Is fair trade efficient?
Is Fair Trade Efficient & A Viable Long-Run Model?
Fair trade is a movement working towards the fairer treatment of producers in less developed countries. It tries to do this by ensuring that producers are given a fairer price for their produce, and promoting sustainability by securing the rights of the producers and workers involved. The first shops that started to sell fair trade products were opened during the 1990’s mainly in countries throughout Western Europe.( Fair Trade Foundation 2010 Fairtrade Foundation chronology website: . 27th November 2010 ) Since then the movement has attracted the global eye of multinationals as well as developed countries. The movement tries to make people act upon their own conscience and buy products as well as to try to educate others such as friends and families so they can buy the products.
One of the key points of fair trade is to try to sell the products at a fair price for producers however; this has many factors taken into consideration to get to the final price. This final price is worked out by the initial cost of production followed by the cost of living followed by the cost of other subsidiaries adding their own mark ups and finally the cost of complying with fair trade conditions. The cost of production would include things such as land labour and capital all the initial costs the producer faces in making the good. The cost of living is the minimum or the fair cost of how much a person or a worker needs in surviving day to day. The cost of complying with fair trade standards is a key cost as producers are often monitored to ensure they are agreeing to their share of the deal. With the help of the Fair trade Labelling Organisation (FLO), an organisation, which ensures the fair trade name, is not being misused and people are complying with the standards of fair trade. The FLO educates producers into better book keeping methods and a general teaching of how to comply with the standards.
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The fair trade targets key minority groups and helps them. One of the ways it does this is through the formation of co-operatives. This is a collection of people from a certain community in that region who will receive a percentage of the premium of the fair trader price normally about 10% or more, and then as a community decide on how to best use those funds whether it is to better the infrastructure of the community.
However, despite all that fair trade does there may be reasons to believe that fair trade may be the second best alternative to direct aid to producers in smaller minority communities. Leclair argued this by saying that Premiums received by Co-operative members do not necessarily lead to surplus production. “Marketing and sales promotion services provided by ATOs are intended to increase demand for products made by their members, resulting in both higher prices and increased quantity sold” further on he explains that the increased recognition of products due to the promotion of Fair Trade leads to increased demand. He argues that the ‘warm glow’ the consumer gets from purchasing the Fair Trade goods means that the, “Marginalised benefit of these products is greater than the simple utility” which leads to the increase in demand.
In Leclairs paper, he produced the following diagram to demonstrate the economic theory behind his theory: on the efficiency of fair trade versus direct aid.
Leclair used the example of a typical handicraft working deriving utility from Leisure, shown by the axis labelled L, and the purchase of goods along the budget line B1. Introducing a subsidy on exports (Px) would result in the asymmetric shift of the budget line along the vertical axis up to B2. This causes a substitution effect of leisure time to labour time and a new equilibrium on the indifference curve I2 and budget line B2. Whereas, a smaller direct subsidy paid to the handicraft producer would achieve this level of utility, as shown by the line B3. However, the problem this creates is how much longer does a sponsor or charities willing to give money to the producer know that they do not have to do any work for it. L* is the result of a direct subsidy where the producer has to do little or no work as they given a subsidy regardless. How ever in the real world, third world producers have no leisure time and would not give up work for leisure as a result of this they would work regardless of getting a subsidy with out having to work and this would result in the over production and over saturating the market. (Leclair 2002 fighting the tide page 7)
Mark Hayes disagreed with Leclair’s findings based on the assumptions how he defines a subsidy. Hayes says that the premium price a consumer pays which is the extra higher price a supermarket charges for a bag of fair trade coffee compared to its standard coffee is what is defined as a subsidy. The consumer knows that they are able to get it cheaper but regardless are willing to pay that extra higher price knowing that it will go back to the producer in the form of a fairer price. Further more he argued that in the third world people would not use the substitution affect and only the income affect. Even if they were, better off and had more leisure time they would use that leisure time to work.
From the above we can begin to conclude what fair trade is about and whether it is a viable long run method and whether or not it is efficient. There is an agreement that fair trade does carry out good work. A number of impact studies (Anna Milford 2005 Coffee, Co-operatives and Competition pg 53) have shown that the starting up or cooperatives has meant that producers feeling more confident and safer that they will get a good price for their produce. They have the benefit of credit at very low interest rates and some cooperative not charging any interest rate at all. The security of knowing they will not loose their land and homes. The increased role of woman in community of these minorities.
Despite all the great and positive work that the fair trade does and the awareness it has created there are some negatives to consider. The first of these is the premium prices and the using of the fair trade name. After further research, a growing number of firms have been using a technique called clean washing a method of selling one product of the fair trade but marketing it like all their products are fair trade. Examples include Cadbury’s and Starbucks who have been found to be the biggest culprits. Furthermore, the use of the premium price the consumer is misinformed about is also a concern. Only about 10% of the actual price the consumer pays goes to the producer, the rest is added on top by parties such as labelling organisations and supermarkets, who think because it’s a fair-trade product plays to the consumers conscience that price won’t be an issue due to the warm glow they get purchasing it.
The produce that is grown by the producer not all of it is sold onto the fair trade market yet again only a percentage is, so therefore this can mean that although the amount that is sold onto the market is given a fair price to the producer the majority of it that isn’t could mean that the producer might still get a low income. This also questions the efficiency of fair trade that if producers know that only a minority of their products are going to fair trade market it could mean that they will produce more to go onto the retail market and in the long could mean over production of goods. Since majority of products the fair trade deals with have scarce demand in the long run an over production can lead to inefficient use of resources and further more the over production could affect non members of fair trade.
Since the fair trade movement is on a small scale it means it can only help a marginal number of producers compared to the number that are still in struggle this denial of help to all producers will leave those who are not part of the movement much worse off. Yet again reaching to the same point that non fair trade producers will over produce in the hope to reach incomes that fair trade producers are reaching and yet again we get to the same conclusion that in the long run it is a waste of resources and there for inefficient. Due to this over production factor, the quality of the goods over the long run again may be compromised. Fair trade farmers know they will get a minimum price and due to this, intervention and security may not produce goods to the highest quality. Before they entered the fair trade agreement quality is all that would differentiate them from other producer’s better quality would mean better prices but the guarantee of minimum prices could demolish the quality factor.
As stated above fair trade is a not on a major scale yet in terms of its popularity it maybe but in terms of the help it can offer to those that it need it, it is not. The lack of diversification of products because of the terms of fair trade questions the existence of the goods its producers produce. the fair trade name over time has been loosing the meaning it set out to create initially multinationals are miss using the name, and fair trade not questioning them or taking action against them knowing full well what they are doing shows that fair trade as an organisation is loosing its value it set out. By picking small minorities, it is segregating others and making it harder for those who are not part of it, which in it self proves the efficiency, and the existence of it in the end.
Anna Milford 2005 Coffee, Co-operatives and Competition pg 53
Leclair 2002 Fighting the Tide pages 7
Hannah Whitchard 2010 Lecture notes
Hayes 2008 Fighting the Tide
(accessed 26 November 2010)
Hannah Whitchard 2010 Lecture notes
(accessed 26 November 2010)