Fair Trade For Some, Poverty For Others

Some of you will know that the past two weeks have been  ‘Fairtrade Fortnight’, and today brings the end to 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 do actively try to identify the poorest farmers, but this has some unfortunate side-effects. Because this creates costs in obtaining creditation, 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). The unfortunate side-effect of this? The poorest countries then 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 don’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 out-dated techniques on crops that perhaps the country is ill-suited to (as Fairtrade does). There is no doubt that 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.

Republished as “Fairtrade for some, poverty for others” in Trinity News (23rd of March, 2010).

© The Free Marketeer 2010

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