Sa-weet - thanks for posting this Tony! This is going to take me a few nights to finish reading though...
Thanks for posting! Coincidentally, I'm in the process of reading it RIGHT NOW!
I heard that this isn't the first time the Adam Smith Institute writes similar arguments. If I find some past publications I'll be sure to post.
This looks really interesting - I'm just starting to read a book on Fair Trade (http://www.amazon.ca/Fair-Trade-All-Promote-Development/dp/0199219982/ref=sr_1_6?ie=UTF8&s=books&qid=1204062545&sr=8-6)
So this will be a really interesting counter-point to the book. I'll post more when I've read the article.
Ian
This will be great to read in the run-up to ewb day with its fair trade focus. Thanks for posting, as I probably wouldn't have looked for it on my own.
It'll be awesome once we've all gotten through it and can discuss it!
-kelly
Ian,
I'd really like to know what you think of Fair Trade for All. I've been looking forward to it for a few months now since I first saw it in a store, but I've got a few books I'm working on before it. I read Making Globalization Work by Joseph Stiglitz this summer and liked it quite a bit (although I may have not fully appreciated/absorbed it all, my understanding of the topics wasn't too high back then - and is still climibing actually)
Cheers,
Florin
Have any of you heard of this faitrade clothing line?
http://www.fairindigo.com/about/fair_indigo_foundation.html
Thanx.
ali
Thanks Tony. At first blush, some of the points in the executive summary seems borderline laughable (particularly the final one: "The evidence is clear: fair trade is unfair, but free trade makes you rich.")
I think it's helpful to preface this reading with a word on the Adam Smith Institute. This think tank is notoriously hyper-liberal in their approach to economics (meaning they tend to love unfettered markets and despise regulation) and the Institute has had a considerable effect on public policy (especially in the 80s).
I recently read another fascinating Fair Trade article from the Adam Smith Institute (Lindsey, Brink. (2004) Grounds for Complaint? 'Fair trade' and the coffee crisis.) which convincingly outlines why the "half baked scheme" of Fair trade dreamed up through the "economic illiteracy...of the anti-globalization movement" is "doomed to end in failure".
At the heart of these arguments is the battle between choosing to liberalize markets or regulate them. Proponents of liberalization work towards optimum efficiency, while proponents of regulation work towards optimum equity. The 'efficiency' argument seems convincing - that with an efficient market, the size of the economic pie grows as large as possible, and so everybody's slice of that pie is bigger, making everybody better off. Not bad, eh?
Regulators think otherwise. They recognize that regulation makes the size of the pie smaller, but realize that the slices of the biggest possible pie aren't always reasonably cut. Some people have massive slices, while others barely get crumbs. They believe there is a balance between keeping the pie sufficiently large and making sure its slices are reasonably divided rather than being satisfied with marginally larger 'efficient' crumbs.
It comes down to this: Markets were created by people to serve people. Markets don't have a mechanism that deals with equity or fairness. People value fairness. Since markets serve people and people value fairness, they can choose to make markets more fair. Regulation of markets helps create fairness.
So keep that in mind when reading. I'm very excited.
Jeff
Exellent write-up Jeff. Reports like the one being disscused are nothing new. Similar ones are written about privitizing health care, cutting social programs etc. It is this type of "evidence" that comes from think tanks like the Adam Smith institute or the Fraser Institute that we must prove wrong. The mentality of a "rising tide that floats all boats" has been repeated for far too long and has proven to be empty rhetoric. Fair Trade is not flawless but it is a huge step in the right direction. According to these reports Fair Trade is inefficient and our alternative is to build economies on the backs of the poor. Haven't we done enough of that already?
Jeff
You bring up some pretty good points. With a name like the Adam Smith Institute it would hard to imagine that they don't have a strongly liberal bent.
However I don't think their argument is about regulation at all. Indeed in their conclusions they mention and support other organizations and certification schemes that help coffee producers.
Their central beef with fair trade is the price subsidy. They are certainly not against labor or environmental regulation.
Ricardo
You're right that they're nothing new, but fair trade is nothing like discussions about health care and other social programs. Your claim that "our alternative is to build economies on the backs of the poor" is not substantiated in the report itself.
Some highlights from the executive summary:
- Fair trade is unfair. It offers only a very small number of farmers a
higher, fixed price for their goods. These higher prices come at the expense of the great majority of farmers, who - unable to qualify for Fairtrade certification - are left even worse off.
This might be the strongest argument against, if true. Though farmers IN fair trade programs are well off, if those who are OUT are worse off, are we back at square one? Note that getting into these fair trade programs is not cheap.
- Many of the farmers helped by Fairtrade are in Mexico, a relatively developed country, and not in places like Ethiopia.
- Fair trade does not aid economic development. It operates to keep the
poor in their place, sustaining uncompetitive farmers on their land and
holding back diversification, mechanization, and moves up the value
chain. This denies future generations the chance of a better life.
This is not strictly true as farmers in the co-ops invest the extra money in schools for example. About the diversification, I don't know.
- Fair trade is targeted to help landowners, and not the agricultural labourers who suffer the severest poverty. Fairtrade rules actually make it more difficult for labourers to gain permanent, full-time employment.
- Just 10% of the premium consumers pay for Fairtrade actually goes to
the producer. Retailers pocket the rest.
- The consumer now has a wide variety of ethical alternatives to
Fairtrade, many of which represent more effective ways to fight poverty, increase the poor's standard of living and aid economic development.
- Fairtrade arose from the coffee crisis of the 1990s. This was not a free market failure. Governments tried to rig the market through the International Coffee Agreement and subsidized over-plantation with
the encouragement of well-meaning but misguided aid agencies. The
crash in prices was the inevitable result of this government
intervention, but coffee prices have largely recovered since then.
Specifically, the ICA was an American attempt to keep the economies of South America stable in the hopes that Communism would not spread there.
- Free trade is the most effective poverty reduction strategy the world has ever seen. If we really want to aid international development we should abolish barriers to trade in the rich world, and persuade the developing world to do the same. The evidence is clear: fair trade is unfair, but free trade makes you rich.
I don't find this point borderline laughable at all. I do disagree that barriers in the developing should be abolished as they certainly need protection to develop. But the overall point, that free trade promotes development, I find irrefutable. With all the talk of poverty in sub-Saharan Africa it is easy to forget that there have been countries who have been improved their living conditions: India, China, South Korea, Singapore, and many others, all through trading. Certainly there are problems as income disparity in China, for example, is a pressing problem. Also, the WTO has ruled many times against developed countries in their continued protection of markets, but to no avail.
I'm not saying full-blast free trade is the magic bullet, since we tried that in the early 1990s with the Washington Consensus and it didn't work. Shock therapy doesn't work. Industries in late-developing countries do need protection, but eventual integration into the trade system should be a goal for all.
I haven't really made up my mind about fair trade. I like the idea that it gives some farmers a predictable price. I'm not sure I like the idea it could (or does) make other farmers worse off. The typical free market argument is that coffee prices are low because there are too many coffee farmers, and that fair trade only reinforces the problem. What's needed, they argue, is for those farmers to start farming something else. However, how this is to be done and whether governments / NGOs / farmer co-ops have the means to do this is another question.
Haven't had much/any time to read the posted article, but I thought I would share a link and the opinion of a economics prof at U of M (Ian Hudson http://www.umanitoba.ca/faculties/arts/economics/hudson/ )
This link is great, but quite long so maybe skim it:
http://my.ewb.ca/home/ShowPost/37414
I was skeptical about the claim that fair trade hurts other farmers (for a number of reasons) so I asked the prof (Ian): "some people would say that if more people bought fair trade then the demand for regular coffee would go down and thus the price would go down even further hurting non Fair Trade farmers."
My attempt at reconstructing Ian Hudson's response:
-> right now most Fair Trade farmers can only sell a small margin (lets say 20%) of their grown coffee for FT prices. The other 80% is sold on the regular coffee market. Now if people started buying more FT, then lets assume that those farmers would be selling maybe 30% of their total coffee on the FT market. This has resulted in them moving 10% of their coffee off the regular market and, thus, lowering the supply of non-FT coffee. You lower the supply and you expect the price to go up. He said it would actually be helping non-FT farmers.
I had been kicking around this same idea before I asked, but seeing as how I have very little in technical knowledge of economics, I really had no idea. My problem (and I'm still a bit reserved) with his argument is that you are simultaneously decreasing supply of non-FT coffee (when more people buy FT), but the act of those people buying more FT coffee you are also decreasing demand for non-FT coffee. The exact relationship between supply and demand escapes me...
Keep up the great discussions! :)
An article in the Guardian regarding the Adam Smith Institute report:
http://commentisfree.guardian.co.uk/harry_phibbs/2008/02/fair_or_fashionable.html
Here is a quote from The Economist (Another liberal-bent publication) on fair trade from December 9 2006, and their explanation for what happens.
Paying a guaranteed Fairtrade premium -- in effect, a subsidy -- both prevents this signal from getting through and, by raising the average price paid for coffee, encourages more producers to enter the market. This then drives down the price of non-Fairtrade coffee even further, making non-Fairtrade farmers poorer.
Seems like a controversial topic for sure.
I should add: That particular economic anti-FT argument (And there are others) assumes that new producers will enter the market, which may not be true.
This whole thing is ripe for investigation, really.
Hey everyone,
I recently wrote a paper on the pros and cons of fair trade for a class on the social context of business (Tony I have to admit I wish this article had been published when I was doing my research). In the end, I found a lot more arguments against FT than for it . . . one of my main problems, though, turned out not to be about economics.
Fair Trade started with "Alternative Trade Organizations" in the 1960s - these were well-intentioned church groups and development organizations who bought little knick-knacks from local artisans and sold them in the western world in "solidarity with the poor". This gradually expanded into fair trade of many different goods. However, this thread of a western-imposed notion travels through the whole history. There are a few reasons this is a problem:
- There is a centuries-old power dynamic between north and south, rich and poor (yes, "us and them"). Is this affecting price and other business negotiations? Who in the fair trade partnership (the western buyer or the local producer) is likely to compromise more? How are cultural differences dealt with? The efficiency expected in most business dealings we are used to may, in the case of fair trade, overcome the needs of the southern partner. On a more philosophical level, how does each culture really define "fair"? Are expectations of both parties being met?
- There is evidence (although I am currently unable to quote the article this came from) that the "Fair Trade Premiums" added to the fair price of FT goods is not directed always by the local community. In many instances, it is the foreign FT buyer who dictates a large portion of that money's use - whether the community builds a school, latrines, improves processing facilities . . . who is to say that they really need those things?
These were the two main arguments in my paper, although they were a little longer and better backed-up. Overall, I just found that FT did not come across as a sustainable, locally-driven, and indeed "fair" idea. At least in terms of development - in terms of social change and awareness in Canada, I think fair trade can be very effective.
But then the question to consider is where we find the balance. Can we promote awareness of something that goes against our view of good development?
Oh and p.s.
Does anyone have an article on the big picture success of Fair Trade? I have read many warm and fuzzy success stories of individual farmers, but I am looking to hear (40 years down the line in this movement) that a community, region, economy is seeing growth and development as a result of Fair Trade. We discussed this in an education session last week, and no-one had heard anything at all.
thanks!
Great discussion. For anyone who is interested I have just created a post that contains a document about why EWB is promoting Fair Trade.
Preston
I agree with David and Sarah that what we really need is some factual investigation.
One of my problems with statements like:
Paying a guaranteed Fairtrade premium -- in effect, a subsidy -- both prevents this signal from getting through and, by raising the average price paid for coffee, encourages more producers to enter the market. This then drives down the price of non-Fairtrade coffee even further, making non-Fairtrade farmers poorer.
is that all of those statements (that I have encountered) are based on "thought" experiments. I'm no expert in economics, but what I've seen from economics profs (econtalk.org), is that these thought experiments are pretty much like "if Sue does X and Bob does Y, then Z should happen". They take theoritical situations and use their reasoning to decide the outcome. My big problem with this is that the people doing these thought experiments usually have never visited/lived in the area in which their thought experiment takes place.
I would say some of the key learnings from EWB for me have been that these types of "thought" experiments should be taken as just an experiment and likely worth NOTHING. Example: EWB doesn't believe that you can design technologies/solutions from within Canada to solve other people's problems (half a world away). Why do we think that some economist from Stanford (or wherever) can accurately predict what will happen with markets in say Ghana?
Transfair USA has a advanced FAQ on FT:
"While in theory, higher Fair Trade prices might incent farmers to increase production, in practice we have often seen the opposite... In fact, studies show that when Fair Trade markets are operating in rural areas, prices paid to non-Fair Trade farmers actually increase. This is because Fair Trade makes accurate market information more widely available to previously isolated farmers, and forces local intermediaries to compete with prices paid to farmers by Fair Trade cooperatives."
http://transfairusa.org/content/resources/faq-advanced.php#oversupply
I had a chance to speak with a representative from La Siembra (Caitlin Peeling) after a panel on FT and I asked her whether the FLO will continue to certify producers in saturated FT markets like coffee. She said that the FLO is not certifying more people in saturated markets. Jeff you met with someone from transfair, is this true? This opens a few more cans of what is "fair"... but may challenge that overproduction concern.
One thing that I feel is really important is for discussions like this to move towards informed discussion. Personal opinions are valuable and important, but it becomes soooooo much more valuable and useful when people include their sources of information / facts.
Before making blanket statements like "Fair Trade saves the world!" or "Fair Trade goes against our view of good development", what we really need is facts... and yes... maybe some opinions :)
Just another perspective on the the argument that it was aid and regulation which caused the coffee crisis:
Dean Cycon, of Dean's Beans (a large and extremely progressive FT green bean coffee buyer and distributor), explains in his book "Javatrekkers" that the coffee crisis was not the product of aid at all, but was rather the by-product of the destructive and embarrassing "structural adjustment" policies the world bank enacted on borrower countries. By forcing farmers to switch to what was deemed a cash crop (coffee) to pay back the loans (and interest on the loans), the World Bank prompted a massive overloading of coffee to the market. Which would make it more a product of markets than the style of regulation or price control used in the FT system, as the coffee crisis occurred when the unregulated price hit rock-bottom. Another argument made in the book is that the bloating of the market with "overpriced" FT coffee simply doesn't happen. If a farmer can only sell 20% on the FT market for a reasonable price, what incentive is there to produce more? In the book, Cycon explains that the opposite is more common, with FT farmers decreasing their yield to maximize the percentage they can sell on the FT market. It doesn't make sense for a farmer to sell upwards of 80% of their produce, which they've produced to the higher FT standard and paid money to certify, on a market which is more than likely offering less than the cost of production.
I'm personally averse to taking any arguments made in this report without some serious evaluation, as the Adam Smith Institute, if you do a background check, is founded by the same people who started the Heritage Foundation, one of the farthest right-leaning Ayn Randian institutes in the world, so their opinion on an economic system that is anything other than absolute market freedom where nothing can't be bought or sold is always going to be spun in a negative direction.
but was rather the by-product of the destructive and embarrassing "structural adjustment" policies the world bank enacted on borrower countries. By forcing farmers to switch to what was deemed a cash crop (coffee) to pay back the loans (and interest on the loans), the World Bank prompted a massive overloading of coffee to the market.
I've never heard that SAPs explicitly forced farmers to switch to coffee. What I have heard, (And this is from the Javatrekkers website) is the the SAPs forced governments to cut their spending, and within this spending was probably money for schools, training, and possibly economic diversification.
Also I attached the EWB-National document that Preston was talking about; it outlines why EWB is doing fair trade for EWB Day, and covers many of the issues we're talking about.
Highlights:
"For Fair Trade Certified producers, it represents a substantial upside in terms of price stability and premium, and some benefits around employment and environmental practices. The vast majority of non-certified growers are simply unaffected by Fair Trade. This is because the Fair Trade market is a very small share of the market, and because it is a differentiated product from the rest of the market.
Uncertified producers may be affected in one of two ways at the local level:
o There can be an upward pressure on local coffee prices, and Fair Trade
creates an opportunity to learn about a better form of organization.
o There can be a downward pressure on local prices and social exclusion
from not being a part of the cooperative.
o Regardless, a very small number of uncertified producers appear to be
affected either positively or negatively.
From the Q&A section:
External question:
Does Fair Trade promote overproduction by distorting market signals?
External answer:
Currently, the Fair Trade market is too small to distort market signals and much of the premium is invested in the community not directly into the farmer's pocket.
Internal discussion:
While the market is currently to small, if the Fair Trade market grew it could depress prices in the conventional coffee market. In addition, the increased price could very well encourage farmers to grow more coffee or at
least not switch to other crops when there is a glut in the coffee market. On the other hand, coffee trees can last for 15 years and are a large investment so it is not easy to switch to other crops and Fair Trade organizations promote and facilitate diversification into other crops. There are some outstanding questions to be answered as the Fair Trade
movement grows, but they are not current issues.
I've never heard that SAPs explicitly forced farmers to switch to coffee. What I have heard, (And this is from the Javatrekkers website) is the the SAPs forced governments to cut their spending, and within this spending was probably money for schools, training, and possibly economic diversification.
I think part of the issue is also the trade liberalization that came with such initiatives. When I was doing some research for a Fair Trade discussion last year, I remember the role of Vietnam played in the coffee market crisis after the support of the WTO/bilateral trade agreements with the US came up quite often. (the sort of trade liberalization I would think think tanks like the Adam Smith Institute would promote)
The quick goggling now seems to support the more indirect links between oversupply and market agreements made by the WTO, rather than an explicit directive to switch to coffee.
Long article about Vietnam/coffee with more details: http://www.urban-renaissance.org/urbanren/index.cfm?DSP=content&ContentID=10057
Article with questionable credibility/sources about The Big 4 (Nestle, Kraft, Proctor and Gamble, and Sara Lee): http://coffeegeek.com/opinions/markprince/11-27-2002
The wikipedia page about Vietnam's economy: http://en.wikipedia.org/wiki/Economy_of_Vietnam
(again, likely heralded by Adam Smith/The Economist as a success story in terms of economic growth, access to markets, etc.)
Fair trade
