Micro Finance Fair Trade and Development


Published on

Revision presentation on micro finance and fair trade

Published in: Education
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Micro Finance Fair Trade and Development

  1. 1. Micro Finance, Fair Tradeand DevelopmentTutor2u, A2 Macroeconomics (EdExcel Unit 4and IB Economics)Autumn 2012
  2. 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. 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. 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. 5. The rapid (early) growth ofGrameen
  6. 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. 7. Grameen comes to Scotland
  8. 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. 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. 10. Leapfrog Investments
  11. 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. 12. Limits / Risks from Micro Finance Moral hazard Adverse selection Asymmetric information
  13. 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. 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. 15. Limits / Risks from Micro Finance Asymmetric information Those seeking insurance have more information about their conditions than agents selling the insurance
  16. 16. Fair Trade 508 licensed companies in the UK including Morrisons, Asda, Starbucks, Unilever and Marks & Spencer, offering 4,500 products.
  17. 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. 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. 19. Fair Trade Purchasing
  20. 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. 21. Coffee Supply Chain
  22. 22. Coffee Prices and Fair TradeGuarantee for Producers
  23. 23. Cocoa Prices Cocoa growers typically receive around 6 per cent of the final price of chocolate paid by consumers
  24. 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. 25. Black Gold – Fair TradeCoffee
  26. 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. 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. 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.”