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The economics of Fair Trade: Responding to a complex problem

Matt Palkert | Tuesday, April 3, 2007

I’ve never seen such hope. Arias, a Ugandan coffee farmer and father of six, proclaimed assuredly, “Someday my children will go to secondary school!” Arias’ hope is due in large part to his membership in Peace Kawomera, a fair trade certified coffee cooperative in eastern Uganda. Since entering the Fair Trade market, members of Peace Kawomera are making unprecedented choices: where to purchase mosquito nets, how to invest in a community coffee mill, where to install a much-needed water pump and, perhaps most importantly, where to send their children to school. To spend time with Arias and his family was a privilege I will never forget, and a privilege that has consequences. When I purchase a cup of coffee, for example, I can’t help but picture Arias’ children making the daily trek to school. Convinced that my purchase can play a role, albeit small, in realizing this image, the choice to purchase fair trade coffee becomes obvious.

The same choice has also become obvious for an increasing number of consumers. The quality of Fair Trade coffee is exceptional; in many places it does not cost more than the conventional premium coffee; and its purchase empowers small family farmers. Who would object to this? Economists, it seems. Their critique goes something like this: The higher price guaranteed by Fair Trade not only encourages production, leading to further oversupply and therefore lower prices for non-Fair Trade farmers, but also discourages necessary “adjustments” or “diversification.” For the benefit of a few, many will suffer. This economic critique has its value, but fails to reflect the complexity of the coffee market as well as the larger story of Fair Trade. And so it stands in desperate need of clarification.

First, the truth of the argument along with some context. Coffee has experienced tremendous price fluctuations since 1989 when production quotas disappeared with the collapse of the International Coffee Agreement. Currently, prices have recovered from the latest plummet, but still signal a surplus, delivering an incredibly meager profit to farmers. Also, only 30 percent of coffee grown on certified farms is sold as Fair Trade. The remainder is sold on the conventional premium market. Together these realities certainly support the economic critique of Fair Trade, but several important factors are missing.

To begin, the coffee trade is riddled with injustice. It was common colonial practice to coerce farmers into growing cash crops or encourage plantations that relied on unjust labor practices. This began a poverty-stricken coffee dependency for most of the world’s coffee farmers. Today, such dependence is perpetuated by both unjust trade policy and short-sighted development programs. Farmers in developing countries cannot compete with subsidized crops imported from the developed world, and so often flee for factory jobs or switch to coffee, if possible. Coffee farmers also suffer from actions of the World Bank, which is largely responsible for a devastating coffee glut in the early 1990s as it pushed mass coffee production on Vietnam. Dependency is clearly a problem that must be addressed. To expect farmers to “adjust” or “diversify” is an unrealistic solution offered by the free market. Such an expectation certainly ignores the unjust context within which farmers operate. What can be done, then, to overcome dependency? Righting and preventing the above injustices is one important step. Two complementary solutions are offered by Fair Trade. Remember Arias? Not only will his children achieve unprecedented levels of schooling, but thanks to the shared resources offered by a cooperative structure and a partnership with a visionary roaster, soon he will be growing vanilla beans as a way of decreasing his dependency on coffee.

Another source of injustice within the conventional market system is found in the power imbalance between small farmers, making up two thirds of all coffee farmers, and buyers seeking the highest profit margin. Small farmers are taken advantage of in numerous ways, and it’s getting worse. The most telling signal is the fact that while worldwide sales of coffee have doubled in the last 20 years, the percentage received by the farmer has been halved.

Lastly and most importantly, Fair Trade is more than a higher price. Its values, such as farmer empowerment, democratic decision making, business transparency, environmental health and long-term relationships allow Fair Trade to be a vehicle for much needed social change. These values ensure that Fair Trade remains committed to human beings first and foremost. Does such a commitment mean that the Fair Trade movement ignores free market economics? Of course not. It attempts to transform it.

So again, I am presented with what I once thought was a simple choice about a cup of coffee, but those darn economists have complicated things. They have forced me to rely on more than a sentimental image to convince me of the right decision. Back to the original question: if I purchase Fair Trade coffee will I hurt non-Fair Trade farmers?

Theoretically it’s possible, but it seems far more important to focus rather on the proven factors that affect the price farmers receive. The market system has failed coffee farmers, not because of any impact from Fair Trade, but because it is riddled with injustice. It is the system that must be transformed, because all coffee farmers have the right to a fair chance at a better life. A systemic and complex problem must be met with a systemic and comprehensive response, and while this includes buying Fair Trade coffee, it also means working for trade that is fair.

Matt Palkert is a graduate student pursuing a Master of Divinity. He can be contacted at mpalkert@nd.edu

The views expressed in this column are those of the authors and not necessarily those of The Observer.