Confusion reigns

Presentation by Prof Chris Cramer, SOAS

Last year the UK government, through DFID, invested an extra £12 mn, to be disbursed between 2010 and 2014, in supporting fair trade. In August this year the DFID director of policy submitted a list to ministers detailing 100 commitments that might be cut: these included a commitment to quadruple support for fair and ethical trade.

• So the UK government seems confused.

Meanwhile, consumers have every right to be confused by fair and ethical trade. One of the main reasons is that there has been a proliferation of labels and certification schemes.

Searching for some ground coffee, you could be forgiven for coming to a choice-induced standstill. Do you buy ‘Good African Coffee’, produced by an African company but not fair trade registered (on purpose)? Do you buy fair trade, to go with your liberation nuts and divine chocolate? Do you save a rainforest? Should you buy organic? Should you buy bird friendly coffee? Or a coffee that is Utz Kappeh certified but not fair trade?

Should you buy from a clearly fair trade organization or would it be more effective to buy a so-called ethical coffee from a major international corporation – Starbucks, for example, who have their own evaluation and monitoring scheme with a range of criteria overlapping with fair trade and environmental schemes? Some discerning consumers might have a hunch that what would help is not necessarily to buy fair trade but to pay for quality above all.

• So, there is consumer confusion.
• And there is confusion in debates about fair trade too. There are perhaps three main lines taken on this.

One argues that fair trade is fair and effective and sensible.

One – derived from neo-liberal economics and echoing the trade-off between equity and efficiency that has long troubled economists – argues that fair trade distorts market price signals and, therefore, is wrong-headed. Only free trade makes any sense.

And the third argues that fair trade is a scam – that it’s a nice idea but hasn’t been monitored properly and is frequently abused: there are child labourers where fair trade would have none; non-fair trade coffee is smuggled into fair trade registered exports, and so on.

So, there is a kind of ideological or evaluative confusion too.

I want you to leave tonight still confused! Why? Because I do not think there are yet strong enough grounds for a sure, caveat-free line on fair trade. It certainly often doesn’t do what it says on the label. It has created some benefits. There is a risk that fair trade diverts attention from prioritising what really reduces poverty, which is dramatic structural change.

Also, consumers need to think about the psychological dimensions to their support for fair trade, especially if they don’t really know much about the places in Central America or in sub-Saharan Africa where fair trade is supposed to function. What fantasies are being projected onto Africans or Central American banana growers or coffee berry pickers by our support for fair trade?

A very powerful reason for much of this confusion is that there is simply far, far too little good evidence to show whether and, perhaps more importantly how, fair trade works, who it is especially fair to, whether it is the most effective way to secure health and education services for poor rural people or to secure and protect rising incomes and working conditions.

One recent book on the subject pointed out how very few impact studies focus on how Fair Trade affects plantation workers. The book also pointed out that there are not many studies that compare changes for those involved in Fair Trade with those not. The vast majority of studies are single case studies with no comparative insights. Not only do the impact studies typically ignore plantation workers but the whole movement ignores wage labour effects within so-called smallholder production. Thus, it is assumed by the Fair Trade movement that coffee is a smallholder crop using only family labour. If this is the case, it is not relevant to ask after the effects on farm workers. But it takes perhaps ten minutes of fieldwork in Ethiopia or Uganda (perhaps after quite a long drive) to find out that there is a large variation in the size of coffee farms and that even on fairly small farms growing perhaps 2 ha of coffee it is necessary to hire in workers during peak periods like the harvest season.

What is it meant to do – claims and mechanisms? The aim of Fair Trade, say Nicholls and Opal, is 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 exploitative terms’

Re-connect consumer and producer, contrary to the model of most value chains.

Why?

Market failures. Exploitation. Terms of trade. Market access. Power of the middleman and of buyer-driven value chains.

MechanismsMinimum priceSocial premium – democratic, collective choice of projects such as schools, clinics, wells. Direct buying from producersPartnershipsProvide informationCredit, pre-financing cropsDemocratic organization of farm workers and farmersNo slave labour or child labour. Must be allowed to unionise.

Fair trade in the market and against the market. Rather as monks strive to be in the world but not of the world. Or to put it as the sub-title of one book on fair trade does, it is about ‘market driven ethical consumption’. Given that for some  people this is bordering on a contradiction in terms, it only adds to the confusion.

What it means is that the fair trade model acknowledges the need for a competitive, profit-driven capitalist organization of the economy but that there is a need to address market failures that make it difficult for poorer people to take advantage of that system. In principle, this is fine: economic development always involves finding out where there are market failures creating bottlenecks and finding ways to resolve them; but it has also always been a matter – contrary to the standard story we are usually told – of getting prices wrong rather than just getting prices right. So there’s nothing that unusual about Fair Trade in this respect.

Fair Trade messes with the market price  – not that it is a perfect market in the first place – but it messes with it without government regulation, which makes it attractive to the current world in which, for example, in the UK since 1979 the entire political class and most other people seem to have converted to the quasi-religious faith in the market.

And it seems to have worked – it’s grown rapidly.

It’s grown fast: US and Canadian Fair Trade sales grew by 102 per cent between 2004 and 207. Global certified tea grew by 112 per cent in 2008.

Sales of Fairtrade certified products in the UK

Estimated UK retail sales by value 1998-2009 (£ million)

* The figures against these products represent the cocoa part of all products containing cocoa and the honey part of all products containing honey.** Following review, some of the 2007 figures have been amended but the total remains the same.

But what are the criticisms? And what is wrong with the criticisms?

1.  Fair trade ensures people get charity while carrying on producing the crops that have locked them into poverty (Paul Collier). No incentive to crop diversificationStay on marginal landReinforce romantic notion of rural smallholder idyll.

I think it is right that the much more significant way to address rural poverty is through diversification and structural change. But, first, the neo-liberal version of this argument – that free trade is the only alternative – has no model for how to achieve that; the reality is that subsidies, protection, state intervention have always and everywhere been the key to such processes of structural change.

Second, there is a laziness about this argument – yes people should not be stuck in producing hopeless crops but we can only discuss this in the light of understanding particular markets affected by fair trade.

In coffee, committing people to production of subsidised robusta is perhaps a dead-end, given its bulk commodity status. But this ignores the decommodification of particularly Arabica and the emergence of the specialty coffee market. There is huge and rising demand here for differentiated and high quality coffee.

Third, ideally people would generally move out of agriculture into manufacturing jobs, which historically have higher productivity and faster growth of real wages. But how are countries to get there? One of the main ways you do this is by generating rapid increases in foreign exchange – you can’t do that by changing overnight to making super-conductors: instead you have to maximise competitiveness from primary commodities. This involves diversification into higher value crops (like flowers, for example) and into different versions of same crops (coffee), raising productivity, and processing (Andrew Rugasira an example).

Fourth, this then raises the question of how you generate more value (including domestically) out of a commodity like coffee. Here there is a serious question for the fair trade model – does it have the capacity to raise value in the same way, close ties between a major high quality international buyer with huge branding advantages and technological know-how does? Does the fair trade model really offer higher prices than some of these international buyers or than buyers who have lived in the country for generations and have developed very productive relations with local producers? I leave this open but I think we want to think carefully about sweeping myths of the bogeyman intermediary, the middleman.

2. Minimum price is an incentive to over-supply, which reduces world price and creates further dependency on fair trade or other charity. This is the Adam Smith Institute’s argument.

Again, if fair trade applies this on a significant scale to affect world prices and does so for bulk commodity crops like robusta coffee there is a point; but this argument doesn’t really tell us much about how and where Fair Trade organizations work – which is often in differentiated markets; and typically it operates on such a small scale it cannot affect the prevailing price.

3. Fair Trade drop in ocean

First, fair trade is dominated by Mexico rather than Sub-Saharan Africa. Some argue that this means Fair Trade is subsidising relatively wealthy farmers, not the poorest.

It is possible that it does this within fair trade schemes/areas too. Is that necessarily a bad thing though?

Second, fair trade accounts for tiny share of world market for each commodity

Third, much fair trade certified output is not sold at fair trade prices – there isn’t a large enough market. Fair trade products account for at most about 1 per cent of their market. What this means, for example, is that a ‘Fair Trade’ tea plantation or cooperative will only actually sell about 2 per cent maximum of its output into the fair trade market.

Fourth, in each area where fair trade operates, only a proportion of farmers are admitted to the scheme – again, the market not large enough. So there is an interesting and unexplored question about who is in and who is outside.

Fifth, the costs of entry are high. How are they distributed?

Sixth, how much of the premium finds its way back?

Our research

Some of the questions raised are ones I am trying to address with colleagues. I can only say a bit, because I am in the middle of a four year research project in east Africa that is trying to find out a bit more about these issues.  Essentially, it tries to answer this question: if you are a very poor rural person in Ethiopia or Uganda (or elsewhere), and you survive (as you are likely to) by having to get some paid work, say in the harvest season for coffee, or a more permanent job somewhere far away where you’ve heard there are flower farms, then are you better off if that work is on a fair trade certified coffee cooperative farm or flower farm, or if the job is on a non-certified cooperative farm or a non-fair trade flower farm?

Just think about this for a minute – do you think there is already an answer to that question?

I don’t know the answer.

Along the way we end up exploring other questions. One is this: when you buy coffee from a fair trade cooperative union, who do you think you are helping? The poorest? Is this what happens? To put the question differently, how are the benefits of fair trade distributed? To answer this involves not just reading the ‘model’ of fair trade from FLO’s website but also understanding how cooperatives actually work. Again, I will tell you when I know. But it might be fun to remind you what Lenin observed among cooperatives in 19th century Russia, in a context where there were also many well-intentioned people in cities hoping to help reduce rural poverty. This was exactly the kind of tale – “a tale invented by kind-hearted people, but a tale nonetheless” – that Lenin targeted in “To the Rural Poor: an explanation for the peasants of what the social democrats want.’

Many urban would-be progressives in Russia at the end of the 19th century believed in the powers of rural communities – the mir – and of the new cooperatives springing up, to serve the interests of the poor, on grounds that they were harmonious organizations of like-interested peasants. Lenin pointed out how wrong this was – how since the dynamics of commercialisation had been set off there was no such equality, and how the people who benefited most from the cooperatives were the better off farmers. They were the ones with the positions of leadership, control over access to resources, and access to labour. “In the rural commune, he who has money has power”. For poorer peasants – “Do you call that farming?” – it was a life of hard labour and endless drudgery and survival depended on reluctantly selling one’s labour to more successful farmers.

Further, to know whether and how fair trade works, it is not enough to have an abstract model of this: you have to understand how fair trade becomes part of or its prospects and effects are shaped by the usually very intense political economy of a particular country or area.

Conclusions

Fair Trade represents a tiny proportion of world market. It has grown fast but there is perhaps limited room for it to make a change. This doesn’t mean it’s irrelevant but it does mean that discussion of fair trade needs to be considered within the context of other policy and resource allocation priorities. Let me put the question this way: should DFID be investing 12 million in fair trade or 12 million in supporting coffee research, improved infrastructure, support for labour inspectorates, etc in Ethiopia – to improve productivity and quality?

Fair Trade may be an interesting part of efforts to improve returns to and more progressive distribution of benefits from agricultural exports. But not unless much more effectively monitored; not unless more focus on wages and conditions rather than unevenly distributed social projects. And not unless combined with much stronger focus on improving quality and productivity.

Fair Trade is not a substitute for a coherent economic development strategy for low income countries or poverty reduction. It is a subsidy that is unevenly distributed and that may help foster dynamics of accumulation and differentiation in rural areas. This is not a bad thing – but the key is whether it’s the best way of doing so, whether it generates the highest possibly demand for labour and best conditions of labour.