Financing The Transformation Of Food Systems: A Flow Of Funds Approach

Generated Summary

This working paper, “Financing the Transformation of Food Systems: A Flow of Funds Approach,” examines the financial aspects of transitioning food systems towards sustainability. It adopts a broad definition of financing, encompassing various fund flows related to food systems, and builds upon a framework of social account matrices. The research investigates the current financial flows in food systems and analyzes their impact on the desired transformations. The study assesses the potential for reallocating existing funds and identifies where additional resources might be sourced to achieve food system objectives. The methodology involves analyzing six main financial flows: consumer spending, food value chain operations, international development funds, public budgets, banking systems, and capital markets. The paper considers overall budget constraints and examines the specific challenges and opportunities within each flow, aiming to inform policies and interventions that can facilitate the transformation of food systems, particularly in developing countries.

Key Findings & Statistics

• The paper references estimates that the total additional costs of food system transformation were estimated at 215.3 billion USD, with these costs being less than 1% of the total government expenditure of the period considered.
• Incremental costs for low-income countries appear as a more substantial effort, but still manageable at less than 1% of savings and investment levels.
• The median of social assistance expenditures is less than 1.2% of GDP for countries in the World Bank database.
• The separate estimates for the expansion of safety nets would imply about 5% of GDP for low-income countries, and somewhat less than 1% of the GDP for lower-middle income countries.
• In the period from 2015-2020, disbursements of international development money have been close to 270 billion USD for all uses/sector, and about 12 billion USD for agriculture, forestry and fishing (AFF), or about 4.5% of all development flows.
• For total credit, the yearly average change in stocks for 2015–2019 is about 1.6 trillion dollars globally, but the average for developing countries (excluding China) is only 87 billion dollars.
• The average annual change in loans for AFF during 2015–2019 is 24 billion dollars worldwide, but the estimated flows for AFF in developing countries would be around 14.2 billion dollars, or some 9.5 billion dollars if China is excluded.
• The estimated additional costs include an annual flow of 6.4 billion in loans to small farmers (Table 3).
• The issuing of Green Bonds in 2019 was 260 billion USD and, of Social Bonds, some 131 billion USD in 2020.
• Developing countries spent about 1.1 trillion dollars (916 billion without China) in social protection (annual average 2010–2017; based on IFPRI’s SPEED database using data from the IMF), or about 3.5–4.0% of the GDP during that period

Other Important Findings

• The paper identifies that the value of food consumption is the source of direct income for all operators within food value chains, which fund their overall expenditures.
• It suggests that the internal flows can be oriented towards desired objectives, such as healthier diets, through policy interventions, including taxes, subsidies, and nutritional information.
• The study highlights that governments can influence production decisions through regulations and controls related to health, safety, labeling, and environmental aspects.
• The paper emphasizes that public budgets and tax systems need to be reviewed to reallocate inefficient agricultural expenditures and fossil fuel subsidies.
• The paper mentions the importance of reallocating existing funds to support the transformation of food systems.
• The study highlights the role of public development banks and financial innovation, and also discusses how to address systemic barriers, such as the need for adequate macroeconomic, regulatory and incentives framework.
• It also suggests the use of green bonds and social bonds.
• The paper advocates for the need for international coordination to assist in the development, financing, and implementation of zero hunger plans and the transformation of food systems, which includes a call for a Zero Hunger Alliance and Fund.

Limitations Noted in the Document

• The paper acknowledges that there is not yet a complete view of all the financial flows related to food systems.
• The estimates presented are partial and may vary due to different sources and coverage periods.
• The definitions and metrics for some of the operations in capital markets are evolving, complicating data collection for those financial operations.
• The allocation of interventions and activities may depend on the type of instrument and specific conditions.
• The costs estimated by FSEC are related to the operation of food systems, without including safety nets.
• The paper notes that the numbers presented must be considered approximations for those groups.
• The study also mentions that some of the activities considered in Table 3 may increase productivity and therefore reduce the cost of food.

Conclusion

The “Financing the Transformation of Food Systems: A Flow of Funds Approach” underscores the complexity of financing the transition towards sustainable food systems. The study emphasizes the need to understand the current financial flows, recognizing the constraints imposed by overall budget limitations, and the need to address systemic barriers. A crucial consideration for the (re)orientation of the financial flows towards the activities that generate the desired transformation of food systems is to have an adequate overall incentives framework, including appropriate macroeconomic policies and a supportive business environment. Moreover, the study suggests that the mobilization of resources requires a multi-faceted approach, including leveraging international development funds, improving the efficiency of public expenditures, and promoting financial innovation. A key recommendation is the strategic use of public resources to leverage private investment, and the implementation of well-designed regulatory frameworks, including those related to climate risk disclosure and net-zero emissions targets. The paper also highlights the importance of collaboration and coordination among various stakeholders, including governments, international organizations, and the private sector. Ultimately, the transformation of food systems depends on aligning financial flows with the desired objectives, which requires a comprehensive approach to policy interventions, institutional arrangements, and monitoring mechanisms. The study highlights the need for further research and better data collection to enhance the understanding of financial flows and their impact on food systems, especially in developing countries. The goal is to create food systems that are not only sustainable and equitable but also resilient to shocks and supportive of both human and environmental health. The paper’s final thoughts encourage a strategic approach that addresses both the internal and external financial flows, and that will require a better coordination to help transform the global food system, including the establishment of a Zero Hunger Alliance and Fund to address hunger.