Waylaid Dialectic

March 23, 2012

The Evidence is in: Fair Trade Doesn’t Work!

Filed under: Trade — terence @ 4:42 am
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As best I can tell, most people’s position on fair trade stems not from evidence but rather from their priors. The radical left dislikes fair trade because it involves – gasp – markets and (even worse) shopping. Meanwhile free-marketeers dislike it because it distorts markets and (even worse) involves compassion. And, to be fair, Guardian hugging, tree reading liberals like myself are probably positively disposed to it because we wanna split the difference and can sleep easier at night when reassured that it is possible to actually harness markets to generate more humane ends.

None of which has anything to do with evidence.

However, on the evidence front, via Paul Clist, via Lee Crawfurd, we find James Choi citing Bruce Wydick:

Fair-trade coffee isn’t a scam, but it is hard to find a development program that has attracted so much attention while having so little real impact. The most recent rigorous academic study, carried out by a group of researchers at the University of California, finds zero average impact on coffee grower incomes over 13 years of participation in a fair-trade coffee network. Low impact is due to a flawed program design: growers must pay for FLO (Fair-trade Labeling Organization) certification and bear the costs of compliance with fair-trade standards. When coffee prices exceed the $1.41 threshold (as they do today, with prices at around $2.50), all growers essentially receive the same market price. It is when coffee prices fall below this minimum price that the real benefits of the program kick in. But in these same years of low coffee prices, coffee growers flock to fair-trade certification, lowering the fraction of the fair-trade crop that can be marketed at the higher fair-trade price, thus neutralizing the benefits of the program.

What is more, fair-trade programs continue to encourage the cultivation of more coffee; the best thing for coffee growers around the world would be if everyone grew less.
–Bruce Wydick, Christianity Today, on the case for free-trade coffee

So, there we go, evidence has resolved the debate. And I can finally go back to drinking crappy instant, right.

Not so fast.

Because, as is often the case in the complicated world of development there’s a little more to the evidence than first meets the eye.

Here’s Reuben and Fort from ‘The Impact of Fair Trade Certification for Coffee Farmers in Peru’, which can be found in a recent issue of World Development (ungated link here), who do some nice propensity score matching to determine the impact of Fair Trade on producers. From the conclusion:

For both groups of (organic and conventional) farmers our results did not show significant effect of FT involvement in terms of higher household income. Net income of conventional FT farmers is partly affected by increased costs of hired labor and reduced revenues derived from other cropping activities and off-farm work. In line with results obtained by Valkila (2009), yield levels of organic FT farmers are slightly higher than their counterparts but no significant difference could be found, whereas a negative and significant yield difference was observed for FT conventional coffee farmers. The lack of a real price difference between FT and nonFT producers in both groups seems to be the main limitation for obtaining higher net benefits. The rather limited market for FT sales in the region and the high local coffee prices largely explain this fact. Consequently, FT prices are increasingly considered as a regional floor price offered by local traders to all coffee farmers and thus nonFT farmers reap similar benefits as part of an externality effect.

Even though, there are some significant difference in household expenditures patterns for FT producers that generally present higher levels of animal stocks, better access to credit and increments in the value of their agricultural assets during last years. In terms of general wellbeing, farmers in older FT cooperatives appear to be better-off than the ones in cooperatives with recent FT involvement. Additionally, FT farmers also invest more in house improvements and land-attached infrastructure than their nonFT counterparts. The improvements made in (organic) coffee production reveal another effect of FT in terms of providing more stable income to farmers that enables a gradually shift towards more specialized (organic) farming. 13

These findings largely corroborate FT effects registered in some earlier studies that report fairly modest direct income effects and highly uneven effects on parameters of health, education and migration (Arnould et al., 2009; Mendez et al., 2010; Barham et al., 2011). Similarly, major FT effects are registered in aspects of credit use and internal capitalization. In line with Arnould et al. (2009) we find that FT implications are strongly related to the length of cooperative participation. Since our study captures full household income, we could also register substitution effects in terms of land use and labor, resulting in a stronger FT coffee specialization and a decline in off-farm employment. This is the likely result of the behavioral change in risk attitudes that may be considered as the most important benefit from FT. It also indicated that FT plays a major role in the transition towards more entrepreneurial coffee production practices and attitudes.

The lack of many expected effects from FT can at least partially be attributed to the deficient distribution and use of the FT premium as perceived by the farmers. The fact that only a quarter of the total number of interviewed FT producers perceives any tangible benefits from the premium is a clear indication. Moreover, premium investments in social and collective infrastructure benefit FT and nonFT farmers alike. In addition, regional markets for coffee and labor are both influenced by the transition towards (organic) coffee production, occasioning generally higher output and input prices.

Whereas household-level welfare effects still appear to be limited, FT played an important role in the processes of recovery of the agrarian cooperatives and for the improvement of coffee production. FT farmers proved to be substantially more inclined to make in-depth investments, renting additional land and improving organic fertilizer use. In this respect, FT paved the way for quality upgrading of coffee production. Given the current proliferation of coffee standards and the increasing importance of premium segments, it is likely that FT producers in Junin province become attractive counterparts for delivering coffee under private labels. This is in fact already happening with the oldest FT cooperative La Florida that made the step towards multi-certification and started to deliver also under the Utz-Certified and Starbucks labels. Since sales to FT outlets remain constrained, FT paved the way for acceding more rewarding outlets served by private labels (see Ruben & Zuniga, 2011 for a similar case of competing labels in Northern Nicaragua).

Maybe subsequent studies will debunk this one, but for now I get to keep my priors. Fair trade: not a panacea, not perfect, but on average, in some ways at least, it almost certainly helps.

[Update: link fixed – thanks Simon]

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5 Comments

  1. Thanks Terence, very interesting. Your ‘ungated link’ goes to a blank page on your site — I downloaded the article from elsewhere and will read in full. First impressions:

    — the ‘externality’ effect of FT (i.e. that it benefits everyone) is counted as limiting its impact, but seems to me to be quite a good thing
    — the ‘higher input costs’ which are seen as also limiting the impact on producer household incomes, if I’m reading this right, refer to higher wages paid to employees, which seems to be a very good thing. On this topic, I think some radical leftists dislike fair trade not so much because it involves markets as because it overlooks class. This finding should be good news for them.
    — the conclusion that setting an income floor drives quality (rather than improved ‘productivity’ being required to improve incomes) is exactly what I’m arguing in an article I’m writing at the moment on a different sector. Can send to you if you like.

    Comment by Simon — March 23, 2012 @ 7:40 am

  2. OK, read the whole article now. My first reaction was to get depressed, because I’m a good couple of stats courses away from being able to fully engage with, let alone design, this kind of econometric analysis.

    Then I cheered up, because in their results section they in several places correct or flesh out their data with additional qualitative information (and they also run into a contradiction, suggesting FT producers are moving towards specialisation but also noting they’d bought more animals). Perhaps in-depth case studies are valuable after all? I know there’s this craving to ‘isolate the intervention’, medical-like, but it seems to me that local details like the generally high coffee prices in the area, the fact that the cooperatives keep the premium and don’t pass it through to their members, and the transition being made to organic farming by the largest cooperative, are an irreducibly important part of the story.

    I also found it odd/amusing that there was almost no information on how the survey was designed and carried out. How did they get 360 Peruvian smallholders to provide accurate [?] data on their income, savings, expenditure and asset values? The statistical test is described in some detail but we don’t even get a paragraph on this.

    Comment by Simon — March 23, 2012 @ 9:17 pm

  3. Hi there Simon, please do send me the article.

    I know what you mean about designing such analysis. I guess the trick (after the stats courses) is then to work as a junior partner to someone else doing this kind of work.

    I also think that a lot of quantitative work is poorly written up. I reckon these authors could, with a little bit more care in the writing process, have made what they did more intelligible to the lay person – which is kind of important given that most of those involved in development aren’t quants.

    I agree with you about the importance of case study work – there is so much that just can’t got at through quantitative analysis. Qualitative work may have it’s drawbacks but, in many areas, it’s all we have.

    And I rather suspect that the data gathering stuff is kept out because…we’ll you’ve seen the inside of a sausage factory right? Quantitative data gathering in developing countries is often a very messy business.

    Still, if anything, it probably only added a bit of random error and won’t have systematically skewed the results.

    Comment by terence — March 24, 2012 @ 2:29 pm

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