Phulbari Coal Extraction: Open pit mining to affect food security in Dinajpur

May 31, 2008

The Daily Star, May 31 2008. 

Oil, gas protection body leaders tell meetings at Phulbari, Nilphamari

Leaders of National Oil, Gas, Power, Mineral Resources and Port Protection Committee said here yesterday the food security will be affected in the district if the coal in Phulbari is extracted through open pit mine method.

They said about 40 square mile land in four upazilas in the district will be damaged in the process. 

The committee leaders were addressing a meeting titled, ‘People’s Demand and Phulbari Coalmine,’ held yesterday at Rabeya Community Centre at Phulbari where three persons were killed during a carnage there on August 26, 2006. The meeting was presided by committee convener Md Saiful Islam Jewel. 

The coalmine will bring numerous sufferings to villagers, they said. They said the coal will be utilized outside the country rather than using for domestic purpose. 

The meeting expressed dissatisfaction as the government is yet to implement the 6-point demand signed after Phulbari carnage on August 30, 2006. They urged the caretaker government to implement the demand. They urged the people of the four affected upazilas to thwart any conspiracy of foreign investors in this regard. 

Md. Saiful Islam Jewel, convener of Phulbari Oil, Gas and Mineral Resources and Port Protection Committee told the meeting that nation will decide to utilize the underground resources of the country and Phulbari people will thwart any conspiracy against them with the Phulbari coal project, he added. 

The speakers observed that a strong political will is needed to resolve the issue. In his address, Prof Anu Mohammad, general secretary of the committee said that the underground asset belongs to people who will decide their fate. 

Among others, Prof Anu Mohammad, Engineer Sheikh Muhammad Shahidullah and Haider Akbar Khan Rano of Workers’ Party, Zunayed Shaki, Gano Sanghati Andolon, Prof Samsul Alam (member), Tipur Biswas of Gano Front and Advocate Abdus Salam spoke. 

Earlier, the committee leaders held a press conference at ‘Media House’ in Nilphamari on Thursday, said our district correspondent. They said the countrymen won’t not allow any amendment in proposed coal policy. 
They said for coal extraction, the principle of utilisng mineral resources for betterment of people, not for making profit, should be followed. The coal also should be extracted by national organisations, they said.

Chaired by Sreedam Das, convener of the district unit of the committee, the press conference was addressed by Engineer Sheikh Muhammad Sahidullah, Prof Anu Mohammad and Noor Mohammad.

They said ‘Asia Energy’ is spreading corruption in order to establish their ‘devastating’ plan as a development project. They said the expert committee formed earlier termed the development plan of ‘Asia Energy’ as illegal and their project against the national interest. 

Prof Anu Mohammad alleged ‘Asia Energy’ is trying to divide public opinion by making some agents. 

Phulbari bed reserves at least 572 million tonnes of coal. If Bangladesh Government signs any deal with a company then coal extraction will last for 30 years where about 50,000 people will be relocated, according to officials of Asia Energy.


Getting out of Food Crisis

May 30, 2008

GRAIN, May 2008
This is a pre-release of the editorial on the food crisis of the July 2008 issue of GRAIN’s Seedling magazine. GRAIN decided to distribute this now in support of the mobilisations of social movements around the High-Level FAO Conference on World Food Security, held from 3 – 5 June, 2008 in Rome.

While there has been widespread reporting of the riots that have broken out around the world as a result of the global food crisis, little attention has been paid to the way forward. The solution is a radical shift in power away from the international financial institutions and global development agencies, so that small-scale farmers, still responsible for most food consumed throughout the world, set agricultural policy. Three interrelated issues need to be tackled: land, markets and farming itself.

In March 2008, the United Nations Food and Agriculture Organisation (FAO) and other international agencies began talking openly about a global food crisis. As with many such crises, they were a little late. Food prices — especially for cereals, but also for dairy and meat — had been rising throughout 2007, markedly out of step with people’s incomes. People had coped by changing their eating habits, which included cutting back on meals, and had taken to the streets to demand government action. By early 2008 grain prices were surging and riots had broken out in nearly 40 countries, instilling fear among the world’s political elites.

A few months have now passed since the global food crisis was put on the world agenda. The causes of the problem have been identified and more or less understood.[1] Yet the food crisis is still unfolding. Prices are continuing to climb, a whole class of “new poor” has emerged, governments are scrambling to find or manage grain supplies, and the eruption of another major setback could provoke a really dramatic world crisis.

Everyone agrees that something needs to be done but there is vast disagreement as to what this implies. The policy priests at the World Bank, the World Trade Organisation and the International Monetary Fund, the corporate boards of directors and, indeed, most governments and their teams of advisers want us to continue on the course of industrialising agriculture and liberalising trade and investment, even though this recipe just promises more of the same in the future. Social movements and others who have been fighting the injustices of today’s capitalist model see things differently. For them, it is now time to break with the past, to mobilise around a new, creative vision that will bring not only short-term remedies, but also the kind of profound change that will actually get us out of this food crisis — and, indeed, the unending series of crises (climate change, environmental destruction, poverty, conflicts over land and water, migration, and so on) that neoliberal globalisation generates.


Many people are becoming aware that no solution is possible unless we open the doors to a real shift in power. The policymakers, scientists and investors who have led us into the current mess cannot be relied upon to get us out of it. They have created a profound double vacuum: a policy void and a market sham. The policy void is palpable. Instead of generating bright ideas to build a more sustainable and equitable food system, those in power seem capable of only knee-jerk responses that amount to more of the same: more trade liberalisation, more fertilisers, more GMOs and more debt to make it all possible. The very notion of, say, rewriting the rules of the finance system or clamping down on speculators are taboo topics. Even the food self-sufficiency policies being adopted in some developing countries, in themselves a very good idea, often repeat failed Green Revolution strategies.

More disturbing, the political and business elites don’t want to face the fact that, whether you are a working-class homeowner in the US or a mother queuing for rice in the Philippines, confidence in the market has been shattered. Farmers in Thailand are stupefied. Last year they were getting Bht10,000 (US$308) per tonne of rice delivered to the mills. Today they’re paid Bht9,600 (US$296), even though the price of rice to the consumers has tripled![2] The US dollar (still a global currency for food trade) has plunged, while the price of oil (on which industrial food production depends) has gone through the roof.. As a consequence, governments have started taking food out of the market, as they simply don’t trust the way food is being valued any more. The government of Malaysia, for instance, has announced that it will bilaterally swap palm oil for rice with any nation willing to make the deal, while several other countries have banned the export of food. [3]

Against this backdrop of bankrupt ideas and systems, there is no other credible way forward than to rebuild from the bottom up. That means turning the whole thing over: small farmers, still responsible for most food produced, should be the ones setting agricultural policy, rather than the WTO, the IMF, the World Bank or governments. Peasant organisations and their allies have clear, viable ideas about how to organise production and services and how to run markets and even regional and international trade. Ditto for labour unions and the urban poor, who have an important role to play in defining food policy. Many groups, such as the National Farmers’ Union in Canada, the Confédération Paysanne in France, ROPPA in West Africa, Monlar in Sri Lanka and the MST in Brazil, have issued strong calls to revamp agricultural policy and markets. International organisations, such as Via Campesina and the International Union of Food Workers, are also ready to play a role.


Three interrelated issues need to be tackled to get us out of the food crisis: land, markets and farming itself.

Access to land by peasant farmers is clearly central. With the surge in commodity prices and the new market for agrofuels, land speculation and land grabbing are occurring on a horrific scale. In many parts of the world, governments and corporations are installing plantation agriculture, displacing peasants and local food production in the process. Indeed, the model of export-led agriculture and import dependency at the root of today’s crisis is going into overdrive, destroying the very systems of food production that we need to get out of our present dilemma.

The situation is becoming even more critical as land grabbing is going global and becoming official. According to some sources, Japan has acquired 12 million hectares of land in South-east Asia, China and Latin America to produce food for export to Japan, which would mean that Japan’s overseas croplands are now three times the size of its mainland! [4] The Libyan government has leased 200,000 hectares of cropland in Ukraine to meet its own food import needs, and the United Arab Emirates is buying large landholdings in Pakistan with Islamabad’s support.[5] Last year the Philippine government signed a series of deals with Beijing to allow Chinese corporations to lease land for rice and maize production for export to China, triggering a huge national outcry, from Filipino peasant organisations right up to the Catholic Church. Chinese corporations have also been acquiring rights to productive farmland across Africa and in other parts of the world. The Beijing government is about to make the buying of land overseas to produce food for export to China a central and official government policy. [6]

Land has, of course, always been a central demand from social movements, particularly for peasants, fisherfolk, rural workers and indigenous peoples. Agrarian reform tops the list of measures urgently needed to put an end to the growing plague of rural poverty and to empower people to feed themselves and their communities, reversing the explosion of urban slums that is so central to this food crisis. It is high time that the proposals from the peasant organisations are taken seriously and implemented.

Another major issue in dire need of attention is how to deal with the market. For decades, neo-liberal trade liberalisation and structural adjustment policies have been imposed on poor countries by the World Bank and the IMF. These policy prescriptions were reinforced with the establishment of the WTO in the mid-1990s and, more recently, through a barrage of bilateral free trade and investment agreements. Together with a series of other measures, they have led to the ruthless dismantling of tariffs and other tools that developing countries had created to protect local agricultural production. These countries have been forced to open their markets to global agribusiness and subsidised food exported from rich countries. In that process, fertile lands have been diverted away from serving local food markets to producing global commodities or off-season and high-value crops for western supermarkets, turning many poor countries into net importers of food.

One of the more obscene aspects of the food crisis is the spectacular profits that the market has allowed big agribusiness and speculators to make from it. Contrary to the impression conveyed by some media, few farmers are seeing any benefits from the price hikes. We have already quoted the example of Thai farmers now getting less for their rice while consumers pay three times more. Farmers in Honduras, once the bread basket of Central America, can’t afford to buy seed or fertiliser any more, as prices for these inputs have soared. [7] Corporations, on the other hand, are making record profits at every link in the food chain — from fertilisers and seeds to transport and trading. Earlier this year, GRAIN documented the 2007 profit increases of the major food and fertiliser corporations. [8] In the first quarter of 2008, while many hungry people were further cutting back on the amount of food they eat, the major food and fertiliser companies were reporting even more spectacular profit increases. [9]

At the same time, massive speculation is occurring. According to a leading commodities broker, the amount of speculative money in commodities futures has risen from US$5 billion in 2000 to US$175 billion in 2007. [10] Half the wheat now traded on the Chicago commodities exchange is controlled by investment funds.[11] At the Agricultural Futures Exchange of Thailand, speculation on rice has, within one year, tripled the average number of contracts traded daily on the exchange, with hedge funds and other speculators now representing up to half of the daily contracts being traded. [12] All of this speculative activity from pension funds, hedge funds and the like, plus the shifting of commodity trade from formal exchange markets to direct over-the-counter deals, is sending prices soaring. Such a bubble is inherently unstable and bound to burst, with unpredictable results. With few exceptions, governments and international agencies are hardly talking about this part of the food crisis equation, let alone doing anything effective to deal with it.

In contrast, trade unions and farmers’ organisations have been vigorously calling for proper regulation and controls, particularly since producers and consumers are the groups most affected by it all. Calls by social movements for food sovereignty invariably include urgent proposals for priority to be given to local and regional markets and for measures to be taken to reduce the dominance of international markets and the corporations controlling them. Other proposed measures include suspending, if not dismantling, the WTO Agreement on Agriculture, taxing agribusiness corporations to improve the distribution of resources and establishing national strategic reserves. This would allow governments to manage supply more efficiently, to encourage competition, to inhibit the formation of monopolies, to carry out formal investigations into speculation on the commodity markets and then to take measures to control it, and so on. [13] There are many options, if we truly want to change things.

Then there is the issue of farming itself. The food crisis has galvanised the voices of the old Green Revolution into calling for more of the same top-down packages of seeds, fertiliser and agrochemicals. Since the main reason why the food crisis is hurting so many people is their inability to pay today’s high prices, simply boosting production is not necessarily going to resolve anything, especially if this means driving up the costs of production. The high-yielding varieties of staple foods that the Consultative Group on International Agricultural Research (CGIAR), the FAO and most agricultural ministries are so enthusiastic about require more petroleum-based fertilisers and other chemicals, all of which have undergone huge price increases that effectively put them out of reach of many farmers. In any case, chemical fertilisers are one of the main sources of the greenhouse gases produced by agriculture. Throwing even more of them at already exhausted soils, as many Green Revolutionaries are now advocating, would merely push the world deeper into climate chaos and further destroy the life of the soils.

Here again, there is a vast array of solid proposals and experiences for moving towards farming methods that are productive, non-petroleum based, and under the control of small farmers. Scientific studies have shown that these methods can be more productive than industrial farming, and that they are more sustainable. [14] If they are properly supported, such local farming systems, based on indigenous knowledge, focused on maintaining healthy, fertile soil, and organised around a broad use of locally available biodiversity, show us ways out of the food crisis. To build on these, one has to stop relying on the experts of the World Bank and the CGIAR and start talking instead to local communities. One would need not only to build new strategies and to collaborate with different players, but also to put an end to the criminalisation of diversity so that farmers can freely access, develop and exchange seeds and experiences. It would mean, too, that governments stop promoting agribusiness and export markets, and start protecting and celebrating the skills, knowledge and capacities of their own people.


It is clear that those of us outside governments and the corporate sector need to come together as never before to build new solidarities and fronts of action both to address the immediate problems of the food crisis and to build long-term solutions. If we don’t work together to facilitate a power shift that puts first the needs of the rural and urban poor, we will definitely get more “business as usual”. Reorienting our agricultures and food systems to make them more just, more ecological and truly effective in feeding people is no easy task, but surely we all have a part to play. Rather than wait or look for ready-made solutions, we need to create those better systems now, collectively.


There is a PDF version of this editorial

[1] See, for example, GRAIN’s contribution, “Making a killing from hunger“, Against the grain, April 2008

[2] “Chiang Rai farmers protest“, The Nation, Bangkok, 15 May 2008

[3] Leo Lewis, “Food crisis forces Malaysia into barter: palm oil for rice“, The Times, London, 14 May 2008. Already, about one-third of the world’s tradable rice has been taken out of the market. See “Nigeria: Food crisis, not just rice“, Vanguard, Lagos, 14 May 2008

[4] ” Food crisis looming over Korea”, Chosun Ilbo, Seoul, 4 March 2008

[5] “Food crisis turns banks into field hunters“, Sabah, Turkey, 15 May 2008. Simeon Kerr and Farhan Bokhari, “UAE investors buy Pakistan farmland“, Financial Times, London, 11 May 2008

[6] Jamil Anderlini, “China eyes overseas land in food push”, Financial Times, 8 May 2008.

[7] Alison Fitzgerald, Jason Gale and Helen Murphy, “World Bank ‘destroyed basic grains’ in Honduras“, Bloomberg, 14 May 2008

[8] GRAIN, “Making a killing from hunger“, Against the grain, April 2008

[9] See, for example, Geoffrey Lean, “Multinationals make billions in profit out of growing global food crisis”, Independent on Sunday, London, 4 May.

[10] Figures compiled by commodities brokerage Gresham Investment Management, as reported in The Globe and Mail, Toronto, 25 April 2008. This is money that big funds spend, not on buying or selling the physical commodity, but on betting on price movements. Even so, they help to determine prices, so they affect the prices paid by those purchasing the physical commodity.

[11] Paul Waldie, “Why grocery bills are set to soar,” The Globe and Mail, 24 April 2008.

[12] “Rice contract volume rises with speculators moving in,” Bangkok Post, 7 May 2008

[13] See, among others, IUF, “Fuelling hunger“, Geneva, 28 April 2008,  or National Family Farm Coalition, “Family farmers respond to the food crisis“, The Nation, New York, 28 April 2008

[14] See for example: http://www.farmingsolutions.org, and



— For more information and further reading, GRAIN has compiled a page on the food crisis with relevant links, documents, audio and video

— High-Level FAO Conference on World Food Security

The Bonnfire of Biodiversity: fuelling the food crisis 

Food Crisis Symptom of Dubious Liberalisation

May 30, 2008

By Aileen Kwa*, May 29, 2008. IPS

GENEVA, May 12 (IPS) – The high food prices that have sparked riots in many parts of the developing world — from Indonesia, India and Bangladesh to Cameroon, Cote d’Ivoire and Haiti — should come as no surprise. These are only the latest in a series of events many developing countries have suffered as a result of opening their borders and neglecting domestic agriculture.

A large number of developing countries have conscientiously implemented World Bank and International Monetary Fund (IMF) conditions and World Trade Organisation (WTO) commitments. They have applied the given structural adjustment policies — and have seen the damaging consequences to their domestic agricultural sector.

The consequence has been the certain erosion of their capacity to produce their own food.

In the era of stronger state control in the 1970s and even the early 1980s, domestic food markets in the developing world were often in the hands of state marketing boards and cooperatives. Marketing boards would guarantee floor prices, and provide fertilisers and seeds. They also controlled import volumes, redistributed food where there were production shortfalls, and purchased commodities from cooperatives.

These marketing boards were not always run in the best possible way; there were many instances of corruption or inefficiency, but they did fulfill certain critical functions. Farmers were provided a market to sell their produce to, which meant they had a livelihood. Prices were stable even though they were often lower than what farmers would have liked.

As a result of these policies, many developing countries were either net food exporters, or at least were nearly food self-sufficient.

All that has changed over the last 20 years. Investment support to farmers was done away with. Small farmers were told to produce for the international market, and their markets were opened to producers from outside. Rather than supporting staple crops, government support went to the export sector. Since all would specialise in the products where they had ‘comparative advantage’, gains were supposed to accrue all round.

But rather than producing winners, millions of the poorest subsistence farmers were knocked out of their own markets. Imports took over what was previously produced by local people. Over the last 20 years, the production capacity in many countries has severely diminished.

The Philippines has been one prime example of such policies. “During the 60s and 70s, we were self-sufficient,” Jowen Berber of Centro Saka, an NGO working on agrarian issues with farmers, told IPS. “That was the time that the government was heavily investing in rice — irrigation, infrastructure, marketing support and production support such as credits and inputs. But when the government stopped those incentives and subsidies, rice production slowly decreased.”

Berber said “the acreage of irrigated land has also been falling because the government has not been maintaining irrigation facilities. We also have a very high level of post- harvest losses in rice — up to 35 percent because our post-harvest facilities are very old.”

Instead of supporting farmers with guaranteed prices as before, Berber said “the government now intervenes to buy less than 1 percent of the domestic rice that is produced. They are buying more imported rice than our own local rice.”

A study on import surges by David Pingpoh and Joean Senahoun, commissioned by the UN’s Food and Agriculture Organisation (FAO) in 2006, noted that the Cameroon government support to the rice sector was removed in 1994 through implementation of IMF and World Bank policies. The fertiliser market was privatised. Rice yields of poor farmers dropped as fertilisers became unaffordable. Tariffs were liberalised, and annual rice imports doubled from 152,000 tonnes to 301,000 tonnes between 1999 and 2004.

This opening rendered the country vulnerable to the policies of other countries. At the time, India was de-stocking its rice surplus, and rice imports from India increased from 7,900 tonnes in 2001 to 60,300 tonnes in 2002. As a result of this import surge, rice farmers were hard hit, and many left the sector. Land for rice cultivation dropped 31.2 percent between 1999 and 2004.

According to the FAO, Cote d’Ivoire also saw imports flooding in when the market was opened up. As a result of implementing commitments at the WTO, Cote d’Ivoire removed import restrictions on key agricultural goods, particularly rice. Duty on all agricultural products was set at a maximum of 15 percent, except for 25 tariff lines.

As a result, rice imports increased at an annual rate of 6 percent from 470,000 tonnes to 715,000 tonnes between 1997 and 2004. Imports were mainly from Thailand, China and India. Domestic production dropped 40 percent over this period.

In Nepal, the civil society organisation ActionAid documents that rice import surges came in 1994, 1996 and 2000, with imports increasing by 175 percent, 55 percent and 800 percent respectively. From 24,500 tonnes imported in 1999, by the year 2000 imports had hit 195,000 tonnes. The porous borders between Nepal and India, and the Nepal-India Trade Treaty were widely seen as the cause of these surges. In certain areas of Nepal, domestic prices fell by nearly 20 percent. The southern belt bordering India saw a multitude of rice plants and rice mills shutting down.

Today, in the latest twist of events, food prices have increased due to global shortfalls. Food production has been redirected towards biofuel production. Drought in Australia has contributed to shortages on the world market. Speculators playing on commodity markets have further increased prices.

Up to 37 countries have been gripped by protests and riots. In Cameroon, seven people were killed in the unrest in February. Food riots also took hold of Abidjan in the Cote d’Ivoire in March this year.

At meetings in Berne in Switzerland to address the global food crisis, UN Secretary- General Ban Ki-Moon, World Bank president Robert Zollick and WTO director-general Pascal Lamy again made a plea for more free trade the panacea. But farmers remain unconvinced that more of the same policies that have contributed to the last two decades of destruction of agriculture can help.

Reacting to the push by the WTO leadership, the World Bank and the UN to stitch up the Doha Round so that further liberalisation can assist in resolving the food crisis, Henri Saragih, international coordinator of the global network of peasant farmers La Via Campesina writes, “Protecting food has become a crime under free trade rules. Protectionism has become a dirty word. Meanwhile, countries have become addicted to cheap food imports, and now that prices are shooting up, hunger is raising its ugly head.”

 * Aileen Kwa is a Geneva-based policy analyst, presently on leave from Focus on the Global South. This article was first published by IPS, 12 May 2008

The Time Has Come for La Via Campesina and Food Sovereignty

May 30, 2008

By Peter Rosset*, May 29, 2008

Around the world it seems more and more that the time has come for La Via Campesina. The global alliance of peasant and family farm organizations has spent the past decade perfecting an alternative proposal for how to structure a country’s food system, called Food Sovereignty. It was clear at the World Forum on Food Sovereignty held last year in Mali, that this proposal has been gaining ground with other social movements, including those of indigenous peoples, women, consumers, environmentalists, some trade unions, and others. Though when it comes to governments and international agencies, it had until recently been met with mostly deaf ears. But now things have changed. The global crisis of rising food prices, which has already led to food riots in diverse parts of Asia, Africa and the Americas, is making everybody sit up and take note of this issue.

But, what are the causes of the extreme food price hikes? There are both long term and short causes. Among the former, the cumulative effect of three decades of neoliberal budget-cutting, privatization and free trade agreements stands out. In most countries around the world, national food production capacity has been systematically dismantled and replaced by a growing capacity to produce agroexports, stimulated by enormous government subsidies to agribusiness, using taxpayer money.

It is peasants and families farmers who feed the peoples of the world, by and large. Large agribusiness producers in most any country have an export “vocation.” But policy decisiones have stripped the former of minimum price guarantees, parastatal marketing boards, credit, technical assistance, and above all, markets for their produce. Local and national food markets were first inundated with cheap imports, and now, when transnational corporations (TNCs) have captured the bulk of the market share, the prices of the food imports on which countries now depend have been drastically jacked up.

Meanwhile the World Bank and the IMF have forced governments to sell off their public sector grain reserves. The result is that we now face one of the tightest margins in recent history between food reserves and demand, which generates both rising prices and greater market volatility. In other words, many countries no longer have either sufficient food reserves or sufficient productive capacity. They now depend on imports, whose prices are skyrocketing. Another long term cause of the crisis, though of lesser importance, has been changing patterns of food consumption in some parts of the world, like increased preference for meat and poultry products.

Among the short term causes of the crisis, by far the most important has been the relatively sudden entry of speculative financial capital into food markets. Hedge, index and risk funds have invested heavily in the futures markets for commodities like grains and other food products. With the collapse of the home mortgage market in the USA, their already desperate search for new avenues of investment led them to discover these markets for futures contracts. Attracted by high price volatility in any market, since they take their profits on both price rises and price drops, they bet like gamblers in a casino. Gambling, in this case, with the food of ordinary people. These funds have already injected an additional 70 billion dollars of extra investment into commodities, inflating a price bubble that has pushed the cost of basic foodstuffs beyond the reach of of the poor in country after country. And when the bubble inevitably bursts, it will wipe out millions of food producers throughout the world.

Another important short term factor is the agrofuel boom. Agrofuel crops compete for planting area with food crops and cattle pasture. In the Philippines, for example, the government has signed agreements that commit an area to be planted to agrofuels that is equivalent to fully half of the area planted to rice, the mainstay of the country’s diet. We really ought to label feeding automobiles instead of people as a crime against humanity.

The major global price increases in the costs of chemical inputs for conventional farming, as a direct result of the high price of petroleum, is also a major short term causal factor. Other factors of recent impact include droughts and other climate events in a number of regions, and a conspiracy involving the CIA to destabilize certain governments not well-liked by Washington. In Venezuela, Bolivia and Argentina, the private sector and the TNCs are working hard to export food items sorely needed by the local population, or otherwise prevent them from reaching market, as a way to delegitimize the leaders of those countries.

Faced with this global panorama, and all of its implications, there is really just one alternative proposal that is up to the challenge. Under the Food Sovereignty paradigm, social movements and a growing number of progressive and semi-progressive governments propose that we re-regulate the food commodity markets that were de-regulated under neoliberalism. And regulate them better than before they were deregulated, with genuine supply management, making it possible to set prices that are fair to both farmers and consumers alike.

That necessarily means a return to protection of the national food production of nations, both against the dumping of artificially cheap food that undercuts local farmers, and against the artificially expensive food imports that we face today. It means rebuilding the national grain reserves and parastatal marketing boards, in new and improved versions that actively include farmer organizations as owners and administrators of public reserves. That is a key step toward taking our food system back from the TNCs that hoard food stocks to drive prices up.

Countries urgently need to stimulate the recovery of their national food producing capacity, specifically that capacity located in the peasant and family farm sectors. That means public sector budgets, floor prices, credit and other forms of support, and genuine agrarian reform. Land reform is urgently needed in many countries to rebuild the peasant and family farm sectors, whose vocation is growing food for people, since the largest farms and agribusinesses seem to only produce for cars and for export. And many countries need to implement export controls, as a number of governments have done in recent days, to stop the forced exportation of food desperately needed by their own populations.

Finally, we must change dominant technological practices in farming, toward an agriculture based on agroecological principles, that is sustainable, and that is based on respect for and is in equilibrium with nature, local cultures, and traditional farming knowledge. It has been scientifically demonstrated that ecological farming systems can be more productive, can better resist drought and other manifestations of climate change, and are more economically sustainable because they use less fossil fuel. We can no longer afford the luxury of food whose price is linked to the price of petroleum, much less whose industrial monoculture production model — with pesticides and GMOs — damages the future productive capacity of our soils.

The time has truly arrived for La Via Campesina and for Food Sovereignty. There is no other real solution to feeding the world, and it is up to each and every one of us to join mobilizations to force the changes in national and international public policy that are so urgently needed.

* Peter Rosset is based in Oaxaca, Mexico, where he is a researcher at the Centro de Estudios para el Cambio en el Campo Mexicano. He is on the Board of Focus on the Global South. This is his own translation of the original, at


May 30, 2008

By * Shalmali Guttal, Focus on the Global South, May 2008

In a press conference in Timor Leste’s capital city Dili on May 14, top UN officials declared that the country is not at a risk of starvation from the global food crisis. According to the World Food Programme (WFP) Country Director Joan Fleuren in Timor Leste, “The Government is working hard to increase its imports” and sell it at subsidised prices in an effort to manage the situation and ensure that there is no food crisis. (1) The Ministry of Agriculture estimates that annual rice consumption in Timor Leste averages about 83,000 metric tones (mt) of which, 40,000 mt are produced domestically. The shortfall is made up through imports which are already at 50-60,000 tones and rising. Acting Special Representative of the Secretary-General to Timor Leste, Reske-Nielsen, suggests that rice imports provide the Timorese Government with time to come up with medium and long term solutions. (2)

This view, however, differs significantly from that of many Timorese analysts, who fear that the country is locked into a dangerous dependency on imports to meet its food needs and already displays the early symptoms of a chronic food crisis. About four months ago, before the onset of the food crisis, the price of rice was 14$ – 16$ for a sack (about 35 kg). Now it averages about $25 a sack in Dili and is significantly higher in rural areas — if it reaches there at all. And despite the Timorese Government’s recent move to subsidise rice prices, there simply isn’t enough subsidised rice to go around. Most of it is swallowed up in Dili and according to Dili locals, a significant portion is sold at much higher prices by rice traders, especially in rural areas. Like most net food importing countries, Timor Leste does not have control over the import prices of rice and other staples. Equally serious, it does not have an effective public distribution system to ensure that food imports reach its rural population. Relying on private companies to handle distribution, the Government cannot even ensure that those who need subsidies most are actually able to avail of them. According to Elda Guterres da’Silva from KBH, a Timorese organisation dedicated to vocational education, (3) “The new government is out of touch with problems in the rural areas; it seems intent to put in a market system and this will increase the number of poor people. Only those with money can buy rice.”

Hunger is not new to Timor Leste. In 2004, reports of severe hunger and starvation were reported among tens of thousands of households in at least five districts and people in eleven out of thirteen districts survived largely on food aid. (4) Majority of Timor Leste’s population of one million (approximately 80 percent) resides in rural areas and is engaged in subsistence agriculture. Local production is not sufficient to meet the population’s food needs throughout the year and in 2001, about 80 percent of villages were estimated to face food shortages at some time during the year. (5) While food shortages during the lean period of an agricultural cycle are common in subsistence economies, a combination of historical factors and recent government policies are entrenching what many Timorese fear will be a long term, chronic, food crisis. Although reliable updated consumption statistics are difficult to come by, reports from some rural areas indicate that there is already not enough food and people can only eat once a day.

The problem is not only imports, but also rice itself. According to Arsenio Pereira of HASATIL (6), a Timorese organisation committed to sustainable agriculture, “There is too much dependency on rice. Indonesians promoted this dependency. Before Indonesian occupation, there were a variety of staples that Timorese people ate, especially in dry and mountainous areas, but the Indonesians insisted that everyone grow and eat rice; current government food policy is also focussed on rice.” This view was echoed by other people I talked with in Dili last week, who pointed out that even today in rural areas, there are many other staples that are consumed — what they call traditional foods. Pereira explained, “Rice is important, but not the only food. We have more than 10 varieties of beans, 20 varieties of maize, and varieties of yams, cassavas, bananas and sweet potato. But if these traditional foods are not given importance, they will be lost and we will be entirely dependent on rice.”

Although Timor Leste’s rural areas are generally cut off from even the minimal level of services available in Dili, hunger is as high in Dili as in many rural areas. Dili residents are almost entirely dependent on rice as their staple food, unlike rural communities for whom traditional foods still form an important part of their daily diets.


But Timor Leste’s food shortages have as much, if not more, to do with the country’s policy regime as with low production. Upon the insistence of international donors, the World Bank and the International Monetary Fund (IMF), the country’s post-war reconstruction has been modeled on free market economics with severe restrictions on direct governmental involvement in providing public services, price supports and building up a strong domestic economy through investment in public infrastructure in crucial areas such as agriculture, food security, education and local cottage industry. The economy has been radically liberalized and the government is seeking to make the country a haven for private investors through tax holidays, land concessions and other privileges. Job creation, which could have received a boost through public investment, has been left to the dynamics of free market competition.

At least a quarter of the country’s arable land is being handed over to private companies (mostly foreign with some local collaboration) for growing agro-fuels, particularly sugarcane and jatropha. Agricultural land is also dogged by intensifying conflicts among competing claimants, and among farmers and private concessionaires. Timorese locals report that import contracts for rice and other goods and economic concessions are routinely handed over to foreign companies without a public tender process and “single sources” that are personal contacts of the country’s senior leadership. Rural communities do not usually even know that their lands — which are their only assets — are now the “property” of a private company and that they are soon to become contract labour on the lands that they have tended for generations. In the upland district of Ermera, conflicts remain unresolved between local coffee producers and Timor Global, a private company that secured a 25 year concession on all coffee growing lands in the district. According to Antero da’Silva, a professor at the National University, “The government’s plans are oriented towards making farmers more dependent on markets, imports and free trade, and not on independence.”

In the agriculture sector, the World Bank and bilateral donors (particularly Australia and the US) have focussed almost entirely on rice and a handful of cash crops such as vanilla and coffee and at the cost of other staples that constitute the country’s traditional foods. However, decades of intensive and chemically driven rice production during Indonesian occupation have resulted in serious soil degradation in several rice growing areas, bringing down yields and rendering the land unsuitable for producing other crops. “Land used for rice production during Indonesian times cannot be used now, it was destroyed because of too many chemicals to intensify rice production. The soil needs to be regenerated,” says da’Silva.

Such ecological considerations are not a priority under the post-independence donor regime in which official agriculture policy has continued to promote intensive, chemical inputs driven agriculture, but under free market conditions. Over the past six odd years, production inputs and rural transportation have become so costly that that locally produced rice cannot compete with imported rice in price and quality. Genetically modified seed trials are now reportedly being conducted in Betano and Maliana districts by “experts” from an Australian company through a project called Seed of Life. “The donors and WB trying to increase production using hybrid seeds, chemical fertilisers, etc. Their emphasis is not on increasing food security through internal capacity and resources, or by promoting local foods, but by importing rice and food from outside, including food aid from WFP and FAO,” adds Pereira.

The combination of land conflicts, rising and unaffordable agricultural production costs, and hunger has prompted many rural people to move to Dili and large towns looking for jobs. But life in the city is as much, if not more of a struggle as back home in the village. The adoption of the US dollar as the national currency has inflated the prices of even the most basic food necessities. And then there is the international aid industry that set up shop in Dili immediately after the 1999 referendum. Timor Leste recieved over US$ 3 billion in “reconstruction assistance,” much of which went to pay for bloated salaries and facilities for international “experts.” Faithfully following market signals, the food and service industries adapted themselves to servicing the needs of an international community flush with reconstruction cash. A domestic, business elite emerged from among those who had land and houses to rent to expatriates and assets to invest in restaurants, hotels, supermarkets private security, etc. The upshot of all this was the cost of living in Dili rocketed way above the average salary of ordinary Timorese — US$ 30-60 per month. Even the earlier “pre-crisis” cost of rice (which is now remembered fondly by the Timorese) of US$ 14-16 per sack was a big burden on an a family with children and elderly to feed.

The promised foreign investment that was supposed to create jobs did not arrive. Start-up and operating costs are high in Timor Leste, as water, electricity, telecommunications and equipment are all extremely expensive. Restaurant owners and expatriates prefer to shop at supermarkets that sell imported products rather than local produce and meat markets, citing concerns of hygiene and quality. The lack of public investment in education and vocational training has resulted in an extremely small number of young people who are considered employable by the aid industry and its private sector appendages. According to Rigoberto Monteiro, General Secretary of the Timor Leste Trade Union Confederation and member of the National Labour Board, only 500 jobs are available every year in the public and private sectors. Majority of those looking for work in the city end up in a weak and unpredictable informal sector, without secure and sufficient income.

Little wonder then that hunger and malnutrition are as high in Dili, alongside markets filled with food, as they are in the country’s villages.

In 2005, Ben Moxham, a researcher with Focus on the Global South based in Timor Leste poignantly observed, “While Timor’s harsh climate is partly responsible, the question that screams to be asked is why a nation of just under a million people, which in the last five years is supposed to have received more donor funds per capita than anywhere else in the world, is going hungry.” (7)


Further to the west, in a country that underwent a similar process of post-conflict reconstruction 17 years earlier than Timor Leste, severe hunger and malnutrition are become increasingly visible alongside an explosion of affluence and a concentration of wealth. As a ward of the international reconstruction and development industry since 1991, Cambodia too adopted the free market model demanded by international donors, the World Bank and the IMF. What has resulted is a cowboy capitalist economy where practically everything is for sale to the highest bidder. Small pockets of plentiful consumption are surrounded by large areas of scarcity and deprivation.

Economic growth has averaged at 11 percent over the past three years, spurred by booms in the tourism, garment manufacturing and real estate sectors. But not everyone has benefitted from these booms. Agriculture and fisheries, the mainstays of the majority of Cambodia’s population, have been systematically assaulted by free market policies, privatisation and liberalisation. The private sector has been aggressively promoted in every possible sphere — the economy, environment, agriculture, education, health, water supply, etc. Cambodia’s multilateral creditors, the World Bank, IMF and the Asian Development Bank (ADB), have demanded and achieved complete government “disinvestment” in essential public infrastructure, supports and services, and exhorted the country’s peasant farmers and artisanal fishers to compete in a free market that they are completely ill equipped for. As a result, farming and fishing has become increasingly precarious occupations for rural families, driving them into debt traps and eventually forcing them to abandon agriculture altogether.

Ruling elites in the Cambodian Government have facilitated a frenzy of land-grabbing in both rural and urban areas creating landlessness, homelessness and destitution at a scale never envisaged by ordinary Cambodians who really believed that they were in for better times. Vast tracts of fertile agricultural lands and rich forests (ranging from 10,000 to 300,000 hectares) have been given away as economic land concessions to foreign companies under 99-year leases for industrial tree plantations, agribusiness activities, tourist resorts, golf courses and other recreational facilities. Economic concessions extend to fishing areas, wetlands and even the country’s coast and islands. A growing, wealthy, domestic middle class has also joined the band-wagon, buying up land from small farmers and fishers unable to meet the rising costs of agricultural production, health care and food. Many of the country’s powerful bilateral allies (for example, China, Vietnam, Thailand and Singapore) have also claimed their piece of the prosperity pie through exclusive, no-bid contracts for infrastructure, energy, mining and oil and gas projects.

The prosperity of the domestic (largely urban) elites and foreign land owning companies classes has resulted in severely negative impacts among the rural and urban poor and even the middle classes, creating new vulnerabilities and poverty. Inflation is high (almost 11 percent at official count, though locals say that it is actually higher) and the cost of food and staple goods have increased sharply, creating twin crises of hunger and malnutrition. According to Boua Chanthou, the Director of PADEK, a Cambodian NGO working on integrated community development in more than 500 poor villages in Cambodia, “A crucial factor related to food is land; Cambodian farmers do not own enough land. A recent study shows that 60 p[ercent of Cambodian farmers are either landless or own less than half a hectare. How can they produce enough food for even their own consumption? A family of five people needs at least two hectares of land to be able to produce enough food. The Government needs to act quickly to implement social land concessions and redistribute land to the farmers.”

The problem is not lack of food per se, but lack of access to food and the means to produce food among rapidly increasingly numbers of people who are being systematically stripped of their abilities to feed themselves. While it is true that much of Cambodia’s agriculture (including fisheries) is small-hold and susceptible to weather and climate conditions, Cambodia is a rice and food exporter and till recently, it was the sixth largest rice exporter in Asia. Large agribusiness companies such as Thailand’s Charoen Pokphand (CP) have established operations in Cambodia for producing animal feed as well as pig and chicken farming. High grade Cambodian rice is grown under contract for Thai businesses in the western part of the country while Vietnam buys lower grade rice grown in the eastern part of the country. Fish from Cambodia’s Great Lake, the Tonle Sap, is exported to neighboring countries and to the numerous restaurants and resorts that cater to the tourist industry.

And yet, the people who produce this food are poor, hungry and malnourished. Since agricultural production does not provide sufficient food for the entire year, nor does it bring them enough income, they don’t have the cash to buy rice and food from markets that are over-flowing with food. Other important sources of food for rural families are the natural commons such as forests, wetlands, rivers and lakes from which they harvest food and medicinal plants. But the enclosure of these resources by private interests, as well as their degradation resulting from over-use has cut off rural communities from their last, fall back source of food and nourishment.

A Food Security Atlas launched in February 2008 by the WFP shows high levels of hunger and malnutrition in the country, especially in areas plagued by land-grabbing, economic land concessions and extractive industry. Included in the 10 “hot-spot” provinces that are considered the most food insecure and vulnerable is Siem Riep, home of the famous Angkor era temples and the tourist mecca of the Mekong region. Province residents say that the boom in the tourist industry has served as a massive suction pump, sucking away resources from local communities and leaving them poor, hungry and vulnerable.

Says Chanthou, “The open market system to export rice is not working in favour of the poor, who do not have enough money to buy food when prices go up. Therefore, the Government needs to intervene. The Government has taken some positive action recently, but should have done more.”


In both Timor Leste and Cambodia, the roots of severe hunger, malnutrition and starvation were planted a long time ago. In the case of Timor Leste, they can be traced back to Portuguese colonialism and the imposition of plantation agriculture on a traditional, multi-crop agricultural system. But what we see today in both countries are not simply ghosts from distant colonial pasts. There have been significant (and nightmarish) events over the past few decades that have entrenched food deprivation among innocent civilians.

The report of the Committee for Truth and Reconciliation (CAVR) Chega! documents how famine was induced in Timor Leste in 1977-78 by Indonesian military occupation and the war against Timorese independence forces. (8) At least 80,000 people died of hunger and related diseases during this time as military objectives were more important to the Indonesian military than the lives of occupied peoples. During the same period in Cambodia, millions of Cambodians were brutalised and starved by the Khmer Rouge in labour camps that were set up — ironically — to grow rice for the Khmer Rouge and its most important ally, China. In both countries, food and agricultural systems were militarised and fractured, and food itself became a weapon by which power was wielded.

The transitions of both Cambodia and Timor Leste to independent, “post-conflict” nation states did not result in freedom from hunger for the majority of their populations. Certainly, gains were made on many fronts — social, economic and political — but these gains were not equitably shared by all , nor did they include rebuilding the potential of families and communities to feed themselves. On the contrary, the economic blueprints devised by donors and creditors emphasised cash crops over food crops, and placed domestic producers and workers at the mercy of markets in which they had no leverage or space to maneuver. The World Bank, IMF and ADB were more interested in whether commodity markets functioned efficiently and whether suitably “enabling environments” for the private sector had been created, than whether local people had enough to eat.

Today, all the global trends related to rising food prices are reproduced at local levels in Timor Leste and Cambodia: rising costs of fuel and essential goods, doubling of the price of staples, diversion of grain to bio-fuels and animal feed, the conversion of agricultural lands to industrial, housing and tourism estates, the hoarding and manipulation of food supply by traders, profiteering by speculators through futures trade, etc. And as in every developing country, rising prices of rice, wheat, soy, corn and other staples have not translated into higher prices for small-scale producers or into increased food security for them. On the contrary, middlemen, traders, speculators and agribusiness companies are making a killing — literally.

But even when world food prices come down, unless economic and agricultural policies are drastically amended in both countries, food shortages, hunger and malnutrition are not likely to abate. “Now we can see the negative impacts of the free market” said Mateus Tilman from Kdadalak Sulimutuk Institute (KSI), an organisation working on land reform in Timor Leste. According to Tilman and HASATIL’s Pereira, resolving land conflicts and governmental investment in rural infrastructure are crucial steps to tackle food shortages and hunger. “Our dream is to have comprehensive agrarian reform and empower our farmers. Land must remain in the hands of the farmers” Tilman adds. KSI works closely with HASATIL, whose members are promoting food sovereignty as a long term solution to the country’s food crisis. “We need to plant more local food crops, build independence in food and reduce dependence on imported seeds and fertilisers. We also need to promote local knowledge among farmers — use and nurture their local knowledge and build more; and we need to provide information to farmers about climate change, trade and other related issues.”

Unfortunately, there are few such visionaries in Cambodia. Most development NGOs are reluctant to take on the country’s elite power structures and confront national economic policies that are accelerating land and resource crises and reproducing the food crisis. However, local farming, fishing and indigenous communities are organising and federating in an attempt to build a strong and collective national voice.

Mirroring trends elsewhere, the tragedy in both countries is not that there is not enough food, but that the food does not reach everyone who needs it. Even in instances of actual food shortages, food is available in neighboring areas and countries, and with timely governmental intervention, serious food crises can be averted. But as has become evident over the past year, the world can have record grain production as in 2007 (2.3 billion tons) and still people can be impoverished by rising food prices. (9) The high profits recorded by agribusiness companies and futures traders in 2007 show that food has become a commodity for speculation and profit making. While governments in developing countries, especially net food importing countries, are finally taking some actions to protect their economies and food stocks, it is uncertain whether they will have the courage to move away from the economic orthodoxy of free market theory preached by the World Bank and the IMF, and commit to the drastic transformations of national economic, agricultural and food policies needed to build genuine, long term food security.

It is extremely important that we start to rebuild the capacities of our communities and societies to feed ourselves. La Via Campesina’s proposed paradigm of peoples’ food sovereignty offers the most appropriate and adaptable selection of strategies to do this. For Timor Leste and Cambodia, peoples’ food sovereignty can ensure that independence, national reconstruction and peace building find longer-term, sustainable and home-grown expressions.

* Shalmali Guttal is a senior associate with Focus on the Global South. She can be contacted at


1. See UNMIT Weekly number 42:

2. ibid

3. KBH is the acronym for Knua Bua Hatene, a Timorese non-governmental organisation that provides vocational education to youth and vulnerable groups to facilitate employment and food security.

4. East Timor: a Tiny Half Island of “Surplus Humanity. Ben Moxham, February 18, 2005. 

5. ibid

6. HASATIL is the acronym for Hametin Agricultura Sustentavel Timor Lorosai which means ‘Strengthening Sustainable Agriculture in Timor Leste in Tetum, one of Timor Leste’s national languages.’

7. ‘East Timor: a Tiny Half Island of “Surplus Humanity”‘. Ben Moxham, February 18, 2005. 


9. Making a Killing from Hunger. Against the grain, April 2008, GRAIN. 

Risk Concentrations in Financial Conglomerates

May 26, 2008

By Andrew Cornford∗, SUNS # 6480, 23 May 2008

Unforeseen shifts in concentrations of banking risks have been at the centre of the current credit crisis. Such concentrations are now a major item on the regulatory agenda and the subject of a recent paper (‘Cross-sectoral review of group-wide identification and management of risk concentrations’) issued in April by the Basel-based Joint Forum on Financial Conglomerates.

The Joint Forum paper draws on two surveys, one of the views of 15 supervisory bodies from 10 countries and the other of approaches to identifying and managing risk concentrations in 18 financial conglomerates. Its publication coincides with that of two other reports covering actual risk management practices in some financial conglomerates during the credit crisis. ‘Observations on Risk Management Practices during the Recent Market Turbulence’ [March 2008] is a survey conducted by a Senior Supervisors Group from France, Germany, Switzerland, the United Kingdom and the United States of eleven of the largest banking and securities firms. The second, ‘Shareholder Report on UBS’s Write-Downs’ [April 2008] is a review of the key findings of a report by the Swiss bank, UBS, to the Swiss federal Banking Commission on the reasons for its huge losses due to structuring, trading and investment activities, in particular, those due to securities with a value which referenced United States sub-prime mortgages.

The establishment of the Joint Forum in 1996 was the outgrowth of work of the Basel Committee on Banking Supervision and of the International Organization of Securities Commissions (IOSCO) in 1992 on principles for the supervision of financial conglomerates. This work led to the establishment of a working group called the Tripartite Group of Banking, Insurance and Securities Regulators, which was reconstituted as the Joint Forum in 1996 and now comprises the International Association of Insurance Supervisors (IAIS) as well as the Basel Committee and IOSCO. The membership of the Joint Forum is limited to banking, insurance and securities supervisors from 13 industrial countries.

The risks which the Joint Forum is concerned with are those which arise from the mixing of banking, securities and insurance activities in a single business structure. Such mixing creates new connections between the risks of the separate activities. The connections are a potential source of contagion within the financial firms themselves as well as, more broadly, throughout the financial sector. Moreover, the mixing poses new problems for management and supervisors in areas such as conflicts of interest between different parties participating in or affected by the firm’s activities, internal transparency and financial reporting, and setting levels of capital appropriate to the different activities of the conglomerate as well as for the firm overall.

For the purpose of the work of the Joint Forum, a financial conglomerate refers to a group of companies under common control whose activities consist of the provision of services in at least two of the sectors, banking, securities and insurance. Such conglomerates have a history which long antedates the 1990s. In the United Kingdom, for example, in the 1960s, large commercial banks established subsidiaries to provide hire-purchase and other specialized financial services. In continental Europe, conglomeration often took place through internal expansion of the operations of universal banks and through an increase in the number of Bancassurance and Bancaffianz groups which provide both banking and insurance services. In the United States, financial conglomeration received a huge fillip from the 1999 Gram-Leach-Bliley Act which ended the comparmentalisation of banking embodied in legislation of the 1930s (the Glass-Steagall Act) and opened up new possibilities for the integration of banking, insurance and securities business.

The initial focus of the Joint Forum was the internal organization and management of financial conglomerates, and its recommendations responded to concerns regarding the internal transfer of risks which might threaten the stability of the more sensitive parts of conglomerates such as their banking activities. The April 2008 paper was originally intended to be a sequel to earlier technical work on the management and supervision of concentration risk. However, drafting was overtaken by events beginning in summer 2007, and in consequence, the discussion covers features of concentration risk highlighted by the credit crisis and connections between concentration risk and other key financial risks such as liquidity and market risk.

For the purpose of the Joint Forum paper, risk concentrations are defined as exposures with the potential to produce losses large enough to threaten a financial conglomerate. The concentrations may involve the conglomerate’s assets, liabilities, off-balance-sheet positions, and the execution and processing of transactions.

These definitions make it possible for the Joint Forum to maintain in the paper its customary primarily microeconomic focus on internal risk management and firm-level supervision. However, the transmission of risks between financial conglomerates and the broader markets in which they operate nonetheless intrudes owing to the need to include principles for the management of liquidity risk – a subject which necessarily reflects conditions in these markets.

Such definitions also in principle exclude traditional concentration risk in the form of external exposures to a single firm, sector or set of related economic activities. Here too, however, recent events intrude, and the paper itself acknowledges certain concentration risks that arise owing to developments external to the conglomerate in the markets in which it operates.

Nevertheless, the definitions chosen by the Joint Forum mean that the paper does not address the concentration risks which are typically a major concern of regulators of commercial banks and financial conglomerates in emerging-market countries. In Asia, concentration risk is often part of the same set of problems as related-party lending. Identification of risk concentrations due to exposures of financial firms to particular groups can be handicapped by use of multiple legal entities by borrowers. This can take a bewildering number of forms such as lending by a bank to an apparently independent company or individual that on-lends the funds to a related company or arranging for another bank to lend to a related company against a guarantee not recorded in the books of the originating bank.

Moreover, risks due the denomination of the assets and liabilities of banks and their borrowers in foreign currencies, which have proved of great importance in combined banking and currency crises in emerging markets, are also not covered in the Joint Forum paper. Owing to the effect of depreciation of the currency and deflation on the ability of borrowers to meet obligations denominated in foreign currencies, these crises often bring into the open hitherto concealed concentration risks involving financial and non-financial firms and sectors.

The focus of the Joint Forum paper reflects its membership and mandates. This does not imply that the contents of the paper do not merit wider attention. With the development of their own financial markets, financial firms and their supervisors in emerging-market and other developing countries are increasingly likely to confront issues related to financial conglomeration similar to those exercising their counterparts in developed countries. Moreover, subjects raised in the paper are relevant to understanding international financial markets to which, for good and ill, most countries are now exposed in varying degrees.

The first section of the Joint Forum paper reviews traditional approaches to the management of concentration risks. The following section focuses on the increasingly active management of concentration risks in the context of the rapid growth of the market in financial instruments which transfer risks between different parties. This is followed by a discussion of the challenges posed to the corporate governance of financial conglomerates by more integrated approaches to risk management. The next section of the paper takes up a number of technical issues related to the identification and management of concentration risks. These include the measurement of the capital required for concentration risks, and stress testing and scenario analysis. An annex takes up selected features of the regulatory regimes in major industrial countries.

The survey of industry practice discussed in the first section of the paper indicated that risk identification and management in financial conglomerates still tends to be managed within silos corresponding to major risk categories. Under a silo-based approach, personnel, processes and systems are grouped by risk categories such as credit, insurance, liquidity and market risk. Credit risk concentrations are controlled through risk limits on exposures to particular names, economic sectors and sub-sectors, geographic regions and countries, and products (such as real-estate or consumer lending). Such an approach is not conducive to integrated risk management.

The survey also found that securitisation exposures – so important in the current credit crisis – are usually grouped by tranches corresponding to different levels of risk and return for investors. This approach attributes a key role to the credit ratings of different tranches. The Joint Forum’s survey found that only a few conglomerates use a “look through” approach to securitisation exposures which entails assessment of the credit risk of the assets underlying the tranches of the securitisation.

A non-integrated, silo approach to risk management can be particularly problematic with respect to liquidity risk which reflects developments at the interface between the conglomerate and the markets in which it operates. Financial firms encounter three types of liquidity risk: (1) funding mismatch risk, that is the risk that the firm will not have sufficient funds to meet its normal obligations; (2) market liquidity risk, that is the risk that the firm will not be able to convert assets to cash or to access financing on reasonable terms (owing to a lack of buyers or uncertainty over valuation); and (3) contingent liquidity risk which results from difficulties in meeting obligations due to firm-specific or market-wide unexpected events.

All three types of liquidity risk have been pervasive during the credit crisis. Under contingent liquidity risk, banks have had to reconcentrate on their balance sheets liquidity and credit risks from off-balance-sheets entities which the banks originally created or sponsored but for which funding from investors subsequently ceased to be available. The verdict of the Joint Forum is that, in comparison with other risk categories, liquidity risk tends to be less well integrated into systems of conglomerate-wide risk management in spite of its special importance in stressful market conditions.

These conclusions are reinforced by findings in the reports of the Senior Supervisors Group and of the UBS. The Senior Supervisors found that the firms which had been more successful in managing their problems were those which “aligned treasury functions more closely with risk management processes, incorporating information from all businesses in global liquidity planning, including actual and contingent liquidity risk”.

The Senior Supervisors also viewed the disappearance of liquidity as a major cause of the huge losses incurred by some financial firms on their holdings of Super Senior tranches of Collateralized Debt Obligations (securities backed by portfolios of loans, bonds and other assets including mortgages). These tranches were at the very top of the securitisation structures of CDO tranches, not only carrying the highest possible rating from credit rating agencies but also classified as even safer than other tranches with such ratings.

Owing to their low capital requirements and thus low financing costs, Super Senior tranches were an investment favoured by banks for their own portfolios. However, the result of banks’ own investments in these tranches was a heavy concentration of holdings of Super Senior tranches in a single category of institution. During the flight to liquidity in the late summer of 2007, when banks wanted to sell these assets, there were few buyers so that the banks had to take huge losses. The conclusion of UBS, for which 75 per cent of the losses of its CDO desk (or 50 per cent of the bank’s total losses) up to December 2007 were due to Super Senior positions, is “that there does not appear to have been a liquid secondary market and that the business tended to retain the Super Senior tranche”.

As the Joint Forum paper notes in the second section of the paper, in recent years, there has been an enormous growth in the markets for instruments transferring risk. The gross notional value of all positions in over-the-counter (OTC) derivatives (i. e. derivatives not traded on organized exchanges) exceeded $500 trillion in mid-2007. Of this total, more than $40 trillion consisted of credit default swaps, a derivative which transfers credit risk. Financial conglomerates participate in the markets for risk transfer in various ways and for various purposes: to fund assets which they originate; to manage the credit, market and insurance risks of positions retained on their balance sheets; to invest in securitised products; and to generate revenues from trading on their own account as well as from distribution to their customers.

However, according to the Joint Forum, “Often, the process of so-called risk transfer more closely resembles a transformation of a variety of risks into credit exposures to the counter-parties to which they were transferred”.

Moreover, the complexity of the products available through these markets has generated new risk management challenges. Some of these are due to features of the products themselves. Among these are increased systematic risk (i. e. risk which cannot be diversified away) due to the way the assets backing CDOs are pooled, the opacity of the products, and additional leverage which increases the rapidity of the changes in value of a product or portfolio in response to changes in market, credit and liquidity risk.

Moreover, the challenges to integrated risk management are the more formidable, the broader the conglomerate’s participation in different risk-transfer activities. Active risk management or other forms of involvement in risk-transfer activities through the markets for risk-transfer products leads to additional exposures to liquidity risk since the effectiveness of the products for both hedging and income generation depend on their marketability and their value as collateral for financing.

In this context, the report of the Senior Supervisors Group draws attention to the role in the credit crisis of innovative products which “had been created during the period of more benign market conditions” so that “banks and securities firms had not observed how such products would behave during a significant market downturn and found their risk management practices tested to various degrees”.

UBS’s criticisms of its own processes include the absence of a comprehensive view of its exposures to sub-prime mortgages in different parts of the UBS Investment Bank. This view was required for the setting of overall portfolio limits to complement transaction-by-transaction approval for CDO positions and related hedges. Such a view would be an essential part of integrated risk management. However, UBS’s priorities were elsewhere: “the emphasis was generally on speeding up approvals as opposed to ensuring that the process achieved the goal of delivering substantive and holistic assessment of the proposals presented”.

Under the features of good corporate governance required for integrated risk management, the paper returns to subjects also covered in an earlier 2003 report of the Joint Forum. Failings regarding corporate governance, the Joint Forum acknowledges, are still common and are exemplified in the UBS report. In addition to the absence of holistic assessment just mentioned, the UBS report also notes that members of [Investment Bank] Senior Management “did not sufficiently challenge each other in relation to the development of their various businesses”.

Under corporate governance, the focus of the Joint Forum is on organizational structures. Missing from the paper is discussion of the way in which in a financial conglomerate, even a well designed organogram, does not necessarily ensure that senior decision takers have at their disposal the information required for successful risk management. Multiple organizational layers put distance between data gatherers and users in senior management, and information gets lost in the summarizing of data as they are transmitted up the organizational chain.

Failures on this front in major financial firms during the credit crisis raise questions about the still-widely-held assumptions as to the optimum size of financial conglomerates. These questions include how far the drive to expand through the establishment or purchase of new entities in both home markets and across borders, which can still be observed among major international banks, is compatible with the maintenance of effective internal information transmission and controls, even allowing for the aid furnished by the latest technology.

As the complexity of financial transactions and organizations has grown, regulation and supervision have come to rely increasingly on the vetting of systems of internal control of the financial firms. At the same time, an increasingly important part of such systems are procedures which depend on computer simulation. Two of these procedures covered in the Joint Forum paper are the estimation of economic capital and stress testing and scenario analysis.

Economic capital is the amount which a financial firm believes is necessary to absorb potential losses due to major categories of financial risk. Stress testing is a tool used to evaluate through computer simulation the potential impact of an event or movement in a set of financial indicators.

The appeal of economic capital is the common measure of risk which it imposes across different businesses and risk categories. On the other hand, the models used have the limitation that they often fail to take account of indirect and second-order effects. For example, they may not capture the indirect credit exposure of a bank to the collateral of a loan as well as the direct exposure to the borrower, thus missing the potential risk concentration due to the joint exposure.

Moreover, the estimates of risk correlation used in the models are often subject to shortcomings. Partly, these are due to insufficient data, especially for periods characterized by disturbances. But the shortcomings also reflect the way in which risks due to different factors are aggregated. For example, in the case of a loan backed by collateral, a simple correlation between market and credit risks may take account of the effect of an increase in interest rates on the likelihood of default but not of the negative effect of the higher interest rates on the value of the assets serving as collateral which are seized by the bank.

Stress testing and scenario analysis have advantages of flexibility and transparency over models of economic capital. The two techniques can be used to investigate the potential effects of a wide range of risks specified in ways more susceptible to intuitive understanding. These include business risks, reputational risks, legal risks, country/transfer risks, and various other event risks. However, stress testing and scenario analysis are subject to the limitations of the expert judgment used to select them. Moreover, there is a lack of widely recognized procedures for stress tests as a tool for measuring risk concentrations and liquidity risks, especially those which manifest themselves as part of scenarios involving other risks with potentially market-wide effects.

The points raised under stress testing and scenario analysis by the Joint Forum are reinforced by the findings of the Senior Supervisors Group: “Some [firms] found that their stress tests or scenario analyses generally matched the movements in markets, but others found that the actual shocks to credit spreads [and thus to asset prices] tended to be wider and longer lasting than their prior analyses had suggested”. In particular, high credit ratings proved to be poor proxies for low price volatility.

The Joint Forum’s discussion of economic capital and of stress testing and scenario analysis indicate that, useful though they can be, they are neither magic bullets nor quick fixes for the problems for internal control and supervision posed by increasingly complex financial firms.

As shown by the annex of the Joint Forum paper, regulatory control of concentration risk in major industrial countries consists mainly of limits on exposures to particular borrowers or other counter-parties.

In the European Union, rules for large exposures are included in the Capital Requirements Directive (which implements Basel 2) and set limits to such exposures in relation to the capital of financial firms. There are also rules limiting large exposures in relation to capital in Japan and Canada. Rules in the United States reflect the multi-tier character of its regulatory regime with different regulators at both federal and state levels. They include not only limits on large or concentrated exposures in relation to capital but also ceilings on loans in relation to value for exposures to residential and commercial property. The qualitative dimension of risk concentrations in these countries are addressed in rules to be followed by the supervisors of financial firms.

Reflecting the Joint Forum’s consultative character, the paper does not attempt to provide a blueprint for regulatory reform. Each section concludes with Considerations designed to flag the principal points of the preceding diagnostics. The results of the paper’s recommendations will, or alternatively will not, eventually be reflected in new regulation at the national level and in improved risk management in financial conglomerates themselves.

By and large, the trend to financial conglomeration is not as advanced in emerging-market and other developing countries as in the member countries of the Joint Forum. The paper’s value lies in the attention it draws to problems to which such conglomeration can give rise. But there is no reason why the authorities in developing countries should accept the view, implicit or explicit, in much of the literature on the subject that financial conglomeration according to models found in industrial countries is an inevitable feature of financial development.

Both the institutional structures of financial conglomeration and the complex transactions which usually accompany it are the subject of regulatory permission for domestic firms and of procedures for granting market access to foreign financial firms. The latitude for conglomeration of different financial activities in a single firm should reflect decisions by the authorities based on national priorities. Historically, compartmentalization and specialisation were long features of the financial sectors of several industrial countries.

As for any presumption that the complex financial products typically associated with financial conglomeration necessarily bring wider economic benefits, the last word can be left to Paul Volcker, former chairman of the United States Federal System who, in a speech to the Economic Club of New York in April 2008, noted of the move from “a commercial bank centred, highly regulated financial system to an enormously more complicated and highly engineered system” that “It is hard to argue that the new system has brought exceptional benefits to the economy generally”.

This is a contrarian observation coming from this source and one which should be borne in mind by those responsible for financial-system design in emerging-market and other developing countries.

*Andrew Cornford was formerly a senior UNCTAD economist and is currently Research Fellow at the Financial Markets Center.

Discredited strategy

May 25, 2008

*Patrick McCullyThe Guardian, May 21 2008

Increasing allegations of corruption and profiteering are raising serious questions about the UN-run carbon trading mechanism aimed at cutting pollution and rewarding clean technologies.

Download the International Rivers’ third annual “Dams, Rivers & People” report  

The world’s biggest carbon offset market, the Kyoto Protocol’s clean development mechanism (CDM), is intended to reduce emissions by rewarding developing countries that invest in clean technologies. In fact, evidence is accumulating that it is increasing greenhouse gas emissions behind the guise of promoting sustainable development. The misguided mechanism is handing out billions of dollars to chemical, coal and oil corporations and the developers of destructive dams – in many cases for projects they would have built anyway.

According to David Victor, a leading carbon trading analyst at Stanford University in the US, as many as two-thirds of the supposed “emission reduction” credits being produced by the CDM from projects in developing countries are not backed by real reductions in pollution. Those pollution cuts that have been generated by the CDM, he argues, have often been achieved at a stunningly high cost: billions of pounds could have been saved by cutting the emissions through international funds, rather than through the CDM’s supposedly efficient market mechanism.

And when a CDM credit does represent an “emission reduction”, there is no global benefit because offsetting is a “zero sum” game. If a Chinese mine cuts its methane emissions under the CDM, there will be no global climate benefit because the polluter that buys the offset avoids the obligation to reduce its own emissions.

A CDM credit is known as a certified emission reduction (CER), and is supposed to represent one tonne of carbon dioxide not emitted to the atmosphere. Industrialised countries’ governments buy the CERs and use them to prove to the UN that they have met their obligations under Kyoto to “reduce” their emissions. Companies can also buy CERs to comply with national-level legislation or with the EU’s emissions trading scheme. Analysts estimate that two-thirds of the emission reduction obligations of the key developed countries that ratified Kyoto may be met through buying offsets rather than by decarbonising their economies.

Almost all the demand for CERs has so far come from Europe and Japan. In the next few years, Australia and Canada could become significant CER buyers. In the longer term, the US could become the largest single market for CDM offsets under legislation being debated. The climate plan by Republican presidential hopeful John McCain would allow supposed emission reductions in the US to be met through domestic and CDM offsets.

Around 2bn CERs are expected to be generated by the end of this phase of Kyoto in 2012. At their current price, project developers will sell around ?18bn-worth of CDM credits over the next five years. The CDM approved its 1,000th project on April 15. More than twice as many are making their way through the approvals process.

Marginal improvement

Any type of technology other than nuclear power can apply for credits. Even new coal plants, if these can be shown to be even a marginal improvement upon existing plants, can receive offset income. A massive 4,000MW coal plant on the coast of Gujarat, India, is expected soon to apply for CERs. The plant will spew into the atmosphere 26m tonnes of CO2 per year for at least 25 years. It will be India’s third – and the world’s 16th – largest source of CO2 emissions.

Many observers had hoped that the CDM would promote renewables and energy efficiency. Yet if all projects now in the pipeline generated the CERs they are claiming up to 2012, non-hydro renewables would attract only 16% of CDM funds, and demand-side energy efficiency projects just 1%. Only 16 solar power projects – less than 0.5% of the project pipeline ? have applied for CDM approval.

For a project to be eligible to sell offsets, it is supposed to prove that it is “additional”. “Additionality” is key to the design of the CDM. If projects would happen anyway, regardless of CDM benefits, then their offsets would not represent any reduction in emissions.

But judging additionality has turned out to be unknowable and unworkable. It can never be definitively proved that if a developer or factory owner did not get offset income they would not build their project or switch to a cleaner fuel supply- and would not do so over the decade for which projects can sell offsets.

The documents written by carbon consultants to justify why their
clients’ projects should be approved for CDM offsets contain enough lies to make a sub-prime mortgage pusher blush. One commonly used “scam” is to make a proposed project look like an economic loser on its own, but a profitable earner once offset income is factored in. Examples include the Indian wind developers who failed to tell the CDM about the lucrative tax credits their projects were earning.

Off-the-record, industry insiders will admit that deceitful claims in CDM applications are standard practice. The carbon trading industry lobby group, the International Emissions Trading Association (IETA), has stated that proving the intent of developers applying for the CDM “is an almost impossible task”. Industry representatives have complained that “good storytellers” can get a project approved, “while bad storytellers may fail even if the project is really additional”.

One glaring signal that many of the projects being approved by the CDM’s executive board are non-additional is that almost three-quarters of projects were already complete at the time of approval. It would seem clear that a project that is already built cannot need extra income in order to be built.

Michael Wara, a law professor and carbon trade analyst from Stanford University, and Victor show in a recent paper that “essentially all” new hydro, wind and natural gas fired projects being built in China are now applying for CDM offsets. If the developers are being truthful that their projects are additional, this implies that without the CDM virtually no hydro, wind or gas projects would be under construction in China. Given the boom in construction of power projects in China, the fact that it is government policy to promote these project types, and the fact that thousands of hydro projects have been built in China without any help from the CDM, this is simply not credible.

Additionality also creates perverse incentives for developing country governments not to bring in, or enforce, climate-friendly legislation. Why should a government voluntarily act to cap methane from its landfills or encourage energy efficiency if in doing so it makes these activities “business-as-usual”, and so not additional and not eligible for CDM income?

Waste gases

The project type slated to generate the most CERs is the destruction of a gas called trifluoromethane, or HFC-23, one of the most potent greenhouse gases, and a waste product from the manufacture of a refrigerant gas. Every molecule of HFC-23 causes 11,700 times more global warming than that of CO2. Because of this massive “global warming potential”, chemical companies can earn almost twice as much from selling CERs as from selling refrigerant gases. This has spurred concern that refrigerant producers may be increasing their output solely so that they can produce, and then destroy, more waste gases.

A rapidly growing industry of carbon brokers and consultants is lobbying for the CDM to be expanded and its rules to be weakened further. If we want to sustain public support for effective global action on climate change, we cannot risk one of its central planks being a programme that is so fundamentally flawed. In the short term, the CDM must be radically reformed. In the long term it must be replaced.

*Patrick McCully is executive director of International Rivers