Sunday, May 07, 2006

Well-meaning demand and supply

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.

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