Waylaid Dialectic

August 5, 2014

Does Fair Trade Work

Filed under: Trade — terence @ 8:43 am

An interesting looking new NBER working paper from Raluca E. Dragusanu, Daniele Giovannucci, Nathan Nunn reviewing the economics of fair trade.

From page 11:

In side-by-side comparisons, Fair Trade certified producers do receive higher prices, follow specified work standards, and use environmentally-friendly methods. We review this evidence, but also explore the more difficult questions of interpretation. Are the changes that are correlated with Fair Trade production also caused by certification or is some other factor like the entrepreneurial capacity of the producer affecting both outcomes? What factors make producers more likely to join Fair Trade? What may happen to the advantages of receiving a higher price from being a Fair Trade producer as more producers seek to join? After taking these factors into account, the balance of the evidence does suggest that Fair Trade works—but the evidence is admittedly both mixed and incomplete.

March 23, 2012

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

Filed under: Trade — terence @ 4:42 am

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]

February 28, 2012

Fair Trade and Unfair Critique

Filed under: Trade — terence @ 7:51 pm

I could almost agree with this anti-fair trade whinge on the Guardian. I certainly think stronger unions in some third world countries would be a good idea. Yet two aspects of the article bug me.

First, the overarching intellectual framework which seems to be something along the lines of: fair trade can’t solve everything; therefore fair trade is no good. This is an obvious logical fallacy. Not to mention a tired tool of argument that some on the left never seem to tire of using. It’s true that fairtrade isn’t a panacea. But the history of the last century suggests that the search for grand social cure alls is a fool’s errand. What’s more – effecting structural change in other countries is often very hard to do. Which means we may be waiting a long time for the rise of unions. Which means that if fair trade helps in a small way in the meantime, why not do it? It’s better than no help at all.

Second parts of the article are at odds with other parts. Specifically:

By doing that it throws responsibility for making sure farmers and workers are fairly paid back on to consumers – who may or may not be able to afford to take their morals shopping, especially in a recession – rather than on the big businesses, the international traders, the manufacturers and the retailers that make substantial profits out of the goods they sell.

Fair trade alone cannot address the core problem of excessively concentrated markets in which a handful of overpowerful transnational corporations dictate terms of trade and suck profits up into their own coffers.

If the problem is corporate capture of the supply chain leading to low wages then surely fair trade importers, by avoiding leeching corporate monopsony, ought to be able to pay workers higher wages at no cost to the consumer.

Or, if fair trade really necessitates higher costs to the consumers, then this can’t be because corporate middlemen are currently taking a huge bite out of the commodity train. Unless the fair trade organisations are doing the same too. Which they aren’t.

If corporate trade practices are the issue for the types of products that fair trade services then the costs of fair trade won’t be born by consumers. And if consumers have to bear the costs then the issue can’t be the corporate supply chain. Just can’t.

That our author can’t see this makes me suspect her mind was never open to fair trade in the first place. To many markets, not enough structure, or something.

I’m interested in left wing alternatives to the world we live in. But I don’t think their pursuit should blind us to smaller but more probable wins.

Blog at WordPress.com.