Wednesday, November 25, 2009

The Food Drama is far from being over

During the world summit on food security (16-18 November), there are alarming news coming not only from underdeveloped countries with more than a billion people suffering hunger but also from the wealthiest nation. According to the US Agriculture department, around 49 million, say 14% of US families, do not have access to sufficient food and a further 11% has bad nutrition. The economic crisis has worsen the situation especially for large families : in 2007, 12 million children lived in families without any food, now the figure is 18%; more children are also in a serious state of malnutrition, rising from 700thousand to a million. these figures tell the human drama behind the recession which is far from being over.

What happened in this summit ? As Shakespeare said, much ado about nothing . The only strong message came from the Pope Benedict XVI, in his address to the summit: "Hunger is the most cruel and concrete sign of poverty. Opulence and waste are no longer acceptable when the tragedy of hunger is assuming ever greater proportions (...) the Catholic Church will always be concerned for efforts to defeat hunger; the Church is committed to support, by word and deed, the action taken in solidarity – planned, responsible and regulated – to which all members of the international community are called to contribute”. Moreover he lamented the weakness of current food security mechanisms, and urged better market access for poor countries.

The Summit formulated the objective of achieving food security for all through an ongoing effort to eradicate hunger in all countries, with an immediate view to reducing by half the number of
undernourished people by 2015. But once again, rich States did not show any concrete gesture to alleviate hunger in the most in-need countries. The final resolution sets a number of commitments, but no additional money. Where are the promises made at the G-8 in L'Aquila?

Concretely, the main message is the central role of agriculture in fighting climate change and ensuring food security. Agricultural production has to increase but at the same time the impact n the environment has to be mitigated. Specialists recommended governments to use bioenergy as a positive force for rural development. There are opportunities and risks for the environment and food security which need to be taken into account.

But, let's be clear, it is not about technology. The Brazilian experience has been successful, despite many difficulties, in achieving ahead of schedule the Millennium Development Goal to halve poverty and hunger by 2015, including through political will and social programmes for smallholder farms and women. So why not follow this example?

Saturday, November 21, 2009

Is Free Market Ethical?

I read recently an article from Philip Booth ('Ethics alone will not prevent financial crises' in FT 15 Nov.) from the Institute of Economic affairs*, a British right wing think tank which supports the revival of free market ideas on 'ethical' grounds. Basically, he argues that free market as such is not against catholic social teaching as laid down in recent encyclicals of the Church. But his main argument is also to fight against the idea that the crisis has deep ethical causes such as bribery, greed and other immoral sentiments.

He writes: "governments and regulators have distorted incentives and, as a result, the self-interest of bankers has not been in harmony with the interests of society and disaster has followed". In other words, if the economy was ruled solely by free market ideas, the crisis would have never happened. This is an 'immoral' argument which owes more to Hayek and Friedman than to the Church social doctrine.

I agree that the crisis does not have as such an ethical root, although it is clear that immoral behaviour has contributed to aggravate the crisis leading to the financial meltdown in 2007. Speculative bubbles are the fruit of greed and lust for money, not the result of rational economic behaviour.

However, the topic raises more profound philosophical issues which underpin the whole debate about ethics and economics. Adam Smith referred to the 'invisible hand' to describe the apparent benefits to society of individuals behaving in their own interests. He writes in his 'Theory of Moral Sentiments' (1759): "... In spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose ... be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society". In other words, Smith explains that man pursues his self interest while commanding himself based on the principles of natural law.

A. Hirschman departs from Smith's moral philosophy and develops a powerful reconstruction on the 'ideological' origins of capitalism. His main argument is that the rise of capitalism depended on the activity of merchants and bankers, which was originally considered sinful. So, what changed? How could an immoral enterprise become ethically acceptable? The answer lies in the moral justification of the interest as opposed to the passion - which by essence is unpredictable and irrational. Following his thinking, it is not an argument in defence of capitalism, but rather a cause of its birth and rise over more than two centuries. But, while acknowledging some virtues of capitalism, Hirschman also admits that interest driven behaviours might be dangerous, and therefore might need to be contained. His arguments have gained some validity in the context of the crisis as self interested economic behaviour, e.g. in the financial sector, will require more stringent and transparent rules.

When the Pope suggests that self-interest should be put in harmony with collective interest, he expresses a moral view. But, what is the dominant conception of economic virtue today? Isn't market competition extended to many segments of the economic and social sphere, including education and health?

In fact, Ethics matter as much as Economics. It is hardly impossible to draw a dividing line between the two. We must understand that Economics is a moral science which pursues the achievement of common good. But as every (honest) economist knows, it is more difficult to translate those principles into practice.

** The Passions and the Interests:Political Arguments for Capitalism before Its Triumph, Princeton University Press 1997

Sunday, November 8, 2009

Climate change, poverty: two defining challenges

Climate change and poverty are the two defining challenges of the 21st century and they must be tackled together. It means that if we fail one, we fail the other. The aim is to meet the environment's carbon constraints while creating the growth necessary to raise living standards for the poor.

It is true that climate change affects gravely the poorest in many parts of the world. Natural disasters have a devastating impact on human lives and also on means of subsistance.

There is no alternative to a low carbon economy. Current growth patterns are characterized by high prices for fossil fuels and undermined by a hostile physical environment that climate change is already creating. If risks are not addressed, the eventual consequences will be worse.

Climate change poses a profound threat to our economic future and to the economic possibilities of our grand children (to quote a famous essay by Keynes), while low carbon growth promises decades of sustainable prosperity.

The Stern report* concluded that "the benefits of strong, early action on climate change considerably outweigh the costs". It proposes that one percent of global GDP per annum is required to be invested in order to avoid the worst effects of climate change, and points out that failure to do so could risk global GDP being up to twenty percent lower than it otherwise might be.

However, there is a continuing rich-poor divide on sharing the burden of curbs on greenhouse gas emissions in a drive to avert droughts, wildfires, species extinctions and rising seas. At the G-20 on 7 November, Britain pushed to reach a $100bn deal to meet the costs of climate change by 2020 but developing nations held firm they would not accept.

The forthcoming UN summit in Copenhagen will probably not lead to an agreement on the costs of climate change. Economic interests from rich and emerging countries seem difficult to reconcile. But rich countries should also endeavor on helping the poor to adapt to climate change, sharing technology and cutting emissions from deforestation. The selfishness of the rich countries is in fact the main source of division.


Tobin Tax is back?

At the G-20 in St Andrews on 7 November, the British PM Gordon Brown has proposed a levy on financial transactions to stabilize markets and raise new resources. This is nothing else than the so-called 'Tobin tax' ( proposed by the Nobel Price for Economics James Tobin in 1972) . Since then, that proposal was discussed in several occasions, but in particular after the two important financial crises which preceded the current one: in 1992 where the European Monetary System was under threat after the massive speculative attacks against the Sterling and the lira (which lost about 30% of its value) putting the Italian economy in a quasi default situation; the Asian crisis in 1997, which had devastating consequences for some Asian economies with riots and demonstrations for hunger.

The Tobin tax consists in a minimum levy on financial transactions , for instance 0,5% (as proposed by Prof. Tobin in an interview to Der Spiegel in 2001). In global finance, gains could be infinitesimal but the high frequency of operations and the large sums involved yield gigantic profits . So even a low tax could result in cancelling a large volume of transactions, which would not be profitable, although markets would gain in stability. Furthermore, tax revenues would be significant : at 0,5% it is estimated that they would represent more than 80 billion dollars a year, which according to many would be sufficient to eradicate extreme poverty in the world.

Such tax requires a large consensus among the most powerful governments and so far it has been opposed by all financial agents- which is not surprising- and also by many economists. According to opponents, speculation may be bad ethically speaking but has an important role in financial markets operation to guarantee financial liquidity. We can still think that the risks deriving from the Tobin tax might be deliberately overstated: even George Soros, who gave rise to the currency crisis in 1992, declared that the tax would have undermined his interests, but that it could have beneficial effects for the world economy.

It is not surprising that the proposal has been endorsed by all opponents of globalization, but Prof. Tobin himself argued that his idea was intended to make the world economy work better, although he also supported the idea to use it as a remedy to fight poverty. Created in 1998, an international organisation called Attac* supports the idea of introducing such tax to promote social justice.

Hitherto Europe was divided on the tax, with on the one hand France and Germany in favor and the United Kingdom against it. Gordon Brown's declaration in support of the tax is most welcome, although he made clear that the tax revenues would go into a fund for the State to intervene in bailouts. There is thus an important nuance: it would be reinvested in the country for emergence purposes not to redistribute resources to eradicate poverty. In any event, an agreement among European states will not suffice, and would need to be endorse by G-20. In the final declaration**, there is no mention of this tax but the discussion is far from being over.

* Attac (Association for the Taxation of Financial Transactions for the Aid of Citizens ) -