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Common Error No. 101 Print E-mail
Written by Dr Madsen Pirie   
Friday, 25 April 2008

101. "We should help third world producers by buying Fair Trade goods."

Actually, we should help third world producers by buying more of everything they produce. 'Fair Trade' aims to give higher prices to approved producers in the developing world, inevitably at the expense of others. It tries to manage trade, setting the price it thinks more appropriate than the market price, and giving some of the extra money paid to producers who have signed up to its organization.

But only a small proportion of the price differential finds its way back to people in poorer countries. The movement is big on heart-warming individual anecdotes, but scores low on the overall statistics. Only a tiny proportion of goods are designated as 'fair trade,' and most of the higher prices paid are swallowed up before they reach the original third world producer.

It might make a few people feel good, but it is not going to be a significant factor in the drive of poor countries to become richer. They do that by selling goods that the world wants. Often this starts with primary products, but real development can come when they gradually add value to their products by such things as refining and marketing, and take more of the value back to their own country.

Countries do not stay poor because we all pay too little for our coffee. Coffee responds to market forces, and some of these countries over-expanded production, with an increased supply that caused a price fall. Some have sensibly moved into added value, doing the processing, packaging and branding themselves for greater returns. If 'fair trade' keeps more basic coffee-growers in business, it contributes to that over-supply and depressed price.

We could help poor countries most not by trying to manage a small part of the market at inflated prices, but by removing our tariffs and subsidies, and buying as many of their goods as we can.
 

Comments (2)Add Comment
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written by Stewart, April 25, 2008
As I understand it, Fair Trade is as much about working conditions as it is pay. It almost doesn't matter if no more money is getting to the producers - what matters is that we know their employees enjoy a certain level of safety and respect at work. Anyway, If I pay 50p more for Fair Trade, I don't expect all of that 50p to direct to the producers. I just expect the producers to be paid fairly for their work. The rest goes to Cafe Direct for the value added in bringing me this service.

Furthermore, companies like Cafe Direct are not "setting the price it thinks more appropriate than the market price". They are selling their goods to the same market as Nescafe - it is consumers who are willing to pay more to guarantee the working conditions of those who have grown the coffee. This is a good example of the market putting a value on something as intangible as labour rights -- free market economics at its best!

So yes - in fact, buying Fair Trade does benefit third world producers. If you had instead titled this 'common error' as "We should help third world economies by buying Fair Trade goods", I think you would have a much stronger case.
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written by Nick Kaplan, April 29, 2008
Stewart; That all sounds very nice but it is unfortunately not quite how it works. The problem is that not a single country has ever managed to achieve any significant level of development whilst selling primary goods. The only way for a country to develop, or at least start the process of development, is by developing secondary industries and exporting. This is what all the Asian Tigers did and have benefited hugely. Such a move can only be achieved if individuals stop subsistence farming and which, unsurprisingly, will only ever keep individuals on a subsistence income (the whole point of development being to get individuals not just to subsist but to prosper). The problem therefore with fair trade is that it encourages such farmers to stay in markets they quite clearly should have left a long time ago. If the market Price is low it means costs need to be cut if a profit is going to be made, this will only be achieved through using technology which will vastly improve the efficiency of farming making it far less labour intensive and more profitable. This will lead to structural changes in the economy, as farming becomes mechanised and less labour intensive less jobs will be available in the farming sector whilst demand will go up in the secondary sector which produces the machines the remaining farmers need. These remaining farmers will earn significantly more than their former subsistence income, whilst the development of a manufacturing sector will lead to the rise of higher paid jobs and wide scale development (so long as trade barriers are lifted). So while the sentiment of fair trade is right (in that it recognises that countries will only develop as part of a global market, not by aid alone), its naive benevolence ends up doing more harm than good, by stopping the economies involved transforming into economies with a reasonable chance to prosper.

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