Saturday, March 25, 2006

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.)

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