23 August 2005

Fair Trade Coffee: Unstable grounds...

Here in Glasgow's West End around the University of Glasgow, there is a strong "Fair Trade" coffee movement. Not only do many coffee shops prominently advertise their use of Fair Trade coffee, even many of the churches here flagrantly indulge in this movement. It is both sad and disconcerting that an upscale, intellectural neighbourhood surrounding Adam Smith's Alma Matter should so flagrantly ignore basic economic principles.

Prices are normally the primary feedback mechanism to inform producers of the relative changes in supply in demand. High prices suggest that they need to increase production. Low prices induce them to lower production. In the case of commodities like coffee, increases in production involve a delay of several years between the planting of new coffee trees and the first harvest. So, while supply does adjust to price changes, it does cannot do so quickly. Over the past decade, supply has increased substantially in response to high prices in the mid-1990's, and has become more efficient in many ways, lowering costs of production.

Grounds for Complaint:

By paying substantially more than market rates for fair trade coffee, the fair trade producers have incentive to produce MORE coffee, rather than cutting back production, as the world coffee price would suggest. In other words, by buying fair trade coffee, we encourage fair trade producers to increase the supply of coffee and thus depress the market price even further. Given that only about 1% of coffee produced is fair trade, the losers by the lower world market price far outnumber the winners who happily benefit from the fair trade subsidy.

Oxfam's Bitter Coffee:

It is precisely the poorest producers who cannot organize themselves or afford to pay for fair trade certification who suffer the most with the advent of fair trade coffee. By increasing demand for fair trade coffee, those tiny producers outside of fair trade have an even lower demand for their non-fair trade coffee, lowering the price.

If we truly want to help coffee growers, rather than just assuage our guilt, there are things we can do. By freeing up markets in other alternative commodities - like textiles - coffee farmers would have more options if the market price of coffee is too low for them to make a living. We should also stop subsidizing producers through organizations like the World Bank and IMF, which distorts market forces by reducing the relative costs of production of some farmers while others bear their full costs. We can also drink more coffee, hence increasing demand.

In short, the best cure for the poor around the world is not feel good activism like fair trade, but encouraging fewer international trade restrictions, thus allowing poor countries to sell us things they produce in order to improve their quality of life. See subsequent blog entry on Sweatshops. We can do far more for the world by learning and applying basic economic principles than by wearing coloured wrist bands.