Is Fair Trade Good or Bad for Economic Development?

Introduction

The Aim of Fair Trade:

To offer the most disadvantaged producers in developing countries the opportunity to move out of extreme poverty through creating market access under beneficial rather than exploitive conditions. (Nicholls & Opal, 2005)

The objective is to empower producers to develop their own businesses and wider communities through international trade.

Fair Trade offers a new model of the producer-consumer relationship that reconnects production and consumption via an innovative supply chain model which distributes its economic benefits more fairly between all stakeholders.

Fair Trade attempts to address the gross imbalances in information and power that typify North-South supplier-buyer relationships by countering the current failures evident in many global markets.

Different Meanings for Different People

“We wouldn’t be selling this stuff if there wasn’t something in it for us in the context of sales benefits, the halo of Fair Trade, and brand benefits. So we started to get interested in it and we felt, frankly, that it was a sector that was ripe for something to happen” Hamish Renton, Tesco UK

“I used to live in a thatch hut with a mud floor. Now I have two concrete houses. And I have been able to educate my children. Sophia is at university and Laurence is a teacher. They had to work in a shrimp farm when they were younger, but my children now only go to school. We don’t need them to work.” Jeromino Tush, Cocoa Grower, Belize

“Fair trade is about working with marginalized producers – people on the edge of the international trading system. Its bringing them in and building their sustainability, their understanding of selling and trading and allowing them to survive often in situations were they normally wouldn’t. It’s about empowerment and the growth of output and quality for the groups and to get to a point where they no longer need to engage with the Fair Trade relationship. ” Diana Gayle, The Fair Trade Foundation

A History: Fairtrade Labelling

Fair Trade has been around for over 40 years, but was only given an official label during the late 1980’s.

1988 saw the launch of the first Fairtrade label, Max Havelaar, under the initiative of the Dutch development agency Solidaridad. The first ‘Fairtrade’ coffee from Mexico was sold into Dutch supermarkets.

In the late ‘80s/early ’90s the Max Havelaar initiative is replicated in several other markets across Europe and North America, including the “Fairtrade Mark” in the UK and Ireland.

In 1997 the Fairtrade Labelling Organizations International (FLO) was established in Bonn, Germany to unite the labeling initiatives under one umbrella and establish worldwide standards and certfication.

In 2002 FLO launches a new International Fairtrade Certification Mark. The goals of the launch were to improve the visibility of the Mark on supermarket shelves, facilitate cross border trade and simplify export procedures for both producers and exporters.

By 2007, 21 Labelling Initiatives are members of FLO International. New additions include Mexico and Australia/New Zealand.

A History: Fairtrade Foundation1992 saw the Fairtrade Foundation established by CAFOD, Christian Aid, Oxfam, Traidcraft and the World Development Movement, which was later joined by the Women's Institute.

By 1994 The first Fairtrade certified product, Green & Black’s Maya Gold Chocolate made with cocoa from Belize is launched.

In 1998 Bristol, Nottingham, Bath and Norwich City Councils become the first local authorities to convert to Fairtrade coffee and tea.

In 2000 Fairtrade chocolate bar, Dubble, with the aid of Comic Relief was launched, with an award winning education pack taking Fairtrade in 15,000 UK schools.

By 2004 the number of Fairtrade retail products reaches 350. The Fairtrade Mark celebrates its 10th Birthday and the Fairtrade Foundation wins the Charity of the Year award. Marks & Spencer switches all the coffee sold in its 198 in-store Café Revives to Fairtrade .Tesco unveils its Own Label range of Fairtrade products.

In 2007 loose Fairtrade certified bananas are launched by Sainsbury’s and Waitrose. A TNS public survey commissioned by the Fairtrade Foundation reveals that awareness of the FAIRTRADE Mark has risen to 57% of the adult population. Sales of Fairtrade certified products top £500m.

In 2009 Cadbury Dairy Milk commits to going Fairtrade. Fairtrade beauty products are launched. Starbucks roll out their 2008 announcement to go 100% Fairtrade for all espresso-based coffees in the UK and Ireland.

The Facts and Figures

Globally, consumers worldwide spent £1.6bn on Fair Trade certified products in 2007. This is a 47% increase on the previous year directly benefiting over 7 million people - farmers, workers and their families in 58 developing countries.

The table below shows the amount of money that has been spent on Fair Trade certified products in the UK measured in millions of pounds.

Year/Products

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Coffee 13.7 15.0 25.5 18.6 23.1 34.3 49.3 65.8 93.0 117.0 137.3 157.0

Tea 2.0 4.5 5.1 5.9 7.2 9.5 12.9 16.6 25.1 30.0 64.8 68.1

Cocoa Products

1.0 2.3 3.6 6.0 7.0 10.9 16.5 21.9 29.7 25.5 26.8 44.2

Honey Products

n/a n/a 0.9 3.2 4.9 6.1 3.4 3.5 3.4 2.7 5.2 4.6

Bananas n/a n/a 7.8 14.6 17.3 24.3 30.6 47.7 65.6 150.0 184.6 209.2

Flowers n/a n/a n/a n/a n/a n/a 4.3 5.7 14.0 24.0 33.4 33.0

Wine n/a n/a n/a n/a n/a n/a 1.5 3.3 5.3 8.2 10.0 16.4

Cotton n/a n/a n/a n/a n/a n/a n/a 0.2 4.5 34.8 77.9 50.1

Other n/a n/a n/a 2.2 3.5 7.2 22.3 30.3 45.7 100.8 172.6 219.4

TOTAL 16.7 21.8 32.9 50.5 63.0 92.3 140.8 195.0 286.3 493.0 712.6 799.0

The Economics of Fair Trade

Below is a list of market failures that occur in the global trading market. These failures lead to a gross imbalance in information and power between consumers and producers.

• Imperfect information• Lack of access to financial markets• Lack of access to credit• Inability to switch to other sources of income generation• Weak legal systems and enforcement of laws

Fair Trade directly addresses these problems to give producers access to information and the opportunity to gain bargaining power against Fair Trade product retailers.

How does Fair Trade Work?

The basic principles of Fair Trade include:

1. Direct purchasing from producers2. Transparent and long-term trading partnerships3. Agreed minimum prices4. Focus on development and technical assistance via the payment

to suppliers of an agreed social premium.

Within these four principles, direct trade and long term trading can improve the functioning of the export market for producers in developing countries and hence contribute to economic development.

1. Direct Trade with Producers

Fair Trade importers must, wherever possible, buy directly from a farming co-operative, a farming estate, or local producer group.

A co-operative structure is a situation where farmer members own shares in an umbrella organization, with equity ownership.

While estates, plantations, and large scale craft and textile manufacturers have historically enjoyed access to to export markets, small scale producers are typically isolated from direct export access unless organized into co-operatives.

To achieve of Fair Trade, microeconomic market failures must be corrected through retailers working directly with co-operatives.

Lack of Access to Markets

Farmers in developing countries have a lack of access to markets due to low funds and geographical location, making them reliant on middlemen to buy their products.

This link in the supply chain is exploitive as competition by buyers is rarely achieved resulting in farmers only receiving one price offer.

In a co-operative structure, resources are pooled together to buy or rent trucks which makes them less open to exploitation by middlemen and gives them greater access to markets.

However, it may be considered inefficient. Middlemen are better at taking products to the markets than top-heavy co-operatives.

Although they are more efficient, middlemen cartels means that farmers don’t receive as high a price if middlemen were in competition.

Co-operative formation allows direct access to export markets, with a higher price and hence higher incomes for producers.

Lack of Price Information

Farmers in remote locations do not know global market prices because of a lack of information obtaining tools, such as telephones, newspapers, radio news or the Internet. Information for these farmers is usually limited to one middleman that visits the farm.

When co-operations pool together they can invest in telephones and faxes etc to get more information from contracted retailers and other sources.

With this information producers are able to make decisions about the quantity and the quality at which they produce, given the global market equilibrium prices.

E.g. Cocoa farm in Ghana used co-op funds (only £100) to purchase scales to protect themselves from exploitive middlemen with rigged scales resulting in higher levels of income for the farm.

Lack of Quality Information

Small producers, on their own, have little direct market feedback from retailers in the North, which results in a lack of information about industry quality and general industry information.

Joining large export co-operatives open up many ways of direct communication with the North:• Hiring of English/German-speaking staff• Flying to conventions to meet possible clients•Hiring and training staff to send samples and descriptions of their products to clients

Co-operative structures and direct trade allow small-scale low-income farmers to deal directly with large traders in the north to address information imbalances in the trading system.

Lack of Competitive Credit

Small scale producers borrow money during the panting season for seeds and fertilser and pay the lender back, with interest, after they have sold their crop.

There is a lack of competition in the market for money borrowing. This means that producers only have one option in terms of who they borrow money from.

The become reliant on one lender as there is no competing offers and these financing rate can be as high as 100% per annum.

Farmers buy goods that they need on credit and are often expected to repay by selling their product for a lower-than market price.

This mechanism means that farmers remain in a state of continued indebtedness which places the trader in a position to sell products and buy producer products under increasingly favourable conditions.

Fair Trade standards require importers to provide 60% of the contract amount if asked by co-operative.

2. Long-Term Trading Relationships

Fair trade importers are required to sign long term trading contracts which smoothes out income and correct information failures and hence encourages constant growth and predictability.

Long term trading relationships improves the importer/producer relationship. Importers support and work with producers to overcome supply and quality problems. This also benefits consumers as the products they purchase are consistent in quality and price.

However, most of these contracts only extend from 6 to 12 months.

Sustainability

Many of the farmers are often left after the initial contract causing problems bigger than they were before. Farmers not caught in the Fair Trade safety net struggle against deflated market prices.

Fair trade cannot aid sustainable economic development, in fact it promotes the opposite, allowing some communities to settle in the primary sector and hold back from diversification and mechanization necessary in growth.

It also leads to the dangerous situation of being over reliant on the fragile commodities market.

3. The Floor PriceFair Trade standards require that all producers are paid a minimum price to cover costs which protects producers from volatile agricultural commodity market prices which may fall below sustainable levels.Fair Trade floor price=cost of production + cost of living + cost of complying with Fair Trade standards.

When market prices rise above the Fair Trade price buyers must pay the market price, although producers and traders can also negotiate price contracts on basis of quality etc.

The floor price is necessary as market prices can fall below costs of production and lead to chronic poverty and instability where these exports account for the main source in income in a developing community with few others resources.

Diagram: The Price Floor

The Floor-Price Drawbacks

a “well intentioned, interventionist scheme...doomed to end in failure."

1. The low prices of commodities such as coffee is due to overproduction. Paying a guaranteed Fair Trade premium 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 – Fair Trade coffee even further, making non-Fair Trade farmers poorer.

2. The floor price mechanism also encourages overproduction, according to Brink Lindsey of the Cato Institute, as sales of their produce are guaranteed. While benefiting a number of Fair Trade producers over the short run, Fair Trade critics worry about the impact on long run development and economic growth.

3. Labour intensive versus capital intensive.

4. The Social Premium

Social Fair Trade premium is paid on top of minimum price to give producers an opportunity to improve social, economic and environmental conditions.

This can increase development through improved health, education, infrastructure, and improvements to increase yield and quality.

The use of this money is decided democratically by the cooperative members so everyone gets a say in how their communities are improved.

Broader community can benefit from these improvements in social and economic capital, not just the Fair Trade producers- multiplier effects.

The Social Premium Myth

The social fair trade premium is undoubtedly a superb idea to provide underdeveloped communities with a chance to grow.

Though not opposed to the idea, we are concerned that global consumers are misled into believing that this premium will be entirely used in the communities.

In fact it may be more efficient to donate directly to charities in these countries as opposed to buying fair trade.

Who Gets What?

Other Impacts of Fair Trade

• FLO Fair Trade standards require farms and co-operatives who employ significant numbers of workers to abide by International Labour Organisation standards and domestic laws that regarding child labour, the right to organise, the use of dangerous chemicals and machinery, working hours, and other fundamental labour/human rights.

This results in decreased child labour, increased unions, better working conditions

The fair Trade process is, thus, an independent verification of wage and labour standards that may exist but which may not be enforced in producing countries.

Alternatives to Fair Trade

Regulation

Diversification

Reduce tariffs on imported goods

Early stages of Fair Trade, even so, it has grown very quickly and seems to have a promising future.