to home buyers and to develop such complex financial packages? The answer lies in the demand for increased profits to raise dividends and share prices. The bonus strategy of payment in shares also drove this. In such a situation banks engaged in the most profitable aspect of banking, which was also the most risky. It is not without irony that financialized capitalism fell because of its exploitation of the very poor. As capitalism runs out of a market for its goods, services or investments, all that is left is the poor. In the case of financialized capital this was the subprime householder. However, the subprime borrowers did not cause financialized capitalism to fail; the cause was its own contradictions.

Profit-driven banks must always be tempted towards speculation, no matter how many firewalls are put up between deposits and investments. For this reason the calls for narrow banking or smaller banks will not work. As long as the companies running the banks are driven by capitalist values they must be driven by the drive for profit, and therefore risk. This would not be so important if the activities of the privatized banking sector were not a liability on the public. But the financial system is interconnected and the only way to save some parts is to save the whole. The speculative sector can only be separated if the deposit-based sector is not part of the capitalist system and if its credit creation capacity is brought under democratic control.

The private control of banking and finance is fundamentally flawed in that its neoliberal claim to financial freedom is in contradiction to the social foundation of money systems. The crisis has also undermined the claim that through global financialization a substantial portion of national populations can sustain their economic future through appreciating financial assets. Far from ‘rolling back’ the state, the implosion of deregulated finance has directly contradicted the neoliberal case that the market and its money system is a self-regulating process that would be distorted by state intervention.

Under the illusion that money was a neutral representation of the wealth of the market, financial institutions operated far and wide. Financial traders speculated on currencies and borrowed from low-interest countries to invest in higher-interest ones. Claiming that their industry was global they played off countries against each other, demanding favorable tax status or lodging themselves in tax havens. In doing so they undermined the conditions of their own existence, the public authority of money.

A major problem for countries such as Greece or Argentina is that they have considerable problems in raising tax with substantial informal economies and high levels of tax avoidance. Finance may have escaped regulation but it has also separated itself from the legitimization of money through public authority. This led the sector to expand to such an extent that the amounts of money at risk threatened the solvency of countries that had residual responsibility for their activities.

Public Foundations of the Financial System

THE FUTURE OF MONEY (2/4)

The financial system is concerned with the issue and circulation of money. Within capitalism the purpose is to direct money to the most profitable use.

Money is a peculiar phenomenon, real and not real so far. In essence it is a promise. Holding money is a claim on any resources, goods or services that are categorized in money terms. However, for these claims to be realized, the sellers of resources, goods or services must trust in the persistent value of that money.

Historically, money has been made of a commodity that can itself be resold, such as gold, but today it mostly consists of base metal, paper, or merely electronic records. People trust it because convention and experience tells them it will be honored. It is also backed by a public monetary authority as legal tender that has a stated value.

This is critical to public responsibility for money. For example, all monetary activities designated in pounds are collectable from the British banking system (or its international agents). Underlying the whole banking system is the Bank of England. Despite it having been made independent in policy terms, the Bank’s authority rests on the financial viability of the nation in terms of its productivity (GDP) and its ability to collectively assemble money through taxes.

As has been shown in Iceland, the people, through the state, are forced to take on financial liabilities created by the private sector. If a company produces a car that ceases to function, the owner does not go to the state asking for a new one. With money, however, this is exactly what the holder of that money will do. People invested in Icesave, the Icelandic online bank, because it offered higher interest. Despite the fact that the bank was linked to a small country of only 300,000 people, investors did not see it as a risky investment.

When the parent bank failed, depositors turned all together to the British government and demanded payment in full. In order to secure the safety of its own banks, the UK lent Iceland the money to repay deposits – a huge debt on the Icelandic people against which they are now protesting.

How could Iceland’s banks have financial commitments several times larger than its economy? Partly this was because the banks took in deposits from around the world, but mainly it was because banks can themselves create money. They do this by issuing bank credit – loans.

Free market has been built on bank credit. Traders and companies have borrowed bank money to set up their businesses. Recently most credit issue has been related to consumption or financial investments such as housing. The illusion is that banks act as intermediaries between savers and borrowers, but that is not so. Banks take in deposits, some paying interest. They also issue loans and charge interest. There is no direct relationship between savers and borrowers.

All deposits are returnable, regardless of what loans are still outstanding. Banks can also lend much more than they have in deposits, traditionally up to ten times more and even more in recent years. This is how financial sectors can explode in total value, eclipsing the productive economy and inflating financial assets.

Recently bank lending has contributed to the vast use of ‘leverage’ to enable the investments of the rich to go even further. Hedge funds, private equity investments and the investment arms of banks use borrowed money to inflate their speculative gambles. Some of these may even be gambles against the banks themselves or the national currency. As more money is issued it floods into the financial system and becomes part of the waves of money looking for a profitable home. As it is impossible to separate the interests of bank depositors or pension holders from financial speculators, in a crisis the whole system must be secured.

In such a crisis, the public groundwork of the money and banking system becomes clear. As all bank-created credit is designated in the national currency, this becomes a liability on the state. The logic would be that such a public liability should also be seen as a public resource. If the people are to be made ultimately responsible for whatever money is issued in their name, should they not have a say about how this money is used?

Far from having democratically controlled access to the process of credit issue, the public, as represented by the state, has itself to borrow from the capitalist owners and controllers of the nation’s money supply or tax money for public expenditure as it circulates. Today more than 95 per cent of money issue is through bank credit. Historically states controlled much higher levels of money issue as coinage. As expenditure on social or public needs are seen as secondary to privatized economic forces, the private sector determines how much public expenditure can, or cannot, be ‘afforded’.

Privatized control of money issue creates the impression that it is the private market that is creating wealth. Certainly it is making money, quite literally, largely through issuing it to itself as leverage to swell speculative trading. Private ownership and control of money issue has created huge differences of wealth. The mass of the people can only hope for a trickle down of economic activity through the consumption of the champagne-swigging traders and increasing numbers of billionaires. On the illusion that the manipulators of money have actually generated the wealth they gamble with, those playing the money markets demand a huge percentage of the product. The levels of pay and bonuses have become so obscenely puffed that they have become an economic ‘gated community’ set apart from ordinary mortals by their wealth. In fact they have stolen what should be a public resource and harnessed it for private benefit.