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March 06, 2006
Fair Trade and Free Trade.
As Stephen Pollard points out in The Thunderer. Free trade is fair trade.
One slight addition, as was pointed out by Owen Barder some time ago. The very fact that some people purchase fair trade items shows that it is, in at least some manner, a good thing. That people voluntarily purchase the items shows that they, for whatever reason, increase their happiness by doing so. As that is the goal, that we should all maximise our utility, that’s a good thing.
I do have a lot of complaints about fair trade, things like the insistence upon non-mechanization, which will perpetuate poverty, the longer term goals of commodity boards, of all trade being thus "fair" as if there is some immutable value that can be placed on goods other than what they receive in a free market.
But at the level of today, a voluntary arrangment that people may take part in or not as they wish, it’s a good thing.
March 6, 2006 in Trade | Permalink
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Comments
[I do have a lot of complaints about fair trade, things like the insistence upon non-mechanization]
???? source?? I really don't recall this being part of the fairtrade standards for coffee or cocoa, though I guess that individual FT buyers can set what conditions they like as long as they meet the FT minimum conditions for price fairness.
Posted by: dsquared | Mar 6, 2006 10:39:28 AM
(also note that the two markets in which Fairtrade first launched, coffee and cocoa, were really very monopsonistic indeed, so I'm not sure that you can say that free trade would necessarily have been "fair" in the way that you want to establish. There was certainly a lot of scope for Nestle and a couple of other big buyers to use the threat of Vietnam to play off other countries one against the other).
Posted by: dsquared | Mar 6, 2006 10:41:29 AM
Silly dsquared, don't you know that any and all distortions in the market must be caused by the government?
Tim adds: Don’t be silly Jim. Some and many might be appropriate statements but certainly not all. "Businessmen seldom gather together but to plot at the expense of the public" or whatever the Smith quote is, been around a few hundred years.
As to the mechanisation issue. A very quick google search:
http://www.ptree.co.uk/credentials.html
Handmade
As part of our Fair Trade policy, we promote traditional skills which are at risk of being lost due to the commercialisation and mechanisation of the garment industry.
Posted by: Jim | Mar 6, 2006 12:18:15 PM
Tim, that is part of "our fair trade policy" for a single retailer. It's not part of the fairtrade standard for cotton, although non-GM is and movement toward organic production is encouraged - you might disagree with both of these things but they are not the same as mechanisation.
Posted by: dsquared | Mar 6, 2006 1:14:15 PM
Tim, don't forget that it's an economists role to conduct means end analysis.
You're right to say that voluntary decisions, by definition, increase utility.
But if a person takes out a loan at 15% they might be even better off if an economist points out that they can find an alternative one at 10%.
It's my own belief that developing farmers would be better off if people buy the cheapest coffee possible and donate the premium they would have paid for Fairtrade to a decent charity.
We have to point out the unintended consequences that may well make actions inconsistant with the desires of the consumers.
Posted by: AJE | Mar 6, 2006 2:41:32 PM
[It's my own belief that developing farmers would be better off if people buy the cheapest coffee possible and donate the premium they would have paid for Fairtrade to a decent charity]
No they wouldn't, as the "decent charity" would presumably not regard farmers whose operations were in good enough shape for them to be taking on substantial export contracts as their top priority. In any case this is about as far from Hernando de Soto's "Mystery of Capital" thesis as you can get; the entire point of Fairtrade is to give farmers enough certainty of income to be able to borrow money and make investments in improving their farms, which it would clearly not be possible to do if your income was coming from a charity rather than an investment contract.
It is the job of an economist to think, full stop, and not just work backward from a politically motivated conclusion ("fairtrade is popular with well meaning lefties so it must be a bad idea") to a half-remembered talking point ("opportunity cost or something, I dunno") and it's a shame so few of them do it.
Posted by: dsquared | Mar 6, 2006 2:52:23 PM
Not sure if you're referring to me personally there (about politically motivated conclusions), if not then I agree with you, if so then shame on you.
the entire point of Fairtrade is to give farmers enough certainty of income to be able to borrow money and make investments in improving their farms
I was under the impression that Fairtrade certification limits the scale of operations and prevents inefficient farms from closing (Based on the reports mentioned here).
I don't see it as anymore of a sustainable solution than types of charity. Although i'm not being too specific when i say "decent charity" there are microlenders willing to let farmers borrow money. Ideally they'd be able to do so with no artificial constraint on the profitability they can glean from those investments.
You point to the uncertainty of income, but don't forget the more obvious solution to this problem - diversification (which comes from trade liberalisation).
Posted by: AJE | Mar 6, 2006 4:00:12 PM
AJE - The use of microloans presupposes that farmers can use their lands as collateral for the loan. This is not the case in most of Africa where land title remains in the hands of the government. This is why land reform is necessary (although not à la Mugabe). Loans also imply interest, and we are back to the errors of the big development banks that leave countries paying back more in interest than they are getting in aid.
I spend every day doling out charitable aid. And every day I become more and more convinced that aid is not the answer. Donors are rethinking it too. Even emergency programmes are beginning to tip towards income generation as an exit strategy in stabilised countries.
It may not be perfect, and it may need some rethinking, but from where I'm standing fair trade is a start. At least it gets a stable revenue into the farmer's pocket, one on which he can perhaps believe in a future.
Posted by: auntymarianne | Mar 6, 2006 5:45:48 PM
[Not sure if you're referring to me personally there (about politically motivated conclusions)]
Yes I was. That thing about "donating to a charity" was daft beyond belief.
[I was under the impression that Fairtrade certification limits the scale of operations and prevents inefficient farms from closing (Based on the reports mentioned here).]
God I hate the way everyone relies on reports these days. Why not just look at the standards? OK then, I'll give you this one for free.
1. Fairtrade standards are only defined for "small producers" of coffee, cocoa and dried fruit (there are "hired labour" standards for bananas, fresh fruit and vegetables and fruit juices).
2. "Small producers" standards are standards for dealing with co-operatives of small growers.
3. A "small grower" for fairtrade purposes is a farm which is substantially worked by a single (possibly extended) family and which does not use substantial amounts of hired labour.
4. To comply with the fairtrade "small producer organisations" standard, a co-operative must be made up of a majority of small growers and have 50% of the volume of the fairtrade certified product produced by small growers.
This is clearly not a material limit on the scale of operations; it's just a statement that Fairtrade is a program that's set up to help small family farms rather than big plantations. Of course, the unit size can be much larger for those commodities where a "hired labour" standard is defined. Fairtrade also clearly does not "prevent inefficient farms from closing" and it is hard to see how it possibly could. Any coffee plantation which is producing today is more or less by definition "efficient", or it would have shut down during the slump of the 1990s. You might think from the outside that it would be better for the small family farms to shut down and be replaced by big factory plantations, but the experience of those countries that have tried it is that as a development strategy this hasn't worked. Fairtrade think that there is a benefit from keeping these people owning their land, and that all they really need is the opportunity to sign long-term price-stabilised contracts, which can be supported by the brand premium Fairtrade is able to establish in Western markets.
Of course, for commodities where there is a "hired labour" standard, there are no limits on size at all.
[You point to the uncertainty of income, but don't forget the more obvious solution to this problem - diversification]
This isn't an "obvious" solution at all. How the heck do you "diversify" the output of a coffee plantation? What are you gonna grow there, mangetout? We are talking about small, family run farms here; the idea that you could get economically viable quantities of more than one cash crop out of them is just implausible. And if you did it would be hugely inefficient at harvesting time; crop diversification on coffee and cocoa plantations is usually a sign that a country is moving backwards from agriculture to subsistence farming.
[there are microlenders willing to let farmers borrow money]
Microlending is not particularly useful to farmers, because they don't deal in "micro" amounts; they want to buy things like tractors and barns and to provide working capital to hire temporary labour to harvest an entire year's crop. That's why what they need are long term contracts of exactly the sort that Fairtrade is prepared to write and large commodity buyers aren't.
Look I'm not saying that Fairtrade is the perfect solution here, but the people behind it have what appears to me to be the very substantial advantage of knowing at least a thing or two about agriculture, commodity markets and their financing, and as far as I can see, most of the people writing knocking copy against them are jobbing economists-about-town who don't, but want to pretend that anything which doesn't fit into a friction-free, first-best free trade model has to be somehow dodgy. This seems to me like a pretty poor state of affairs.
Posted by: dsquared | Mar 6, 2006 5:56:38 PM
[AJE - The use of microloans presupposes that farmers can use their lands as collateral for the loan.]
Auntymarianne; look at what you're saying here. There is no sense in which a loan that is collateralised against a producing farm can be called a "microloan". In actual fact, microfinance organisations don't have much involvement in agricultural lending, because it isn't microfinance. There are a bunch of agricultural lending projects that have started calling themselves "microlenders" because the publicity work carried out by Grameen Bank means that there is a lot of funding available for anything that calls itself "microfinance" these days. But calling an agricultural development bank a microlender doesn't make it into one, and these new "microlenders" have exactly the same problems and opportunities that the old agri-banks did.
Posted by: dsquared | Mar 6, 2006 6:02:24 PM
Dsquared - exactly.
Posted by: auntymarianne | Mar 6, 2006 6:45:22 PM
auntymarianne: i regret that you seemed to have read into my comment that i'm against land reform and think aid is the answer. If you're interested in what I do think, a few articles are here, here, here and here.
dsquared: Not sure why you're claiming that i'm just trumpeting political convictions (any evidence??) but then mock my use of reports and analysis. By all means point out other evidence, but why should I bother reading it if you've already rejected anything I say as being "worked out backwards"?
If you're interested in my responses to your points, and are open-minded about what I have to say, you know where I am.
But to continue on this thread serves little benefit to anyone.
Posted by: AJE | Mar 6, 2006 9:58:02 PM
[Not sure why you're claiming that i'm just trumpeting political convictions (any evidence??) but then mock my use of reports and analysis]
basically because you're expressing strong and definite opinions on a subject you don't really know very much about.
[By all means point out other evidence, but why should I bother reading it if you've already rejected anything I say as being "worked out backwards"?]
Because it might help you get a chance to work it out forwards.
[If you're interested in my responses to your points]
I won't be able to judge that until I see them.
Posted by: dsquared | Mar 6, 2006 10:17:08 PM
1. I haven't been strong & definite at all ("it's my own belief", "may occur", "i was under the impression"..)
2. My current understanding - or so i've intended - is a result of thinking about it forwards. If you reject anything I say because you've assumed that it's politcally driven, then there is ZERO point in me having a discussion with you.
3. It's possible to judge an interest in something prior to having seen it.
Despite all that, i've sent you an email on this issue and since I suspect no-one else is reading this exchange shall we end this thread?
Posted by: AJE | Mar 6, 2006 10:36:21 PM
