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Well-meaning demand and supply
May 7, 2006 | 5 Comments | Joshua Gans
In Project Syndicate, Peter Singer has an article about ‘Fairtrade.’ Fairtrade is a service that ensures that the ultimate product suppliers — e.g., the growers of coffee, cotton and the like — are paid a fair amount for their produce. It appears that some people object to this as being a poor way of helping the poor and that giving money directly to aid agencies may be better. Singer is right in that economists actually have no real objection to Fairtrade: afterall, it is product with certain characteristics and if there are consumers who are willing to pay more for those characteristics then so be it.
I agree with this line but am worried about consumer protection here. Are consumers really getting the product they think they are paying for? Now the one thing I am less worried about is that this might be a device for price discrimination: that fairtrade coffee prices to consumers are sold at a margin way above the additional compensation to coffee growers. At least the growers are getting additional compensation even if it is not cent-for-cent with the additional price consumers are paying. And the consumers are getting whatever additional satisfaction they are over and above what they paying. That is a win-win, it is just that there are a few more winners than just the growers.
What is more difficult to assess is whether growers are being made better off. I think that they probably are but it is not a given. To see this, suppose that would-be coffee purchasers come to growers and say: “we will pay you more than you are getting from your current evil multinational.” Now, no self respecting grower would not take that deal. Indeed, they would all want it. So, how does Fairtrade choose who gets the better pay? If they go to some farms and not others, then there is inequity. If that gets back to consumers, it won’t really be seen as fair. What they would have to do is get a little bit from all farms. But in this case, the returns to switching from other farm products to growing coffee will rise. And so there will be more coffee farmers.
That is not a bad thing in of itself, after all, if growing coffee now has more remuneration then farmers are getting more remuneration. So long as Fairtrade keeps the price it is paying the same, you might say that the system is working.
However, when every farmer is getting a share of Fairtrade traffic, they will competing more intensively to sell the remainder of their crop. To whom? ‘Evil’ multinationals. The increased supply of coffee means that they will pay lower prices for coffee. So, in effect, Fairtrade and their customers end up subsidising evil multinationals and their customers. Whoops!
Unless there are real shortages of coffee growing land and coffee farmers, the end result of Fairtrade is to reduce the costs associated with growing coffee for non-fairtrade trade. The additional margins the growers receive from Fairtrade are ploughed back into even lower prices for coffee sold to others. Indeed, it is conceivable and perhaps likely that no coffee grower will be better off as a result of this.
I must admit that I write all this with a heavy heart because it would be great if the market worked to deliver social demands. However, in this case, it just does not seem likely. Maybe direct aid would be better.
Comments
5 Responses to “Well-meaning demand and supply”
[...] A while back I blogged about Fairtrade; the folks who try to secure growers in less developed countries better prices (click here). I worried that, while well-meaning, ultimately, any additional money consumers paid would flow away from growers (perhaps even to the very multinationals accused of paying growers ‘unfairly’). At the moment, I have a crack team of RAs working on whether the assumptions underlying my theorising are true or not and I will report on that in due course. It turns out to be quite hard to get information from the Fairtrade folks. [...]
[...] I have posted before about my concerns about Fairtrade — the organisation promoting higher prices to growers — despite being otherwise happy with their intentions. (See here and here). This week, The Economist does a review and, in fact, supports to contentions I made in my earlier posts. They asked: who would object to higher prices paid to growers? Economists, for a start. The standard economic argument against Fairtrade goes like this: the low price of commodities such as coffee is due to overproduction, and ought to be a signal to producers to switch to growing other crops. Paying a guaranteed Fairtrade premium—in effect, a subsidy—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-Fairtrade coffee even further, making non-Fairtrade farmers poorer. Fairtrade does not address the basic problem, argues Tim Harford, author of “The Undercover Economist” (2005), which is that too much coffee is being produced in the first place. Instead, it could even encourage more production. [...]
[...] here for the story). Their concern is that they are not sure the growers are really better off. I have worried about this myself. Oxfam’s Neil Bowker rejected criticism of the Fairtrade coffee project, saying: [...]
[...] is not alone in his concerns. Joshua Gans has publically worried about this before (here, here and here). The Economist wrote late last year on the topic here (well worth a read). [...]
[...] Dani Rodrik is getting concerned about Fairtrade. His concerns are similar to ones I have raised here, here and here. John Barrdear summarises Rodrik’s concerns [...]