Is Fair Trade coffee really ‘fair’?

Fair Trade Certified Logo with a superimposed question mark in red

Is Fair Trade coffee really ‘fair’? The short answer: no.

EconTalk’s Russ Roberts chats with Duke Econ Prof Michael Munger about the concept of Fair Trade Coffee. It’s a very difficult challenge to ensure that a consumer price increase correlates with a laborer salary increase. But, even assuming that this difficult challenge is overcome, here is the resounding problem with the Fair Trade concept:

  • What is the purpose of increasing the pay of unskilled labor in developing countries? By artificially increasing pay for a job that requires no learned skills, this discourages learning skills that would result in higher paying jobs in a freer market (without these artificial pay increases). Put more simply: what is the motivation to learn how to use a computer when working on the farm pays just as much? Allowing unskilled labor to remain a poorly paying occupation encourages a country’s economy to develop more highly skilled opportunities.

If I were religious, I would subscribe to the religion of free trade. Amen, Russ.

Link (Direct Link to MP3)

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6 Responses to Is Fair Trade coffee really ‘fair’?

  1. kj says:

    This is ridiculous. You think that the free market will help move computer jobs to rural Vietnam, Ethiopia Guatemala, or Brazil? Ironically, fair trade actually increases the likelihood of computers work in peasant communities, since certification-based agriculture necessitates knowledge production and transfer, i.e. databases and more paperwork (for better or worse).

    But on a more basic level, why do you think of coffee farming as a more “base” skill, when the computer work that you so highly revere would not possibly get done without the sweat of the coffee farmer?

    There are a lot of good reasons to question whether or not fair trade is actually “fair”, but market fundamentalism does not provide any insight in this area.

  2. kfarr says:

    KJ, I appreciate your comments. It’s good to get a discussion going.

    Of course, I have no idea what the best (most efficient and effective) solution is to increase the quality of life (reduce poverty). But, I fear that the concept of Fair Trade is inefficient and ineffective at best.

    The crux of the problem with Fair Trade is that it provides artificially high incentives for a specific type of industry (coffee growing), which I would generally classify as low-skilled labor. Who are we to determine which industry to support in a foreign country? Is this the best form of aid we can offer?

    Conversely, I think it would be silly to provide artificially high incentives for another specific type of industry (computers). “Computers” in this example is not specifically computers, it is meant to represent a skill-based, higher technology trade. It could be represented by nuclear physics or medicine.

    The base argument is probably more broad: we shouldn’t artificially support any specific type of industry in a foreign country. Instead, we should support the infrastructure developments that let a country develop its own growing economy: education and easily available low-cost capital are two basic needs that immediately come to mind.

  3. ed says:

    In response to Kfarr, I agree that the efficiency at which Fair Trade is being implemented is inefficient. Stats show that certified farmers have realized increasing profits over the years, but i would argue that this results in the smallest non-certifed farmers being pushed out of the market.

    I also agree with KJ in that Fair trade is going to help the majority of the community and lead to development (computer use).

    In opposition the Kfarr, I believe that there is a premium placed on Fair Trade coffee which just got bumped up from $.05 to $.10 per a pound which goes to co-ops. So fro every pound sold $.10 goes to the co-op that the Fair Trade farmer belongs to. The co-op basically puts this money back into the community by setting up things like hospitals and schools.

    Also I dont think that we are paying farmers overly high prices, but believe that we need to be aware of what we are doing, and that if these farmers in developing countries are over paid, it could result in wealth pockets in these countries and lead to potential coffee production monopolies.

  4. kfarr says:

    PS. If you’re still reading this, there are many, many more comments that parallel our discussion in deeper detail at the EconTalk page. Check it out.

  5. re: what is the motivation to learn how to use a computer when working on the farm pays just as much?

    Well, what happens if there is no computer available?

    This is ridiculous!

    Have you ever spent time in a less developed country?
    Obviously, there is a huge disconnect between you (the consumer) and the source of your product … that is one of the major problems – Americans think they are entitled to everything at whatever cost (including the human cost).

    Economic development should also be about human development – and the Fair Trade movement provides an option (maybe not the best), but it might be a better option, for small-scale farmers to live a better life and reinvest in social programs.

    One must always realize that the economic and political infrastructure (and history) is different per country – training and higher education might not be available. You must also realize that the industry and job market must also be there to support those with advanced skills – if this doesn’t exist, then those newly trained individuals will meet the employment demands of developed nations…

    So, then, what are your thoughts on US based agriculture and their respective livelihoods? Agriculture is a very important part of economics, especially in terms of trade, it’s hard to imagine one would want to devalue it or its human capital.

  6. crasshopper says:

    I listened to this podcast before Christmas, so my memory of what I thought is not fresh, but here are a few responses.

    • This podcast undercuts the show’s usual free-market idealism. Not only does Munger contradict himself (he says dropping food aid on poor countries harms them by eroding their labor base—however, taking away food aid is tantamount to breaking in windows only to fix them again, which he says is bad), but if people are willingly buying Fair Trade products at a premium which do not accomplish their stated goal, then that puts the entire notion of mutually beneficial trade under fire. [Insert cynical response about how buyers of Fair Trade coffee want to buy only the semblance of morality.]

    • Munger did well in saying that if he could simply “tip” the coffee growers, he would do that (though he later argues that any wage increase to farmers will result in an inefficiently large number of them working).

    • RR and Munger didn’t discuss much, as I remember, the costs of advertising and enforcing fair trade, nor its efficacy in selling only certified beans.

    * Based on the number of AEA members who believe raising the minimum wage is a good idea, I am quite dubious about the utility of Econ101-style Marshallian S&D graphs to answer all relevant questions about labor markets. Notice that EVERYTHING on EconTalk is armchair speculation and does very little with real-world data. And notice that they worship Hayek, Smith, and Friedman. Why is that?

    • Things to google: the book by Alan Blinder on the minimum wage, Greg Mankiw’s blog post on what makes liberal vs conservative economists’ opinions, and the names of the economists who signed a petition to Congress to raise the minimum wage.

    • A nice piece of info to have: real numbers on how much money DOES go to various middle-men, and do living standards rise in the communities that adopt Fair Trade practices? What happens to communities around them? How does this money compare with the efficacy of other forms of aid?

    • I would have also liked them to address the results of any of these studies:

    ^ Ronchi, L. (2002). The Impact of Fair Trade on Producers and their Organizations: A Case Study with Coocafe in Costa Rica. University of Sussex. p25-26.
    ^ Murray D., Raynolds L. & Taylor P. (2003). One Cup at a time: Poverty Alleviation and Fair Trade coffee in Latin America. Colorado State University, p28
    ^ Taylor, Pete Leigh (2002). Poverty Alleviation Through Participation in Fair Trade Coffee Networks, Colorado State University, p18.
    ^ Eberhart, N. (2005). Synthèse de l’étude d’impact du commerce équitable sur les organisations et familles paysannes et leurs territoires dans la filière café des Yungas de Bolivie. Agronomes et Vétérinaires sans frontières, p29.
    ^ Bacon, C. 2005. Confronting the Coffee Crisis: Can Fair Trade, Organic, and Specialty Coffees Reduce Small-Scale Farmer Vulnerability in Northern Nicaragua? World Development Vol. 33, No. 3, pp. 497–511
    ^ L. Becchetti,, M. Costantino (2006). Fair Trade on marginalised producers: an impact analysis on Kenyan farmers, working paper CEIS 220 and working paper ECINEQ2006

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