Does Fair Trade Help the Poor?

Over the past decade, the ” fair trade ” movement has become increasingly popular, especially among Christians who seek market-based approaches to alleviating poverty. But does fair trade, which advocates the payment of a higher price to producers such as coffee farmers, actually work as advertised?

Economist Victor Claar argues in his new book, Fair Trade: Its Prospects as a Poverty Solution , that the fair trade movement simply “cannot deliver on what it promises,” and Christians would do well to pay heed. In a review of the book , Joseph Sunde says:

Given that coffee is perhaps the most popular of fair-trade commodities, Claar focuses his attention there, providing an initial overview of the coffee market itself, followed by a discussion of fair trade strategies as commonly applied. Here, we learn a few important things: (1) coffee is easy to grow, (2) its price is inelastic, and (3) the “market appeal” of one’s beans is essential for success. Additionally, and most importantly, (!!!) demand is dropping while supply is rising .

“Simply put,” Claar explains, “coffee growers are poor because there is too much coffee.”

Sounds like a good spot for some Western stimulus, eh?

The book offers plenty of arguments against such schemes, but this often unspoken reality illuminates the most central: Artificial, top-down fair trade programs toy with price signals and manipulate individuals to do the wrong thing in the wrong place at the wrong time. “Incentives matter,” says Claar. “Once the stakes of any economic game have changed, people alter their behavior accordingly.”

Such manipulation might indeed be helpful if the do-gooders of Equal Exchange could actually understand and predict market fluctuations, but they can’t . Thus, their activities spur coffee growers to follow distorted prices toward ends they might otherwise avoid. On the whole, this imposes a static view of opportunity on such farmers and inhibits them from rising above their circumstances. As Claar explains, it “keeps the poor shackled to activities that, while productive, will never lead to poverty reduction on a large scale — or even a modest one.” [emphasis in original]

On a related note, a new study published in Ecological Economics found that over a ten-year period certified organic and organic fair-trade producers became poorer relative to conventional producers:

The fair-trade business is filled with contradictions.

For starters, it discriminates against the very poorest of the world’s coffee farmers, most of whom are African, by requiring them to pay high certification fees. These fees — one of the factors that the German study cites as contributing to the farmers’ impoverishment — are especially perverse, given that the majority of Third World farmers are not only too poor to pay the certification fees, they’re also too poor to pay for the fertilizers and the pesticides that would disqualify coffee as certified organic.

Their coffee is organic by default, but because the farmers can’t provide the fees that certification agencies demand to fly down and check on their operations, the farmers lose out on the premium prices that can be fetched by certified coffee.

To add to the perversity, it’s an open secret that the certification process is lax and almost impossible to police, making it little more than a high-priced honour system. Although the certification associations have done their best to tighten flaws in the system, farmers and middlemen who want to get around the system inevitably do, bagging unearned profits. Those who remain scrupulous and follow the onerous and costly regulations — another source of inefficiency the German study notes in its analysis — lose out.

As Jonathan H. Alter says , “Labeling coffee as “fair-trade” enables merchants to charge a premium, but it’s not clear those consumers who are willing to shell out extra money for “fair-trade” coffee are getting what they pay for.”