The internal contradictions of Fairtrade?
By Vivek Krishnamurthy
If you have a half-hour to kill this weekend, I'd suggest tuning into the Food Programme on BBC Radio 4 (available as RealAudio) for a fascinating discussion of the international coffee market, and particularly of the growing embrace of the Fairtrade movement by big-hitters in the coffee business world such as Nestle and Starbucks.
I'm a big supporter of the Fairtrade campaign, and all the coffee (and much of the tea) I've bought in the last 18 months has been Fairtrade-certified. As the movement wins more and more converts, however, I'm wondering if Fairtrade may not suffer from the "internal contradictions" that arise from paying certain farmers above-market prices for their produce. The problem is that these high prices will encourage new entrants into coffee production, which will lead to a glut in supply that pushes global coffee prices down. Those who are already locked into Fairtrade supply contracts will do fine, but those who do not receive the benefit of Fairtrade prices will be made even worse off.
Converting every coffee buyer in the world to the Fairtrade philosophy doesn't necessarily solve the problem either, for you still have the inducement to entry provided by high coffee prices, leading to the same glut of coffee, and to strong incentives for those selling at the lower end of the market to defect out of the Fairtrade movement and reap the benefits of lower coffee prices.
The problem is not unlike that created by the price supports provided by the European Union to its farmers under its Common Agricultural Policy (at a cost of more than €43 billion a year). By offering farmers guaranteed prices for agricultural production that are far in excess of world commodity prices, the CAP encourages massive overproduction of basic agricultural products by the Europeans. The surpluses either accumulate in warehouses or are dumped onto world markets at fire-sale prices that further drive down the world price for agricultural commodities, leading to farm income crises throughout the developing world.
This bleak scenario is still a far way off in the coffee market, since less than one percent of world coffee production adheres to Fairtrade standards, but this possibility is something that the Fairtrade movement should begin to take seriously as the movement grows in popularity. In my opinion, a better way to proceed would be to use a mechanism other than price supports to achieve the Fairtrade movement's goals, such as direct income supports to farmers, or direct investments in health, education, and other social projects in coffee-growing areas around the world.
(Cross-posted at the Dominion Wine and Cheese Society.)
If you have a half-hour to kill this weekend, I'd suggest tuning into the Food Programme on BBC Radio 4 (available as RealAudio) for a fascinating discussion of the international coffee market, and particularly of the growing embrace of the Fairtrade movement by big-hitters in the coffee business world such as Nestle and Starbucks.
I'm a big supporter of the Fairtrade campaign, and all the coffee (and much of the tea) I've bought in the last 18 months has been Fairtrade-certified. As the movement wins more and more converts, however, I'm wondering if Fairtrade may not suffer from the "internal contradictions" that arise from paying certain farmers above-market prices for their produce. The problem is that these high prices will encourage new entrants into coffee production, which will lead to a glut in supply that pushes global coffee prices down. Those who are already locked into Fairtrade supply contracts will do fine, but those who do not receive the benefit of Fairtrade prices will be made even worse off.
Converting every coffee buyer in the world to the Fairtrade philosophy doesn't necessarily solve the problem either, for you still have the inducement to entry provided by high coffee prices, leading to the same glut of coffee, and to strong incentives for those selling at the lower end of the market to defect out of the Fairtrade movement and reap the benefits of lower coffee prices.
The problem is not unlike that created by the price supports provided by the European Union to its farmers under its Common Agricultural Policy (at a cost of more than €43 billion a year). By offering farmers guaranteed prices for agricultural production that are far in excess of world commodity prices, the CAP encourages massive overproduction of basic agricultural products by the Europeans. The surpluses either accumulate in warehouses or are dumped onto world markets at fire-sale prices that further drive down the world price for agricultural commodities, leading to farm income crises throughout the developing world.
This bleak scenario is still a far way off in the coffee market, since less than one percent of world coffee production adheres to Fairtrade standards, but this possibility is something that the Fairtrade movement should begin to take seriously as the movement grows in popularity. In my opinion, a better way to proceed would be to use a mechanism other than price supports to achieve the Fairtrade movement's goals, such as direct income supports to farmers, or direct investments in health, education, and other social projects in coffee-growing areas around the world.
(Cross-posted at the Dominion Wine and Cheese Society.)
posted by Vivek Krishnamurthy at
2:33 PM
3 Comments:
Thanks for your comment Dylan. I think I should make clear that for the time being, I fully support what the Fairtrade movement are trying to do, and I would urge you to support Fairtrade as well by buying as many products carrying their certification as possible when you're doing your shopping. Given the very low market share that Fairtrade products currently command, all of the problems that I identify with the Fairtrade model are merely theoretical for now. On the other hand, the benefits of the higher prices commodity producers in the developing world are receiving under Fairtrade are very real, and in my books, it's better for even a few people to be made better off by Fairtrade, than for everyone to suffer under the status quo.
That said, the fact that Fairtrade has this "internal contradiction" that may make it a victim of its own success at some point means that as progressives, we will have to come up with a more stable long-term solution to the plight of commodity producers in the developing world. I can't claim to have all the answers, but one thing that progressives must overcome is their fear of free trade and their penchant for subsidizing declining industries. We can hardly blame American and European agricultural subsidies and import barriers for the plight of the world's coffee producers, but when it comes to more temperate produce (like corn, wheat, and sugar), agricultural protectionism is definitely a root cause of the farm income crisis facing the developing world.
Another interesting idea specifically relating to coffee, tea, bananas, and other such tropical commodities might be for producer countries to impose an export tax on these products and use these receipts to top up the incomes of farmers and farm labourers. The system could be designed in such a way that only those farmers who commit to employing fair labour practices would get access to the pot of money, which creates incentives for existing farmers to clean up their act, without necessarily producing the same inducements to entry as a price support might. The only problem with this model is that it may set off a 'race to the bottom,' in that countries without the export tax would be able to undercut the prices of those countries who do have such a tax. For this to work, it might well require a high level of coordination between producer governments that is impossible to achieve given the very strong inducement to "cheat" and sell your country's produce on the cheap to win market share.
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Vivek Krishnamurthy, at 8:17 PM
Well currently coffee prices are up and to some extent fair trade or not this tendency is likely to go on. Consumers wat beter coffee which means shade grown, better care including hopeflly rearding labor etc.
I am a bit mixed on the fair trade movement because it mixes a lot of ideological messages into it's goals, but what it symbolizes is that I and many others will pay *some* extra sum for a product if it pays it's workers quite decently by the standard of the host company. As stated above this is less necessary in coffee because the demand for quality encourages small owner operated farms etc. but it does apply to all third world products.
Market forces have no effect here, because if the certifying organization is honest then any product so marked will have my approval, the wages are a fixed and unchangeable cost. If manufacturers compete by price then it will not be by cuting the extra 2 or 3 bucks off a 40 dollar shirt which lets third world workers get cklean water, basic education for their kid, maybe even a motorbike with a shorter day, it will be from the niniety plus per cent of other costs outside of labor including that involved in making the materials.
The reatiler may take a cut, we've got a local coffee guy who beats all the retailers includng trader joes with about 70 different beings offered in a 500 square foot store. The advertisors might take a cut and all the folks in the middle (especially the garment industry) but the thng about "fair wage" is that those who want it will not buy if the little players are not in theory covered.
Then let the market force the richer folks to take less. But to the extent that this is popular then this offers those willing to take a risk to find as niche where the 3 (guesstimate) bucks used to pay workers more for a shirt translates into 10 dollars more at the register because this is what a set of consumers want.
Yes as the suppliers grow that 7 day dollar margin shrinks. That isn't bad. The decent wages remain or certification goes.
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Anonymous, at 12:36 PM
^^ nice blog!! ^@^
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