The Skeptic: A fair trade? I beg to differ
Fairtrade fortnight begins on Monday, and with Leicester being the UK's first large urban area to be designated as a "Fairtrade City" by the Fairtrade foundation, perhaps now is the best time to take a look at how we can benefit the world's poor most by modifying our shopping habits, writes Simon Perry.
Buying Fairtrade products makes you feel good. It tickles the part of the brain that makes you feel proud to be doing the right thing. But at what cost?
The Fairtrade Foundation was set up in 1992 by CAFOD, Christian Aid, Oxfam, Traidcraft and the World Development Movement.
The main strategy of the Fairtrade foundation is to fix a minimum price that its certified producers sell their product for. In addition to the fixed minimum amount they are paid for their product, the producers also receive an additional amount of money above the price for social projects. To get on to the Fairtrade system, producers pay a fee to be initially assessed and then annually audited.
Costs vary, but the entry price for a single plantation is 1,137.50 euros. When the market price of their product is high, the Fairtrade system offers little price increase – just 10 US cents for each pound of coffee. But once the price drops, being a Fairtrade producer gives a significant advantage. The producer gets the minimum price of US $1.25 for each pound of coffee.
But there's a problem with this approach. Prices convey information. If your local supermarket has more apples than they can possibly sell before they go off, then they'll be willing to sell them off cheaper.
The discount price is sending you a message – eat more apples. If potatoes triple in price then the opposite message is sent – try rice instead.
Prices create a balancing act on the supplier side of the equation too. When lots of consumers demand something, the price goes up. This is both a message and an incentive to the suppliers to create more.
When demand drops or the market is oversupplied, low prices tell the producer not to bother making any more.
But some producers will stop before others. If you're a coffee producer in a relatively wealthy developing country such as Mexico (per capita GDP US $14,300), you might decide to grow something else or even try another career when the price dips low.
In poorer countries, such as Ethiopia (per capita GDP US $900), there aren't so many other opportunities available.
However, the Ethiopian farmer has been helped out by the Mexican. As the Mexican farmer leaves the coffee growing business, he reduces the supply to the market.
This reduction of supply helps send the market price back up and the Ethiopian isn't quite so badly off after all.
But what happens if we now introduce Fairtrade? With a price tag of 1,137.50 euros to join up, our producer is going to need a little disposable income in order to join. The Mexican farmer, living in a country with a per-capita GDP more than 15 times that of the Ethiopian, is clearly more likely to be able to afford it.
And surprise, surprise, that's exactly what has happened.
While Fairtrade did not respond to my request for the latest figures, those from 2000 show that Mexico had by far the largest number of Fairtrade coffee producers. But if the price now drops with the Fairtrade system in place, what happens? The Mexican is now part of the Fairtrade system and is managing to keep his price high. There is no incentive for him to leave the coffee production business and try something else, despite the clear message coming from the markets telling him we've already got enough coffee.
The Mexican farmer keeps producing coffee, helping to maintain the low price.
By artificially keeping the Mexican farmer in the market, the poor Ethiopian becomes even poorer.
Another problem is the markets that Fairtrade seems to concentrate on.
Cash crops such as coffee and bananas have highly volatile prices.
It's not easy to predict at the time of planting how much the farmer will receive when they finally come to sell – and this makes growing them risky business. Larger farms can reduce the risk by diversifying over several different crops but for smaller farmers, this is impossible.
Fairtrade specifically encourages smaller farmers to continue producing these risky crops.
It also tries to keep those farmers small. Efficiencies in farming can generally be improved by operating larger farms and improving mechanisation.
There is little hope in running a profitable farm another way. But Fairtrade discourages farmers from growing their farms using full time hired labour by imposing stricter rules and regulations for farms who employ.
Locking a farmer into inefficient farming practices by discouraging him from providing full time employment is unlikely to help him out of poverty.
But there are other problems too.
Many Fairtrade producers sell some of their coffee on the open market as well as through the Fairtrade system.
If you're a farmer who has 1000kg of excellent quality coffee, which would fetch a good price on the open market, and 1,000kg of poor quality coffee, then which 1,000kg would you sell on the open market and which would you sell for the fixed Fairtrade price?
I know what I'd do. Increasing the quality of your product is one way of increasing price.
The Fairtrade system decreases the incentive to improve quality in another way.
By encouraging members to form cooperatives that mix the coffee together before they sell it, the profits gained by increasing the quality of the coffee are not only reduced by having it mixed with poorer quality produce, but you then need to split the additional gains with the farmers producing the very coffee that is damaging your price.
And once you spend that extra cash to supposedly help the developing world, critics estimate that only 4% of the premium paid for Fairtrade bananas makes it back to the producers.
Instead of paying £1 more at the supermarket for your coffee or bananas so that possibly a Mexican farmer can make an extra four pence, wouldn't it make more sense to just pick a random farmer in Ethiopia and send him the full £1?
Not only are you passing more money directly on to a poor producer, but you are avoiding disruption of the market by not artificially inflating the price for specific goods.
If he can make more money growing oranges instead, then he can switch freely without fear of losing your charitable contributions.
The Fairtrade system does just the opposite – as economist Paul Collier put it, the producers "get charity as long as they stay producing the crops that have locked them into poverty".
But before looking for ways we can assist the world's poorest farmers, perhaps we should first stop actively harming them.
By taxing imports from outside the EU, we're giving them a significant disadvantage. Worse still, EU farming subsidies make it possible for farmers within the EU to sell their goods for less money than it costs to grow them.
How can poor foreign farmers without access to similar subsidies possibly compete?
The Fairtrade system undoubtedly makes a positive difference to a few, comparatively wealthy Mexicans, but it is far from clear it does much for those in the poorest nations, or that what it does isn't harmful, both in the short term and long run.
Instead of opting for ethically labelled packaging that makes us feel good about ourselves, perhaps we should be doing something that offers a genuine chance of improving the lives of the impoverished – campaigning to eliminate trade barriers and putting an end to farming subsidies.
* SIMON PERRY belongs to a group called Skeptics in the Pub which seeks to rigorously and openly apply the methods of science and reason to commonly held beliefs and claims. In his occasional column for the Mercury he reveals the results of his investigations
Skeptics in the Pub is a monthly lecture series held in a number of cities, including Leicester. Speakers are usually scientists or a prominent sceptic and the talks range from subjects, such as alternative medicine to religious beliefs
10 Comments
by Hugo, Costa Rica
Thursday, February 25 2010, 10:46AM
“FT is a path in the righ direction but still far away from the solution. It recognize the fact the free trade is excluding small farmers of the economy. But the persdon wich wrote this article have no idea... of what he is saying... he can have good arguments about is natural environment, but from the countries where he is speaking about... like Mexico or Ethiopia. Please don't tell us from UK what to do in the third world. Keep quiet... we are going to appreciate... learn first and come and visit Chiapas... in Mexico or Ethiopia before you show your stupidity in Internet.”
by Andrew Kessel, Jamaica Plain, MA
Friday, February 19 2010, 3:53PM
“I completely agree with Jon and thank him for addressing some of those points. Fair Trade is not about charity or about getting a higher price. But for the purpose of this critique and the strong free-market language embedded throughout the commentary I will also focus on price and conventional market theory.
While prices are important for signaling producers and consumers as to what to buy and what produce, they are far from perfect and certainly do not reflect the cost of living or cost of production for the producers (at best they can be taken with a grain of salt as to what's actually going on in the market). As Jon pointed out, if you are producing a point where your costs exceed your income, in reality it's not as simple as "do something different and other people will gain from it." The Fair Trade co-ops in Ethiopia and Mexican are competing in the specialty market and the pricing, while related to the conventional C market, is not the same. In reality, the larger volume plantation style robusta bean farming operations in Vietnam and Brazil has a much larger impact on world coffee prices than any of the millions of small farmers who traditionally, and continue to this day, grow coffee on land consisting of less than 10 hectares. The only reason we have highly mechanized plantation style coffee farming today is because free market ideology suggests that coffee is a homogenized product (undifferentiated) - i.e. coffee farmers in Mexico and Ethiopia are growing the same thing and primarily competing on price and quality. Anyone who's had a cup of Ethiopian Oromian unwashed beans knows that this just isn't true and certain origins within Ethiopia are highly sought after for their unique and renown flavor. If the goal was to make coffee cheaper for consumers by producing more of it and reducing quality, we have succeeded and large (now) wealthy private land-owners have repead the benefit. Over supply has resulted in large parts from gains in "efficiency" encouraged by multi-nationals based in the global North which has not empowered or employed small land holders, cooperatives, or non-colonial descendants or indigenous peoples but rather from reinforcing the status quo. But the point of Fair Trade is not just to help a farmer here or there but to empower entire farming communities and individual small-scale farmers.
Because no one knows for sure what supply and demand actually are, commodity pricing is determined primarily from speculation - which may or may not reflect current market conditions. More specifically, going off what Jon said about consumers not exactly being "rational" just look at the stock market bubble in the late 1990's or the more recent housing market crisis which, in both cases, was caused by irrational exuberance (Greenspan) and traders driving up prices through speculation. Prices are determined by supply and demand but they are also determined by a system of valuation that is whatever we collectively decide it is. While the bubble eventually bursts, or "something that is too good a deal to actually be true" eventually is discovered, these booms and busts don't always bring us back into equilibrium. Often times we swing from one to the other in a very short period of time.
As the other Andrew said: "Encouraging farmers to stay in an unprofitable business only makes the problem worse."
This assumes the business is, and will continue to be, unprofitable because of over- supply. This is where differentiation comes in to play and producers can fetch a premium for value-added (or ethics added) goods like Fair Trade coffee. In economic terms this means pushing the demand curve out. It doesn't even mean that MORE people need to buy MORE coffee but it does suggest that more consumers in the North can, and need to be, persuaded to learn why the price for specialty coffee is often worth the premium and while they might think the mud sitting in their cup is coffee they could be surpris”
by Jon, Leicestershire
Friday, February 19 2010, 1:12PM
“Simon,
Whilst the Fairtrade scheme may be far from perfect, I don¿t think that your criticisms stand up to close scrutiny.
Firstly, the assumptions that you make about the way that markets work are based on ¿neo-classical¿/¿Thatcherite¿/¿Free Market¿ economic theories that are almost as unscientific as astrology, and have proved to be more damaging than any superstition; consumer behaviour is never as rational as free-market theorists would like to believe (apples may be cheaper, but if I prefer bananas, or if I want the status that goes with eating a more expensive fruit, or if Jamie Oliver has convinced me that bananas are a fantastic food, I¿ll opt for them instead of apples). Similarly, these economic models assume that producers have a perfect knowledge of the market and an absolute flexibility in what they produce; and they rarely have either.
Second, the Free-Trade argument ignores the importance of geography: some countries have specific advantages that cannot be altered. Mexico will always benefit from its proximity to the USA; some countries have climates or soils that are better suited to some crops than others. So the notion that producers can switch from one crop to another as the market demands is utopian nonsense.
Mexico may be a wealthy country relative to Ethiopia, but relative to Europe and the USA it is poor; GDP figures are misleading because they disguise the extremes of poverty and wealth (more than half of Mexicans live in poverty according to their government¿s own figures). So if Fairtrade helps Mexican farmers, that¿s a good thing; if it fails to help Ethiopians that doesn¿t mean the whole concept is flawed, just that it is benefiting the poor rather than the poorest, and that obviously needs to be addressed.
I also think that your arguments about the need to make agriculture ¿more efficient¿ are a classic example of the West¿s tendency to impose its own ¿solutions¿ on the developing world. Mechanised agriculture and larger farms invariably go hand-in-hand with other more ¿intensive¿ methods, which usually lead to environmental degradation. But even if they can be made more sustainable, they are always less labour-intensive; so the result is that fewer people are able to make a living in agriculture. Those who do may be better off, but those who are left without work will be in a much worse position.
I have some sympathy with your argument about subsidies, but it ignores two crucial points: first, that they are intended to support farmers in the developed world whose own economic position is far from secure (even if it is better than those in the Third World). More importantly, the EU generally doesn¿t subsidise the production of the crops to which Fairtrade schemes apply. There is no EU coffee mountain. So they have little impact on the prices Third World farmers receive for their produce.
Again, your argument that ¿pure¿ charity is more effective than Fairtrade is worth consideration; but only a tiny proportion of charitable donations reach the people who need them. And one of the arguments for Fairtrade and the sort of schemes that offer more practical help focussed on development that Christian Aid and other charities run is that they don¿t create dependency.
The real problem (in my opinion) is that globalisation based on ¿market economics¿ will always create winners and losers; free trade can never be ¿fair¿ nor can it ensure prosperity for everyone. We should be encouraging the developing world to achieve sustainable self-sufficiency rather than trying to draw it into a system designed to maximise profit for the few and feed our own greed. Writing off debt would be a start, but we should also make it possible for Third World countries to concentrate on feeding themselves first, and supplying our luxuries second. That, incidentally, makes more sense from an environmental perspective as well.
In the meantime, I¿ll carry on buying ”
by Simon Perry, Leicester
Friday, February 19 2010, 11:25AM
“@Andrew, Leicester
The reason that producers do not get a good price for their product is simply because there is oversupply. The only way round this is to produce less of the product (unless you can convince everyone to consume more). To get a better wage, they need to move into a more profitable business.
Encouraging farmers to stay in an unprofitable business only makes the problem worse.”
by Kulgan, Crydee
Thursday, February 18 2010, 2:28PM
“Mark,
If you follow the link you will see that is how the group spell their Name. It's not laziness on the LM behalf.”
by Richard, London
Thursday, February 18 2010, 2:17PM
“Thought-provoking stuff - there's an interesting article here which touches on some similar points: http://smallfarmersbigchange.coop/2009/11/03/fair-trade-in-crisis/”
by Mark, Blaby
Thursday, February 18 2010, 1:23PM
“You don't spell 'sceptic' like that in this country. Too lazy to even consult a dictionary now, Mercury?”
by Andrew, Leicester
Thursday, February 18 2010, 12:42PM
“Simon, i agree with you about the subsidies and tariffs imposed by the EU and US. the best way to help undeveloped nations is to encourage trade with their small scale producers to develop self reliance. However the current situation dosent work as small scale farmers only recieve a tiny fraction of what we pay in the shops and they do not have any influence over the price they recieve - they have to take what they are offered. This is hardly free market from their point of view. Their income is insufficient to improve their buisiness. The minimum price offered by Fairtrade is an attempt to enable these produces to have a reliable income that they can use as a basis for investement to develop their businesses. If you dont like Fairtrade what is your solution?”
by Paul, Leicester
Thursday, February 18 2010, 12:04PM
“Simon, I am so glad to read your view on this feeble-minded good intention. That our politicians foist this wooly thinking upon us like a badge of honour is utterly frustrating. If Fairtrade applied to Britain, we'd still be employing short hand typists in our offices. It is reward for stauts quo, the death of drive and ideas and economic bondage in a worse form than the alternative. This article isn't the work of a skeptic. But Leicester's Fairtrade credentials are a ploy of the politically cynical. Fairtrade is a foul enslavement.”
by karla, moscow centre
Thursday, February 18 2010, 11:45AM
“undisputed main beneficiaries -
career "charity" workers who manage & control fair trade system.”