Waylaid Dialectic

October 24, 2011

Is Fair Trade Really Such a Good Idea?

Filed under: Trade — terence @ 6:54 am

Still recycling old posts while in the field. This one from here, written in 2006.

In a column written for the Times of London in 2004 English blogger Oliver Kamm had this to say about fair trade:

OXFAM, we learnt last week, is going to back a chain of “fair trade” coffee bars. Meanwhile Gap clothing company has disclosed that many of the factories that it uses in developing countries do not comply with minimum labour standards. For those consumers whose prime concern is Third World development, the proper course is clear: buy clothes at Gap and avoid Oxfam’s coffee.

The rationale of Oxfam’s venture is to lessen the hardship that coffee growers have suffered since coffee prices slumped in 1997. The organisation claims: “Coffee growers will win three times . . . They’ll be selling their coffee at a fair trade price; they’ll share directly in the profits and will also showcase their coffee to the UK.”

Unfortunately the sharp decline in world coffee prices is not only cyclical. Over the past decade, exchange-rate movements and new technology have made the Brazilian coffee industry more productive, while Vietnam has used its low wage costs to become a large and efficient producer. Low coffee prices are not the result of market failure, but a sign that there are too many producers.

Of course laissez-faire is no reputable response to the farmers’ hardship. Oxfam is right that there is an obligation to assist poor coffee farmers. But its Scargillite remedy of subsidising enterprises that can never be profitable will prevent the development of new businesses which could be. A better scheme is to support farmers’ efforts to diversify production.

Now, prescience, is unfortunately not one of Mr Kamm’s strong points. He supported the invasion of Iraq writing, on the day of Saddam Hussein’s capture, that:

American and British forces liberated Iraq with a scrupulous concern to avoid civilian casualties; our respect for due process and our commitment to the rule of law extend even to apprehending alive a man who deserves as no one else to burn in hell.

Yes, well, quite. I guess.

When it comes to coffee, almost immediately after Kamm declared that the decline in coffee prices was more than just cyclical, coffee prices began to rise again.
(more here)

Kamm’s predictive powers then can fairly safely be discounted. But what about his more substantive point about the futility of subsidising enterprises and the impact this on people’s incentives to diversify.

Kamm’s argument, in a nutshell, is that: by paying small farmers a premium, Oxfam is reducing their incentives to diversify into areas where they can someday earn enough to move out of poverty.

So does he have a point? Is Oxfam essentially barking up the wrong Coffee-tree, so to speak?

The short answer is no. Kamm is mistaken. His reified world of markets and incentives just doesn’t map to the reality of the small coffee growers that he claims to be concerned about.

This excellent paper by Oxford academic Alex Nicholls provides an in-depth discussion goes into more detail about why simple incentive based explanations such as Kamm’s don’t map to real world development economics.

The most important point is simply that lack of incentives isn’t the real reason why small coffee farmers aren’t diversifying. It’s lack of options and capabilities. For a start, absence of education means that farmers may well be unaware of alternatives available to them. And lack of training means that alternative employment options may be thin on the ground too. By funding schools, fair trade products help overcome this. On top of this, many farmers may not have the capital to switch crops or change careers. The small premium paid to farmers by fair trade organisations can help with this too. Fair trade coffee can also provide money for investment in infrastructure (infrastructure investment has been a significant contributing factor to the success of Brazilian agriculture). And, as the upturn in coffee prices has shown, coffee itself may not be the development dead end that Kamm predicts. Coffee production is certainly not the magic elixir of wealth, but – when topped up with a fair trade premium – it can ease the poverty burden and, through funding education and infrastructure, and by providing capital, what it can do is give farmers an important first step onto the ladder.

It’s very hard to see why mister Kamm opposes this.

Postscript: Earlier this year I was fortunate to attend an informal panel discussion at which the producer of a movie on fair trade spoke, along with the proprietor of a fair trade coffee company and a staff member from trade aid. One thing that came out of this was that, fair trade, like all development solutions is still a fraught process. It’s not a panacea and there are lots of potential problems ranging from large companies co-opting the label to tradeoffs when it comes to eliminating the middlemen from the export/import process.

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2 Comments

  1. May I ask some other questions about this please, Terence? A friend of mine regularly criticizes fair trade, saying that it is too expensive for coffee farmers to gain fair trade certification, leaving them stuck in a cycle of poverty. Is this a legitimate criticism?

    My friend also says that just because something is not certified fair trade it doesn’t mean it’s not fairly traded (i.e. alternative ‘fair deal’ type logos claims).

    Comment by interested — November 7, 2011 @ 11:45 am

  2. Readers may also be interested that many years before Fairtrade existed, we imported almost 3 tonnes of instant coffee from Tanzania to the UK to help support manufacturing in the Third World. Last week BBC radio interviewed me about our ‘Campaign Coffee’, that helped to start the idea of ethically sourced coffee. The broadcast is now available on YouTube (4 minutes):

    Comment by Jon Danzig — November 20, 2011 @ 9:05 pm


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