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Putting Financial Minds to Good Use

The financial services industry has given the world many, um, innovations, such as subprime loans and securitization. Economist Mark Thoma suggests the industry put its expertise to good use to find a way out of the global food crisis.

To combat swings in demand and supplies, the financial services industry could come up with some sort of insurance that poor farmers could buy as a hedge against volatility in prices.

Thoma cites MIT economist Esther Duflo’s explanation of why an increase in price volatility is so damaging:

Poor families in developing countries are already facing enormous risks (they are often self-employed, they are subject to the uncertainties of weather, and their health is fragile), and there is very little insurance against such risks, apart from their own savings or informal solidarity. Furthermore, these risks are more serious for households struggling to provide the bare minimum. A setback might mean sacrificing the children’s education, or not being able to save a little girl from a diarrhea attack. A passing difficulty can leave a permanent scar.

Perhaps it is time to be creative and make the international financial services actually work for the poor: governments could provide price insurance for the poor (in the form of transfers to some when price are high, and others when price are low). Countries that are neither net sellers nor net buyers could do this internally, and countries that are either net sellers or net buyers should be able to sell this insurance on the world market. There is nothing straightforward about these solutions. The key point, however, is that it is urgent to think of something.

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