Stop buying Fairtrade - buy infrastructure pineapples instead

[Koala Boy]

This is going to be a long post, so bear with me.

I’ve long harboured these thoughts about Fairtrade, and decided to air them today. What follows may re-hash arguments you’ve previously heard, if so please scroll down to the bottom where I lay out my alternative approach.

To save critics the trouble, I’m going to point out now that I have no empirical evidence to back up my views. I encourage anyone who has evidence supporting or refuting my position to bring it to my attention. I was seriously thinking of writing my dissertation on the effects of Fairtrade in emerging markets, but I was worried a lack of data would hamper any empirical study I attempted.

Where does the money go?

Yesterday evening, I was in Tesco buying some orange juice (not the tall cartons, the traditional-shaped blue ones). A carton of standard juice costs 57p. A carton of Fairtrade juice costs 79p, so is (here comes the maths bit, concentrate) is 37.3% more expensive.

I had a think about where this money is going. First, I’ve assumed Tesco uses mark-up pricing, and I have it on good authority that supermarkets do this. Cartons of juice have a medium shelf life, so Tesco’s mark-up is probably in the region of 5-6%, lets say 5% (long shelf-life products have larger margins, and short shelf-life products have smaller margins).

That means that buying, packaging and shipping a cartons-worth of the normal juice sets them back a little more than 54p, leaving 3p of pure profit for Tesco. Similarly, if we assume Tesco does not mark-up Fairtrade juice to a larger proportion (why would they, as they care so much about the developing world, to take advantage of the Fairtrade scheme in such a way), the Fairtrade variety will cost Tesco 75p. That means it costs Tesco nearly 39% more to bring the Fairtrade juice to market. I’ll leave out the fancy packaging used on Fairtrade goods.

So we’ve assumed away the possibility already that Tesco does not profit directly from offering Fairtrade juice. Now the premise of Fairtrade is that growers of oranges, bananas, chocolate, coffee and whatnot are paid a “fair” price for their produce. Quite why the market price isn’t fair I don’t know, but I imagine the idea is that they are paid over the market price for their oranges, in order to alleviate poverty. As far as I know, the Fairtrade movement operates through an organisation (a co-operative I believe) which acts as an intermediary, buying the produce at the inflated price and selling it onto suppliers like Tesco. For all their good intentions, this co-operative must operate a zero-profit policy, surely? So they must sell the produce to Tesco at zero profit, which means the difference between the price they buy the produce for and the price they sell it for should only be enough to cover their own administration and transport costs, the wages of their staff, and to protect themselves against market risk and exchange rate risk. Market risk is of course the risk posed to them by fluctuating prices, a big problem in world food markets, and exchange rate risk is the risk of unfavourable swings in the exchange rate, obviously. Luckily, both forward forex markets and commodity futures markets exist, which allows them to hedge against these risks, so the cost to the co-operative is minimised, if it is run efficiently. Of course, the lack of a profit motive ensures they won’t bother to operate efficiently, but we’ll pretend they do.

Now remember Tesco is paying 39% more for a carton of Fairtrade juice. How much goes to the Fairtrade organisation to compensate them for their hard work, I don’t know. The rest goes to farmer, we believe. The poor African orange-grower who was barely scraping a living before, and can now buy Ikea furniture and send his kids to school to be taught that condoms are evil, all because of Fairtrade.

What good does your 22p do?

Short answer? A lot less than if you’d bought normal juice and donated 22p to charity, that’s for sure.

Long answer? My initial thinking here was that the effect of an artificially high price would be the same as the effect of the Common Agricultural Policy, which helps family farmers not a jot. The reason for this is that large agribusinesses expand production to take advantage of the larger profit margins, and new businesses enter the market, reducing this profit margin back to the normal level. Family farms still cannot compete against the large businesses, and we end up back where we started, but with a couple mountains we didn’t have before.

Then I thought that the good-hearted Fairtrade people couldn’t possibly be that stupid – they must selectively choose small family farms to pay extra money to. Well here’s a few adverse effects that this can cause.

Adverse effect #1 – The money goes to landlords.

These quaint family farmers? Don’t actually own their own land most of the time. They rent it from landlords. Now that Fairtrade money is heading into the farmer’s pockets, what do the landlords do? That’s right, raise the rent. So the money goes to the landlords, who were already relatively rich.

Adverse effect #2 – People will quit their jobs to start growing oranges

Even if the landlords don’t snigger evilly as they bump up their prices, the market price of rent will increase anyway. Because now an incentive exists for other people to quit their jobs in factories making things their country doesn’t need, like medicines or clothing, and start renting a plot of land to grow oranges. So the rent increases until this incentive is reduced, and the workforce of the country consists of less factory workers taking advantage of the division of labour, and more people subsistence farming.

Here’s my question – how the hell does that help the country develop?

How does paying people extra to grow bananas do anything other than turn them into a nation of banana growers?

Infrastructure Pineapples
I want people to stop buying Fairtrade goods. It’s pointless. You want to help developing countries? Buy normal goods and donate the difference to a charity. If you instead spend the extra to buy Fairtrade, you don’t know for sure the money is doing good. Some of it goes to running the Fairtrade organisation. Some might even be Tesco’s profit. And the part that does go to the producers is likely to cause adverse economic effects.

If you still feel the need to somehow tie your consumption to your third world aid, then I propose a new scheme – it’s called infrastructure pineapples. Tesco buys pineapples from the usual channels, but sells half of them from a different basket with a different label, for 10p more. The 10p is donated to a charitable organisation with the sole purpose of paying companies in the developing world to build infrastructure to help their economies grow, like roads and mobile phone masts (I actually have evidence for this – the introduction of mobile phones helps economic development for all kinds of reasons - an increase of ten mobile phones per 100 people boosts GDP growth by 0.6 percentage points, in your average developing country).

In conclusion, stop buying Fairtrade please. Buy infrastructure pineapples instead. And my final remark is that I wish I’d thought of Fairtrade first – I’d be a millionaire.

[hr]Stick it up your jumper
IMAGE:images.google.co.uk/images?q=tbn:kD6MwnrIVS0J:www.lovecorner.it/peluches/koala.jpg

[flarewearer]

Where's Alex S when you need him?

[hr][s]Have you ever wondered how you get triangles from a cow?
You need butter, milk and cheese, and an equilateral chainsaw.[/s]
http://www.magnificentoctopus.com/

[amac]

I've never really thought about it but what you're saying make a lot of sense. Finally first year economics is coming in handy!

[Marco Biagi]

Adverse effect #1 - I believe, but am not sure, that the co-operatives used in fairtrade agreements as part of the setup use land that they as an entity own.

Adverse effect #2 - The fairtrade price is a guaranteed minimum price. Quite often the actual market price is above, in which case the market price is, as one would expect, used. In effect, the fairtrade price is an insurance that allows long-term planning and development. That means that the margin is not sufficiently high to inspire mass movement out of proto-industrialisation. It certainly causes far less damage to industrialisation than neoliberal fairtrade policies which would see the economies competing on an 'even' playing field with developed ones and reduce developing world production to agricultural exportation at market rates on subsistence levels.

There is also a premium paid with a fairtrade deal that is ring-fenced for 'development' projects - i.e. infrastructure, health and education. This makes up a considerable proportion of the price difference and seems broadly similar to 'infrastructure pineapples'.

On the macro-scale, fairtrade wouldn't be universalisable, I agree (for reasons I'll go into somewhere else, because I have to leave very shortly). However, in the actually existing current world, fairtrade is a damn good way of assisting the developing world in a way that gives them ownership through at least a form of market mechanism, rather than being 'charity'.

I would also advance the hypothesis that there is already a strong correlation in action, with those who buy fairtrade also being those who donate to development charities.

[Marco Biagi]

[s]flarewearer wrote on 13:16, 19th Mar 2005:
Where's Alex S when you need him?

Probably invading Poland.

[flossy]

Who's Alex S?

[Marco Biagi]

A St Andrews dropout with more ideology and money than sense. He founded the Liberty Club.

See the Alex S Institute at:
http://www.globalizationinstitute.org/

[flarewearer]

He was the epitome of tim nice but dim, he was interviewed in last weeks big issue about this topic.

[hr][s]Have you ever wondered how you get triangles from a cow?
You need butter, milk and cheese, and an equilateral chainsaw.[/s]
http://www.magnificentoctopus.com/

[David Bean]

Oh, Alex is great, though! He and I still keep in touch - in fact, he'll probably read this thread in about five minutes, so hi, Alex! (Waves)

The last time he was in St Andrews, it was to give a talk about this very subject. He touched upon a lot of the issues brought out here, but also noted that a lot of the fair trade money is directed towards areas of the world that are less poor than others already - Brazil, for instance, he cited as one of the major recipients of 'Fair' Trade largesse. A related issue I'd like to raise, in response to Marco, is that if it is the case that 'Fair' Trade money usually goes to primary producers who own their own land, this is another example of money not being directed to the least well off, since these farmers are likely to be wealthier in real terms than those who do have to rent the land they farm, or operate in the kind of feudal system that still operates in some parts of the world.

My view of 'Fair' Trade is that it is laudable enough in its aims, and Marco is correct that there is often a correlation between its consumers and those who donate to charity; but these people's benevolence may be misguided, because there are better things that they could be getting up to (just as Marco and I agree that those who campaigned for the banning of foxhunting on grounds of animal welfare would have made far better use of their time campaigning against battery farming). Alex proposed that funding be diverted to developmental organisations as well, reasoning that existing overcapacity is one of the main reasons for the low market value of primary produce such as unrefined coffee and cocoa, and only through development can countries' economies be offered a viable alternative that would in turn reduce this aggregate supply, thereby increasing price.

My own view goes a little farther. It would be possible, as I was saying on Marco's LiveJournal the other day, for poor countries to develop specifically in the field of refining their primary produce to something closer to the finished goods at market, such as producing instant coffee or chocolate bars. This would add extra value which would stay in the poor countries and contribute to their economies instead of those of the (comparatively rich) consumers and, as the original produce is bulk-reducing, it would be a more efficient means of production too as transport costs would fall. However, as things stand this cannot happen, because we rich countries have deliberately distorted the market to prevent such development, by imposing swingeing tarriffs against these finished goods as they enter, say, the EU or NAFTA. We do this because whilst our climates prevent us from growing coffee or cocoa, it is to the advantage of our economies that the value added in the refinement processes should remain here, instead of being outsourced to the Third World. It is my argument that this policy is not only inefficient, but also highly immoral, and should be stopped. As Johan Norberg writes:

"The iron curtain between East and West has been replaced with a customs curtain between North and South. This is not just an act of ommission, it is a deliberate attempt to keep poor states out of the running. They may sell us things which we are unable to produce ourselves, but heaven help them if they can put us out of business by doing something which we can, but doing it cheaper and better." (Johan Norberg, 'In Defence of Global Capitalism'.)

This is why those who campaign against globalisation have missed the point: yes, Western states often do behave reprehensibly, but what we need in response is more freedom, not less. 'Fair' Trade merely encourages us to concentrate upon the wrong priorities.

[hr]"For what shall it profit a man if he shall gain the whole world and lose his own soul?- Matthew 16:26

[Marco Biagi]

This one's going to be very long too.

The problem with fairtrade, if any, is that unfortunately the current selling point of developing countries is cheap labour. Trade rules on, for example, global minimum labour standards have generally been most enthusiastically advanced by US trade unions (and quite a few Democrats). Their agenda is almost unashamedly to prevent production jobs leaving the already-rich US for the developing world, who can undercut them. The developing countries themselves consistently argue against them, because they know that without the ability to undercut Western producers through low wages, they wouldn't have any selling point at all.

This does not mean that low labour standards are good and should be kept. The problem is that introducing higher ones on their own would not be sufficient. Similarly, if all we did was make *all* trade into fairtrade, we would basically price the developing world out of most of the market.

On a purely market basis, most of the developing world could undercut the developed on agricultural products. However, the US, EU and Japan all have government-funded subsidy schemes to keep farmers in business that artifically lower their production costs. While there are good arguments for keeping those for the genuine family farm, such a concept is rapidly out of date. Most of the rural developed world is actually run by large corporate agribusinesses that are soaking up these subsidies at a tremendous rate and really shouldn't need them. The 2005 EU budget projects spending on agriculture to be 51.4bn Euros - some 43.1% of its total. If free trade rules on removing artificial state support have any valid application, it's on those of us already rich enough globally that we could do without such subsidies.

In fact, those subsidies would be much better spent as aid to the developing world so that it can actively *change* its comparative advantage, boosting its human and financial capital. Giving mobile phones may boost GDP, but the single factor that has every time improved development factors from GDP to infant mortality is education. In order to be effective, education also requires adequate food supply and basic minimums. Education spending is actually less efficient in the developing world than the developed because, basically, if you're starving your first concern is finding food and your second is learning the alphabet.

However, the public sectors required to drive such educational measures in developing economies are weak because there is little taxation base. Aid can help this - especially if the developed countries actually give the 0.7% of national income in aid that we promised in 1970. That's a tiny amount when compared with the 30-something percent we spend on the domestic welfare state. At present only a handful of countries give this amount - most in fact gave more in 1970 than they do now. Britain gives 0.34% while Italy and the US are the worst - 0.2%. Private charitable donation increases that by about 0.00-0.05%. Much of this aid is tied to conditions such as using companies of the donor state, causing much of the wealth to return. Countries can also be required to embark on just the sort of liberalisation of markets that the developed world refuses to undertake in agriculture - this doesn't just damage them, it undermines their fundamental freedom to decide their own future and run themselves.

In any case, aid doesn't help much if the countries then have to spend half their public budgets on repayments of debts they borrowed (generally about thirty years ago) on our advice. Do you want some stats? Guinea Bissau has higher debt than its entire annual national wealth (in GDP terms). Dividing the debt by population, every man, woman and child in Trinidad & Tobago (a strong democracy) owes the West $2535.75. Three quarters of all of Brazil's export earnings get spent on debt repayments.

While there are still a lot of dictatorships out there, a surprising number of established or emergent democracies exist and are treated little different to the rest. Even where dictatorships have to make repayments, it might make sense to divert the debt repayments into UN-based aid programmes into their countries to show that even if their leaders don't care about the population the rest of us do.

So, ideally I'd like to see us...
1) make trade fair (by removing Western subsidies but allowing them in the developing world)
2) drop the debt
3) and increase aid while removing its conditions

Funnily enough, I'm not the only one. http://www.makepovertyhistory.org

Until then I will do my best to buy coffee and chocolate made by people in countries that need the trade but who are not having to endure near-slavery conditions.

[Marco Biagi]

He touched upon a lot of the issues brought out here, but also noted that a lot of the fair trade money is directed towards areas of the world that are less poor than others already - Brazil, for instance, he cited as one of the major recipients of 'Fair' Trade largesse.

Brazil may have a mean GDP of about $21/day, but it has one of the most unequal income distributions in the world. The top 10% of people earn 48% of the wealth. In the UK by comparison, they earn 27.7%. The effect is a huge underclass - 11.6% of their population (about 20 million people) live on less than the local purchasing power equivalent of $1/day, with another 25 million on between $1/ and $2/day (World Bank, 2002 - source available on request). That's a lot of people. In fact, only India, China, Nigeria, Pakistan, Bangladesh and Ethiopia have more people living on less than $1/day.

Brazil is poor. In fact, most of the world is poor. Deal with it.

And if you're interested, if we took all the countries of the world and combined their populations to calculate income distribution, it would be more unequal than Brazil.

A related issue I'd like to raise, in response to Marco, is that if it is the case that 'Fair' Trade money usually goes to primary producers who own their own land, this is another example of money not being directed to the least well off, since these farmers are likely to be wealthier in real terms than those who do have to rent the land they farm, or operate in the kind of feudal system that still operates in some parts of the world.

Yes, they are better off because they're members of a fairtrade co-operative. That's the point.

[Marco Biagi]

He was the epitome of tim nice but dim

Like hell. That was an act, or at least a lucky way of coming across. Like Boris Johnson.

As Lara said during the last Nestle referendum - "He doesn't think they're not doing what we say. He just doesn't care." (allegedly, I quickly add)

[Anon.]

[s]flossy wrote on 13:50, 19th Mar 2005:
Who's Alex S?

My academic mother.

[David Bean]

[s]Marco Biagi wrote on 16:08, 19th Mar 2005:
As Lara said during the last Nestle referendum - "He doesn't think they're not doing what we say. He just doesn't [i]care." (allegedly, I quickly add)
[/i]

I'm damn sure I didn't believe it! When I asked Richard Vianello at the hecklings to prove to me that the claims weren't just a bunch of anti-corporate propaganda made up out of whole cloth, because if he wanted to propose that we ban a firm's produce from our Union then the burden of proof fell on him, he said he couldn't do any such thing but thought it would be a good idea to ban them anyway just on the offchance that the rumours were true. My ass!

Then the bugger went and got himself into the Civil Service Fast Stream!

Moreover, my point earlier was simply that we don't have proper free trade at the moment because of all of these stupid tarriffs and subsidies, but we should be trying to get it, not stop it. I couldn't believe a One World poster I saw last year with a cartoon illustrating 'fair trade' as promoting equality and welfare for the poor, whilst 'free trade' was simply propping up Western fatcats. What disgraceful ignorance.

[hr]
"For what shall it profit a man if he shall gain the whole world and lose his own soul?- Matthew 16:26

[David Bean]

And another thing, when I explained my position on free trade to my left-wing then-girlfriend, she looked confused and troubled for a while, said she thought I had a very strong argument but it couldn't possibly be true because if it were then nobody would disagree so there must be something stupidly obvious I hadn't thought of (odd considering she'd never thought about the matter at all, though she'd spent enough time 'activising' about it), and then insisted that we never talk about it again. Bah! Oh, I do so love the open-mindedness of the Left.

In general, that is. Marco, you're a real breath of fresh air.

[hr]"For what shall it profit a man if he shall gain the whole world and lose his own soul?- Matthew 16:26

[Marco Biagi]

Here: http://www.ibfan.org/english/pdfs/btr04.pdf

Yes, it's produced by an international NGO, but it's one respected and accredited by the UN. And unlike Britain's corresponding NGO, they aren't just concerned with Nestle. Nestle's refusal to attend subsequent parliamentary inquiries into these allegations also speaks volumes.

We weren't allowed to bring a paper copy of that report's 2001 edition along and show it to people since it would have constituted external publicity. My own fault - I effectively set the rules for that referendum. We also didn't have a website. Again, my fault. I also didn't brief Richard as well as I could have after landing him in the lurch with doing the heckling. Yup, guess who. All I can say is that we learn from experience.

I think the international evidence is very strong that Nestle breaks the International Code for Marketing of Baby Milk Substitutes - and does so on an unmatched scale. You might criticise the Code for being too strong - it basically bans all advertising of baby milk substitutes. You might more weakly argue that they don't do so systematically or deliberately (17 pages of violations...?). I don't think anyone who's examined it really doubts that the violations are happening.

[Marco Biagi]

Moreover, my point earlier was simply that we don't have proper free trade at the moment because of all of these stupid tarriffs and subsidies, but we should be trying to get it, not stop it. I couldn't believe a One World poster I saw last year with a cartoon illustrating 'fair trade' as promoting equality and welfare for the poor, whilst 'free trade' was simply propping up Western fatcats. What disgraceful ignorance.

Actually it's an effective comment on the hypocrisy of most of those in the corporate lobby who preach 'free trade', while exerting huge political pressure to prevent it being put into practice in the West.

Alternatively, but perhaps with some imagination, you could take it as an incisive remark on the relative welfare gains of a standard Ricardian advantage model of free trade. Yes, free trade increases overall welfare, but Pareto Optimality is no insurance that the least well-off have enough to attain basic minimums necessary for human decency.

Also, as I said on my livejournal, we live in a global system of countries, and the only way we could have truly free trade would be to get rid of them, because otherwise there will be differentiations in the market.

In any case, while I accept that market mechanisms generally work better than deliberate planning mechanisms (in complex societies anyway), I'd draw your attention to the many assumptions required for the full functioning of a free market model.

- perfect information (i.e. simultaneously knowing and considering all there is to know about all products at all times, all experiences of them)
- perfect understanding of the future, including the movement of exchange rates
- perfect competition (where no company or group of companies has sufficient market strength to influence prices at all and where the setup costs of a company are zero)
- perfect labour flexibility (where everyone can fulfil every job)
- sufficient reward that no one seeks to act outside the law or, internationally, feels sufficiently threatened or exploited by their neighbour so as to break the rules

And personally I think all of that is about as likely as us all loving each other enough to share everything and live in communist utopia.

In fact, I'm happy to be criticised from the Left as well. Johan Galtung, prominent Marxist writer on the global economy, derided the New International Economic Order proposals of the 1970s (roughly those advanced by the Make Poverty History coalition) as a 'capitalism for everybody charter'. But it's capitalism for everybody.

[Guest]

[s]Marco Biagi wrote on 14:58, 19th Mar 2005:
A St Andrews dropout with more ideology and money than sense. He founded the Liberty Club.


Is in a position where he does not need to work?

[novium]

bump, as requested.

[hr]

"those who wish to be feared must inevitably be afraid of those whom they intimidate"
"In anger nothing right or judicious can be done."

[Smith]

I still agree that fairtrade may not be all it says it is, as with the original post.

[hr]

Cake, and fine wine.