Fairtrade for some, poverty for others

Jonathan Wyse takes a look at the downside of the Fairtrade movement from the free-market economist’s perspective and argues that the organisation may be doing more harm than good.

As some of you will know, “Fairtrade Fortnight”, overlapping the end of February and beginning of March, saw an exhaustive media campaign persuading consumers that they should switch over to Fairtrade products. It’s all very well-meaning, and certainly makes consumers feel good about themselves. But does Fairtrade actually make life better for the poorest farmers in the world? The more ethical policy would be to embrace free trade and stop keeping prices artificially high.
Fairtrade does actively try to identify the poorest farmers, but this has some unfortunate side-effects. Because this creates costs, it disadvantages the poor who have little access to capital and live hand-to-mouth. This explains why Fairtrade is most common in Mexico (a relatively affluent country) as opposed to Ethiopia or Rwanda (extremely poor countries that really need our help). So what are the unfortunate side-effects of this? The poorest countries lose business to more affluent farmers, because demand flows to the Fairtrade products coming from Mexico.
If poor farmers make it into the Fairtrade scheme though, things aren’t much better. Fairtrade bureaucrats will kick out farmers if they break rules meant to exclude the rich who don’t need help. What are some of the indicators that the farmer should be kept out of the scheme? If you’d rather maintain small business status than join a co-operative, Fairtrade doesn’t want your coffee. Apart from the unnecessary infringement on individual agency, the co-operatives are often corrupt and the incentives created discourage effort from individual farmers. But if they don’t join up, they’ll lose business.
Now, consider the Fairtrade farmer who’s considering expanding his farm and hiring full-time workers. It’s clearly an economical decision if he’s considering and can afford it. Indeed, mechanisation and economies of scale are the only way to develop these industries. But if the size of his farm goes beyond 12 acres, he’s kicked out of the Fairtrade scheme. Thus it’s more profitable to maintain his small farm and spurn the expansion of his enterprise – along with the boon to local employment this would bring. How do these regulations help the developing world?
So if you want to help people in the world’s poorest nations, it’s better to spurn Fairtrade and donate the difference in price to the countless charities promoting foreign economic development. Moreover, donating to them provides help that doesn’t require the recipient nation to spurn modern technology and continue using outdated techniques on crops that perhaps the climate of the country is ill-suited to (as Fairtrade does). These countries need our help, but they should be encouraged to look forwards, not backwards.
If you consume Fairtrade products, read the literature and educate yourself to the real harm that this well-meaning organisation is doing. Even if you question the reasoning behind them, you can’t challenge the facts: only about 5% of the price of a Fairtrade chocolate bar even makes it to the relevant country. So when you pay that 20% more for the Fairtrade feel-good factor, where do you think all that money goes?
Unfortunately, shops treat Fairtrade as a kind of high-quality line. They know that consumers will pay the premium in the hope that it is justified by the amount that actually supports farmers in the developing world. Thus, prices and profits rise to reflect the inelastic demand with respect to price. So where does that price premium go? If you’re an ethical consumer, you should be asking that question.

Jonathan Wyse blogs under the name of the Freemarketeer.

Fairtrade facts

Fairtrade follows a market-based approach to development. The main idea is to give poor farmers in Less Developed Countries access to markets, while ensuring that they remain protected from the volatility of commodity prices.
According to the Fairtrade website, the movement “is about better prices, decent working conditions, local sustainability, and fair terms of trade for farmers and workers in the developing world”. One of the key features of the organisation is that the producers must be paid a “sustainable price”.
The current social movement has its origins in Europe in the 1960s but attempts to develop a similar movement by NGOs date back to the 1940s and 50s.
The orgainisation has its own independent consumer label which guarantees that the products it certifies adhere to the principle of fair trade (fair prices for producers, concern for the environment etc).
The main products carrying the Fairtrade logo are: coffee, brazil nuts, bananas, cotton, tea, olive oil, citrus fruits and cocoa products.
In 2008, sales of Fairtrade products were valued at US$4.08 billion.
The organisation has come into conflict with thinkers on both sides of the political spectrum. Those on the right insist that the price supports are distortionary and harmful to the producer; some on the left criticise the movement for not adequately challenging the economic system.