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March 18, 2005
Fair Trade Coffee III
Yes, I realise this news is a little old, three years or so but:
Oxfam stated coffee processors should fund, along with rich-country governments, the destruction of at least five million bags of coffee stocks,
Some rough figures. World output is about 100 million bags. Some 25 million families provide that output. (From the ICO.) Let’s assume (wrong, I know, there are large commercial plantations as well as peasant plots, but just bear with me, OK?) that this is simply provided pro rata. Each family produces four 60 kg bags a year.
A few bits of economics.
Average wages in an economy are set by the average productivity within that economy.
We agree that there is insufficient wealth in the world.
We wish to increase the wealth in the world.
Wealth is increased by improvements in multi-factor productivity.
Labour is such a factor.
Wealth would be increased by an improvement in labour productivity.
5 million bags of coffee is the annual output of 1.25 million farming families.
Oxfam thinks that wealth would be increased by destroying the output of 1.25 million families. That is, by reducing multi-factor and labour productivity of these people to zero.
This increases wealth in what way?
March 18, 2005 in Make Poverty History | Permalink
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» OXFAM LOOKING TO REDUCE PRODUCTIVITY OR TRANSFER WEALTH? from Knowledge Problem
Lynne Kiesling Tim Worstall has a post about an Oxfam proposal to enhance the well-being of small coffee farmers. He links to and quotes an article as saying Oxfam stated coffee ... processors should fund, along with rich-country governments, the... [Read More]
Tracked on Mar 18, 2005 2:02:58 PM
» OXFAM LOOKING TO REDUCE PRODUCTIVITY OR TRANSFER WEALTH? from Knowledge Problem
Lynne Kiesling Tim Worstall has a post about an Oxfam proposal to enhance the well-being of small coffee farmers. He links to and quotes an article as saying Oxfam stated coffee ... processors should fund, along with rich-country governments, the... [Read More]
Tracked on Mar 31, 2005 1:31:53 AM
Comments
Ah, the classics. This proposal by Oxfam has not ripened with age, and is as odd today as it was three years ago. I think the best thing that can be said for those who made this proposal back then is that they have been happy to let it die a quiet death -- at least I haven't seen any more recent proposals to destroy coffee to help the poor.
But I am a bit surprised by your posting, Tim. Do you really not know how this would work? The logic is tortured but not as absurd as you suggest. Obviously, before destroying the coffee, Oxfam or someone else (most likely some OECD taxpayers) would have to buy the coffee first. I would guess that this would be on the open market -- you just go out and buy it, because the ultimate price effect will need to work through the market. This poses an interesting side question, not to be covered here, as to whether they would buy-n-burn Fair Trade and/or organically grown coffee [arguments could be made either way, even if you like FT and organic market arrangements].
The logic is straightforward for anyone with a class in economics -- buying and burning the coffee would essentially shift left the supply curve and drive up the price received by all coffee producers (as the quantity left for the remaining market would be reduced by the amount that was bought and burned); you could also diagram the market by representing the purchase by Oxfam as a shift to the right in the demand curve (the normal demand plus the buy-n-burn demand). In any event, the effect is to drive up the price of coffee for producers. With either diagram, the price goes up, and the total quantity consumed goes up, too. [You could make supply totally inelastic in your diagram if you like, in which case Q stays the same, even as P goes up, but even in the short run the supply elasticy to price is almost certainly non-zero. The reality is that total quantity consumed would be higher.]
Of course, the dynamic implications are equally clear. When the price for coffee goes up, standard economics says that production will go up, too, and will erode price inflation. That is why Oxfam, if I remember right, had included as part of their long-term strategy the idea of getting farmers to grow less coffee (and to grow better quality coffee).
If Oxfam could accomplish this -- get coffee growers to produce less coffee, then the logic of the market would say that those remaining growers would benefit from the higher price that they would get for their product. So on that, at least, Oxfam was right.
But how would one accomplish that? No market mechanism will produce this outcome (other than the creation of many other more profitable income-earning activities for the former coffee growers), so you would need government intervention to limit production -- in all or most growing countries (an OPEC for coffee -- OCEC!). In most developing countries, these mechanisms quickly become sources of corruption, because the opportunity to grow and sell at inflated prices becomes valuable in its own right. When developing countries ration non-market profit opportunities, it is rarely the poor who get to grow.
Another problem is that this global trade regime could only work with broad compliance. Should any country choose not to limit is production, they would erode the ability of the others to drive up the price.
But the program can only work if some producers stop growing coffee. How is this better for those left without production quota and forced to do something else? Bottom line -- it isn't. Presumably, Oxfam would then support alternative livelihood projects to find them something better than coffee, but nothing better existed before the price went up (or else they would be doing it), and now Oxfam has raised the bar! If Oxfam had great ideas for alternative profitable activities, why don't they just get started on that and leave the coffee market alone? The departure of coffee growers to alternative livelihoods would accomplish the goal of driving up the market price.
But this task is the hardest -- creating alternative livelihoods that the market has missed. If they could, this in itself would be successful economic development.
In conclusion, the idea that a market intervention can have a short-term impact on the price (and, hence, producer incomes) is not as silly as you suggest. On the other hand, the notion that this kind of approach has anything but a negative dynamic impact on the market makes the proposal even sillier than you suggest.
Posted by: Franck | Mar 18, 2005 11:05:11 PM
