3 Oct 2014

Fair trade does not help small producers

Theresa L writes:*

Fair trade is a very appealing concept to people who would like to see the world become a better place. Every fair cup of coffee or bar of chocolate helps the producers and employees in the Global South to live better lives. At least, this is what the big fair trade certification organizations like Fairtrade International like to tell us: "Fairtrade offers producers a better deal and improved terms of trade. This allows them the opportunity to improve their lives and plan for their future. Fairtrade offers consumers a powerful way to reduce poverty through their every day shopping."

Indeed, a quick look at the coffee prices for the cheapest fair trade coffee and the cheapest conventional coffee at the Dutch supermarket Albert Hein shows that consumers pay a quite high extra charge for fair trade products: the difference lies at € 1.98 per kilo. As the growing success of fair trade products shows, consumers are happy to pay this extra price as a kind of charitable act. But would they still do so knowing that fair trade, on the contrary to what is officially said, does not improve the farmers lives? Probably not. Yet, according to ever more researchers on the field, this is exactly what happens.

The logic of Fairtrade goes as follows: Producers receive a minimum price to protect them from unforeseen drops of the market price so they can make longterm plans and investments. For coffee, the minimum price currently lies at $ 1.40 per pound plus $ 0.20 fair trade premium and an extra $0.30 for organic coffee. If the market price is higher than the fair trade minimum price, the producers get paid the market price. Thus, in theory this should benefit the farmers in all cases.

Yet, researchers found that for example in Ethiopia and Uganda the expected effects of improved working conditions and higher wages fail to appear. To the contrary, "wages in other comparable areas and among comparable employers producing the same crops but where there was no Fairtrade certification were usually higher and working conditions better. In our research sites, Fairtrade has not been an effective mechanism for improving the lives of wage workers, the poorest rural people", said Christopher Cramer, an economics professor at SOAS, University of London, and one of the report's authors to The Guardian.

One could wonder why fair trade farmers, receiving high product prices at all times, don´t invest in an improvement of working conditions and wages. However, when looking into the details of fair trade contracts, it becomes apparent that the benefits of selling to Fairtrade are not higher than its costs. Fairtrade producers have to pay very high certification costs, composed of an application fee of € 525, an initial certification fee lying between € 1,430 and € 4,370, and an annual certification fee lying between € 1,170 to € 2,770, each depending on the size of the cooperation. The producers then have a right to sell under Fairtrade conditions, but in most cases, Fairtrade only buys a rather small percentage of the total produce. As a result, farmers pay for certification but still need to sell big parts of their production to the regular market.

Researchers from Berkley and San Diego University compared costs and benefits, in terms of minimum price, certification fees and percentage sold to fair trade, over thirteen years for coffee cooperatives in Central America. They found that there is almost no longterm benefit regarding producer rents in the fair trade system compared to regular producers.

Bottom Line: Fair trade consumers don´t pay higher prices to save the world. They pay to support organizations certifying fair trade.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.


Alexia said...

Although I can agree with you that fair trade is maybe not entirely what is seems to be, I still believe it can, to a certain extent change the lives of producers in developing countries.

I read an article titled “Teach us how to fish – do not just give us the fish” by The Guardian a while back, and although it only gives us the example of three producers in developing countries, it does demonstrate some the benefits that do come with Fair Trade.

I don’t think they only pay to support organisations certifying Fair Trade as you said, but I also think they do it to benefit themselves and their community. From the article I read, the coffee producer from Costa Rica said that the coffee market was highly unstable for them before they got Fair-trade certified, but since it was approved, they have received guaranteed premiums, which has allowed them to spend money on things such as education, environmental protection, and improvements to their production capabilities.

So although they have to pay a higher fee to be certified as a Fair Trade producer, I still believe that Free Trade does achieve some good; more competition, sustainable source of income, and it can be beneficial for the community in the long run.

Iris said...

While I agree that there is still much that can be improved in the fair trade business, I do think that the idea still has a lot of potential. As this post pointed out, buying fair trade products won't always ensure fair trade for the producer, however in many cases it does help. "Fair trade" is a brand but also a global movement, and there are many different fair trade labels that all approach the concept in a different way. Some organisations are serious about fair trade and do improve the lives of the producers,and other companies, of course, might simply offer "fair trade" products because it's hip and fashionable and good for their image. There certainly are issues with the execution of the fair trade concept, but the idea in itself is good and can work.

Thomas Oberhäuser said...

The thing with “Fairtrade” is, the people want to solve a problem with “trade”, which you cannot do. Trade can never be “fair”, because it's only the market. And markets should not be human, but we.
The market says, best price-product value relationship is my way. - But “fair” means to be good to each other. This has nothing to do with market. - So Fairtrade is a sort of command economy, where you not force, but “beg” the people to do the right thing.
If you want good working place conditions and fair living situations, this is not the part of economy to care for this, but of state, to manage the frames through laws. What? Freedom. The people must be free to leave working places with bad working conditions AND the living standard in its basic form must be provided through the whole community, separated from the market. - “Net domestic product” is for each of us. It is similar to a “family”. Each member has the right to live, despite their efforts in society.
As a costumer and consumer I can say, that I never was interested in “Fairtrade” products. - But what about “Bio” products. - What do you think about them. - Is there a recommendation from the economists?

David Zetland said...

"Bio" is a label that's meant to substitute for "proper" (externality-adjusted) prices for food and fiber. It is therefore subject to measurement error and potential bias (even deception). Putting that aside, there are surely examples of "bio" products that are not so good for the environment and "normal" product are better (apples to apples) as well as products that are, per se, worse for the environment (e.g., meat vs grains).

THEN you can look into social impacts (small independent farmers vs factory farms with exploited migrant workers) that are not identified in labels or prices.

It's hard to "do the right thing" via labels!

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