Sasha Breger, Guest Blogger
Why are development institutions so supportive of the derivatives industry? Given what we now know about derivative instruments and markets—they are complex, volatile, poorly regulated, crisis-prone, and dominated by very large financial firms—the alliance between prominent global development agencies like the World Bank and UNCTAD and the derivatives industry gives real reason for concern. In fact, this appears to be yet another instance in which the interests of the development establishment seem grossly misaligned relative to the goals of the constituencies they purport serve.
As I detail in my recent book on the topic, the governments of commodity dependent economies, agricultural firms involved in commodity trading and processing, and even small farmers have been targeted by these two institutions as actors who stand to benefit from more derivatives trading and the expansion of derivative markets across the developing world. The basic argument is that the welfare of these actors depends critically on prices in global commodities markets. By using derivatives to manage the risk of price fluctuation, tax and export revenues, business revenues and personal incomes could be stabilized and even raised in some cases.
To this end, UNCTAD has been recommending the establishment of local commodity exchanges in a variety of developing countries, exchanges that can both facilitate spot exchanges as well as provide opportunities for forward contracting, and futures and options trading. Similarly, though with a slightly different orientation, the World Bank has been recommending that various developing country parties (public and private) trade on global derivatives exchanges (located mostly in the West) in order to mitigate price risk.
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