Economics

Fair Trade and Development

Geoff Riley

12th January 2013


The Fair Trade movement now covers over 650 producer organisations in more than 60 countries

One of the driving forces behind the founders of Fair Trade was a desire to correct for multiple market failures in industries for many primary sector commodities. These failures included the effects of monopsony power among transnational food processors and food manufacturers which often led to farmers in some of the world's poorest countries receiving an inequitably low and unsustainable price for their products.

The Fair Trade Foundation web site explains fair trade as follows:

"Fairtrade is about better prices, decent working conditions, local sustainability, and fair terms of trade for farmers and workers in the developing world. By requiring companies to pay sustainable prices (which must never fall lower than the market price), Fairtrade addresses the injustices of conventional trade, which traditionally discriminates against the poorest, weakest producers. It enables them to improve their position and have more control over their lives."

The key aims of Fair Trade are to:

  1. Guarantee a higher / premium price to certified producers
  2. Achieve greater price stability for growers
  3. Improve production standards. A grower will be able to receive a Fair Trade licence if it can improve working conditions, better pay and guarantees of environmental sustainability
  4. ·A Fairtrade premium price might be offered - for direct investment in improving businesses and communities. For example in 2008 Tate & Lyle announced all their retail sugar would be Fairtrade, benefiting 6000 sugar producers in Belize who will receive a Fairtrade premium


The Fair Trade movement has critics

1. Impact on non-participating farmers: Some claim that by encouraging consumers to buy their products from Fairtrade sources, this cuts demand for farmers in poorer nations not covered by the Fairtrade label thereby worsening the risk of extreme poverty

2. Who captures the gains from Fair-Trade coffee? There is some evidence that a large part of the premium price goes to processors and distributors rather than the farmers themselves.

3. Others argue that the fundamental causes of poverty are not really addressed by Fairtrade. Greater investment needs to be made in raising farm productivity, reducing vulnerability to climate change, and reaching multi-lateral trade agreements between countries to reduce import tariffs and improve access for poor countries into the markets of rich advanced nations. Other investment might be better targeted at encouraging farmers to establish producer co-operatives of their own and create their own branded products selling direct to consumers.

4. Some free market think-tanks such as the Adam Smith Institute believe that the fair trade movement has resulted for example in excess production of coffee, which has driven down world coffee prices.


Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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