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Crisis roots according to UNCTAD
"UNCTAD a genuine plea against the market “laissez-faire” dogma"
Paul-Florent Montfort, Analyst, momagri
The latest report from the United Nations Conference on Trade and Development (UNCTAD)1was prepared by its interdivisional task force2 and covers the global financial crisis. Published on March 19, 2009, the report highlights the underlying causes of the crisis and rebuts the simplistic explanations usually presented by the media, which generally point the finger at government failure or individual––i.e. traders’––misbehavior.
According to UNCTAD, the crisis was mainly produced by the generalized financial deregulation and liberalization, both driven by an ideological belief in the virtues of the market. Acting as a genuine plea against the market “laissez-faire” dogma, the report lists a series of recommendations that advance the return of an “energetic” and “coherent” intervention of public authorities, especially in agricultural futures exchanges, just as we reported in our article “The UN Conference on Trade and Development (UNCTAD) advocates monitoring speculation on agricultural futures exchanges” 3.
If this idea is now taken for granted, the UNCTAD report gets the credit for going farther by providing a study on “financial effectiveness” and the objectives of regulatory measures––a type of analysis seldom undertaken nowadays. This is the reason why we recommend reading this report, whose key messages are presented below.
Key Messages of the UNCTAD Report
“The ‘market laissez-faire’ dogma of the past 20 years has dramatically failed the test”, and “the financialization of commodity futures markets was a decisive factor in the scope and degree of market volatility”.
Financial deregulation driven by an ideological belief in the virtues of the market has allowed the innovation of financial instruments that are completely detached from productive activities in the real sector of the economy. Such instruments altered the distribution of power between speculators and hedgers on futures markets by favoring the increasing supremacy of purely speculative investment funds4. Yet, according to the report and conversely to the mainstream view of economics theory, such type of speculation is a factor of price destabilization, rather than stabilization, especially on agricultural futures markets.
Such excessive and unregulated financialization is prone to question the usefulness of futures markets.
Price hyper-volatility induced by the increasing financialization of agriculture makes hedge positions more expensive and more complex. They can therefore end up being beyond participants’ resources, primarily for players in developing countries. Thus, for the period between January 2003 and December 2008, risk premiums received on the value of hedge contracts rose by 142 percent for corn, 79 percent for wheat and 175 percents for soybean (source: Chicago Board of Trade). As noted in the UNCTAD report, only selected large companies with sound capital base can shoulder such increases. Smaller players––that is to say most farmers––are therefore forced to scale back their purchases of hedge contracts. This situation in turn can lead to lessen market liquidity, increase volatility and discourage sound investors. In the end, it will also favor decoupling futures markets from real markets and fuel speculative bubbles.
“Financial efficiency should be defined as the sector’s ability to stimulate long-term economic growth and provide consumption smoothing services”.
New financial market regulation––especially in commodity futures markets––is necessary but not enough. Imposing a ceiling on speculative positions, reporting trading data to monitor transactions and other measures will not be enough to “moralize financial markets”, as demanded by public opinion. UNCTAD advocates overhauling financial regulation around functional efficiency (of financial markets and markets of goods and services) and social efficiency (maximizing well-being). The goal is to devise a system that allows weeding out financial instruments that do not contribute to functional and social efficiency.
“Contrary to traditional views, Governments are well positioned to judge price movements in markets driven by financial speculation and should not hesitate to intervene whenever significant imbalances loom”.
Neither players operating on markets nor Governments can know the equilibrium prices in financial markets. Yet, according to UNCTAD, this is not a valid argument against intervention. In fact, the report shows that players not only have no idea about the equilibrium price but that their behavior tends to drive prices systematically away from this equilibrium price (sheepish behavior). Governments do not know the equilibrium price either, but at some point they are the best positioned to judge when the market is in disequilibrium, especially if functional/social efficiency is to be the overriding criterion of regulation. The current crisis clearly demonstrates that trade and financial liberalization demands global cooperation and regulation.
In light of these facts, it is not only necessary but also pertinent to implement a “global institutional arrangement for minimum physical grain reserve to stabilize markets as well as cope with emergencies and humanitarian crises”.»
In addition to strictly statutory measures, a regulation system that hinges on functional and social efficiency fully validates UNCTAD’s proposal to set up a “global institutional arrangement” for minimum physical grain reserve to intervene in markets in case of profligacy. According to the report, such global mechanism should be able to bet against positions of speculative funds and major trading players, to assume the role of “market maker”, a task that would be achieved in line with the public interest goals that are best assessed by Governments.
Beyond the similarity between UNCTAD’s and momagri’s reommendations5, this latest report gets the credit for its comprehensive study of the purposes of new financial market regulation.
Because, while the international community now tries to define new regulatory measures to ward off new drifts in financial markets, the very definition of “financial efficiency” does not seem to be fodder for debate. As shrewdly noted by UNCTAD, there must be, however, a––oh so essential––debate: before defining the rules of the game, the objectives must be identified.
By defining financial efficiency on functional as well as social criteria (stimulate long-term economic growth), UNCTAD thus provides a balanced vision that fully validates the State as regulatory power as well as stock controller, to insure the common good of mankind.
The recent financial crisis sounded the knell of self-regulating markets. UNCTAD’s report validates the alternative: the stabilization-oriented intervention of governments.
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1 Established in 1964 as a permanent intergovernmental body, UNCTAD is the United Nations’ main organization for trade and development. Its goals are to maximize the trade, investment and development opportunities of developing countries and assist them in their efforts to integrate into the world economy on an equitable basis. UNCTAD has 191 member States and is headquartered in Geneva, Switzerland.
2 Established in 2008 by Secretary-General Supachai Panitchpakdi, the UNCTAD Interdivisional Task Force on Systemic Issues and Economic Cooperation is a group of economists tasked with examining the systemic dimensions of crises in a globalized and uncertain world.
3 Please see momagri’s point of view of May 11, 2009 http://www.momagri.org/UK/Points-of-view/The-UN-Conference-on-Trade-and-Development-UNCTAD-Advocates-Monitoring-Speculation-in-Agricultural-Futures-Exchanges-_491.html
4 The report gives two figures to fully quantify this financialization of futures markets: Between 20002 and 2008, transactions in futures markets increased fivefold in volume and multiplied 20 times in value ($3 trillion exchanged during June 2008).
5 Already underscored in the above-mentioned article of May 11, 2009 “UNCTAD Advocates Monitoring Speculation in Agricultural Futures Exchanges”. |
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Advocating for
agricultural market
regulation and global
food governance | |
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