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Micro Finance Fair Trade and Development
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Micro Finance Fair Trade and Development


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Revision presentation on micro finance and fair trade

Revision presentation on micro finance and fair trade

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  • 1. Micro Finance, Fair Tradeand DevelopmentTutor2u, A2 Macroeconomics (EdExcel Unit 4and IB Economics)Autumn 2012
  • 2. Basics of Micro Finance Micro-credit - provision of small-scale loans to the poor Micro-savings – for example, voluntary local savings organisations provided by charities Micro-insurance- especially for people and businesses not traditionally served by commercial insurance businesses Remittance management – e.g. transfer payments made through mobile phone solutions
  • 3. Aims of Micro Finance Sustainabl Extreme Raising Protection e finance poverty domestic against for new enterprises Genderreduction savings in income empower- through lowest volatility - Route out ment financial income (insurance ofinclusion countries ) dependenc y
  • 4. Professor Muhammad Yunus Grameen - "Bank of the Villages“ in Bengali Started 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."
  • 5. The rapid (early) growth ofGrameen
  • 6. Critics of Micro Credit / Grameen • Multiple loans – growing evidence of sub-prime style lending, charged very high rates of interest • Coercive collection practices by some lenders Debt • Limited evidence of the impact of micro loans on poverty reduction • Sustainable savings more important in long run - real incomes need to rise • Duflo argues that direct cash transfers / funding of skills training Savings have a bigger effect in raising sustainable incomes • 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 extraSubsidy debt
  • 7. Grameen comes to Scotland
  • 8. Micro Insurance Examples 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
  • 9. Micro Insurance Risk- Schoolin taking g, Death behaviou and More children Safety net will r encourage less Saving from poorer families will be risk averse able to continue behaviour their education Many of the Insurance can be poorest spend a spring-board as large sums of well as a safety funerals - net insurance reduces this burden Insurance can Life insurance help smooth schemes promote volatility in income small scale saving and spending
  • 10. Leapfrog Investments
  • 11. Andy Kuper – LeapfrogInvestments 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".
  • 12. Limits / Risks from Micro Finance Moral hazard Adverse selection Asymmetric information
  • 13. 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
  • 14. 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
  • 15. Limits / Risks from Micro Finance Asymmetric information Those seeking insurance have more information about their conditions than agents selling the insurance
  • 16. Fair Trade 508 licensed companies in the UK including Morrisons, Asda, Starbucks, Unilever and Marks & Spencer, offering 4,500 products.
  • 17. Free Trade and Fair Trade Free Trade  Fair Trade Free trade gives  Fair access to the primacy to market markets of the forces and involves developed world the harmonization of  Fairer (more trading rules and equitable) prices for the reduction of developing country barriers to trade producers / such as tariffs and processors quotas.  A particular relationship with ethical consumers
  • 18. 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. .
  • 19. Fair Trade Purchasing
  • 20. The basic fair trade concept Traders 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
  • 21. Coffee Supply Chain
  • 22. Coffee Prices and Fair TradeGuarantee for Producers
  • 23. Cocoa Prices Cocoa growers typically receive around 6 per cent of the final price of chocolate paid by consumers
  • 24. Building the Case for FairTrade 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
  • 25. Black Gold – Fair TradeCoffee
  • 26. Joining the Fair TradeMovement Procter & Gamble, Nestlé Kraft, Sara Lee Chiquita, Del Monte, Dole Ben and Jerry’s Cadbury, Candico Sugar Starbucks and Costa Co-Operative, Marks and Spencer, Sainsbury’s
  • 27. Critics of the Fair TradeMovement It is a “niche” second best alternative to aid Not a long-term development strategy Most fair trade farmers continue to sell majority of their output into conventional markets Higher guaranteed prices might encourage over- production rather than diversification Costs imposed by Fair Trade certification are substantial for lowest income farmers Fair 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
  • 28. 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.”