Micro Finance, Fair Trade and DevelopmentTutor2u, A2 Macroeconomics (EdExcel Unit 4 and IB Economics)Autumn 2012

Basics of Micro Finance

Micro-credit - provision of small-scale loans to the poor

Micro-savings – for example, voluntary local savings organisations provided by charitiesMicro-insurance- especially for people and businesses not traditionally served by commercial insurance businessesRemittance management – e.g. transfer payments made through mobile phone solutions

Aims of Micro Finance

Extreme poverty

reduction through financial inclusion

Raising domestic savings in lowest income

countries

Protection against income

volatility (insuranc

e)

Sustainable finance for new

enterprises

- Route out of

dependency

Gender empower

-ment

Professor Muhammad YunusGrameen - "Bank of the

Villages“ in BengaliStarted the Grameen

Bank (GB) more than 30 years ago with the aim of reducing poverty by providing small loans to the country’s rural poor

"Poverty is a common experience everywhere- what we are addressing is rejection by the financial system."

The rapid (early) growth of Grameen

Critics of Micro Credit / Grameen

Debt

•Multiple loans – growing evidence of sub-prime style lending, charged very high rates of interest

•Coercive collection practices by some lenders

•Limited evidence of the impact of micro loans on poverty reduction

Savings

•Sustainable savings more important in long run - real incomes need to rise

•Duflo argues that direct cash transfers / funding of skills training have a bigger effect in raising sustainable incomes

Subsidy

•Grameen has been reliant on subsidised funding to be successful

•Their funding model limits the scalability of micro credit

•Credit is often used to finance consumption rather than investment

•Investing in people a stronger pathway out of poverty than extra debt

Grameen comes to Scotland

Micro InsuranceExamples of micro-insurance include:

◦ An Indian fertiliser company providing free insurance with each bag of fertiliser bought

◦ Cattle insurance policies – small scale insurance policies that cover the death of animals due to accident, disease, foods, drought and other events

◦ Life insurance and accident cover bundled with farmers or other business people buying new trucks

◦ Pay-as-you-plant insurance for Kenyan farmers to insure inputs against drought and excess rain

◦ In South Africa, HIV patients can get life insurance providing they sign up to regular medical check-ups and adherence to taking courses of freely available antiretroviral treatments

Micro Insurance

Safety net will encourage less risk averse behaviour

Insurance can be a spring-board as well as a safety net

Insurance can help smooth volatility in income and spending

Risk-taking behaviour More children

from poorer families will be able to continue their education

Many of the poorest spend large sums of funerals - insurance reduces this burden

Life insurance schemes promote small scale saving

Schooling, Death and

Saving

Leapfrog Investments

Andy Kuper – Leapfrog Investments Kuper founded LeapFrog in

2007 to provide insurance for "millions of people who lie awake at night fearing they will lose everything in the event of a fire or flood or other adverse event".

Limits / Risks from Micro Finance

Moral hazard

Adverse selection

Asymmetric information

Moral Hazard

Moral hazard

Insured people and businesses may take less steps to protect themselves against risks because they know they have the safety net of insurance

Adverse Selection

Adverse selection

The highest risk agents will tend to be those who bid for insurance products increasing the pooled risks of insurance everyone

Limits / Risks from Micro Finance

Asymmetric information

Those seeking insurance have more information about their conditions than agents selling the insurance

Fair Trade

508 licensed companies in the UK including Morrisons, Asda, Starbucks, Unilever and

Marks & Spencer, offering 4,500 products.

Free Trade and Fair TradeFree TradeFree trade gives

primacy to market forces and involves the harmonization of trading rules and the reduction of barriers to trade such as tariffs and quotas.

Fair TradeFair access to the

markets of the developed world

Fairer (more equitable) prices for developing country producers / processors

A particular relationship with ethical consumers

The basis behind Fair Trade

A trading partnership that seeks greater equity in international

trade. It contributes to sustainable development by

offering better trading conditions to, and securing the rights of, marginalised producers and

workers..

Fair Trade Purchasing

The basic fair trade conceptTraders pay producers an agreed

minimum price that covers the costs of sustainable production and living; this gives way to the market price whenever the latter is above this minimum

Coffee Supply Chain

Coffee Prices and Fair Trade Guarantee for Producers

Cocoa Prices

Cocoa growers typically receive around 6 per cent of the final

price of chocolate paid by consumers

Building the Case for Fair Trade An alternative to the world trading system Enables the producer (farmer) to obtain a larger share

of the final consumer price Guaranteed prices are a form of insurance Fairtrade offers a social premium price – helps to fund

reinvestment in production facilities, training, sanitation

Tied to enforcement of better labour conditions e.g. Child labour + environmental standards

Fairtrade purchasers provide micro-credit to growers Important counter balance to monopsony power of

multinational businesses Long term contracts help to reduce uncertainty A complement to, not a substitute to demands for /

pressure to reform global trade system

Black Gold – Fair Trade Coffee

Joining the Fair Trade MovementProcter & Gamble, Nestlé Kraft, Sara LeeChiquita, Del Monte, DoleBen and Jerry’sCadbury, Candico SugarStarbucks and CostaCo-Operative, Marks and

Spencer, Sainsbury’s

Critics of the Fair Trade Movement It is a “niche” second best alternative to aidNot a long-term development strategyMost fair trade farmers continue to sell majority of

their output into conventional marketsHigher guaranteed prices might encourage over-

production rather than diversificationCosts imposed by Fair Trade certification are

substantial for lowest income farmersFair trade penetration is greater in middle-income

than in poor countries (e.g. Mexico)Primary product producers would gain more by

investing in speciality brands (higher value added)What % of the retail price goes to farmers?Price guarantees not the same as income stability

Adam Smith Institute“Fairtrade is not the only

way to make a difference, and it is not the best way either”

“It holds back development, paying inefficient cooperative farms and discouraging diversification and mechanisation.”

“At best, fair trade is a marketing device that does the poor little good.”