Not helped: Third World farmworkers, like this one working with a Venezuelan cocoa harvest, get no direct benefit from “fair trade” products. (AFP/Getty Images)
If you want to help out Third World farm workers, ignore the “Wake up the World” campaign. Don’t have a “fair trade” breakfast — or anything else. The “fair trade” label is a crock.
You’re likeliest to see the “fair trade” label at high-end coffee shops and grocery stores — especially ones with a “progressive” clientele. The certification is supposed to let you enjoy your latte without feeling guilty for exploiting the Ethiopian or Ecuadoran who harvested the beans.
Oh, the likes of Angelina Jolie and Colin Firth endorse it — but the main value it brings is the consumer’s feeling of socially conscious satisfaction.
Fair-trade-certified products — coffee, bananas, cocoa, etc. from developing countries — have boomed this last decade. US sales of fair-trade goods rose from $15 million to $48 million from 2005 to 2009.
Most people think “fair trade” guarantees better pay for agricultural workers in developing countries. The Fair Trade USA Web site insists, “We can change the world by changing our breakfast.”
Sorry: What the organized fair-trade movement actually does is simply provide selected producers of cash crops in such nations with guaranteed minimum prices for their products. The direct benefits are small and rarely go to the least well-off. Worse, fair trade can hinder economic development.
Consider how it all works.
Again, “fair trade” merely guarantees certain producers a minimum price for a commodity. This gives farmers a safeguard against price drops, which can come in handy if they can’t access more sophisticated forms of financial hedging.
But how much does fair trade actually help poor people? Most fair-trade producers are outside Sub-Saharan Africa, the world’s poorest region. Mexico has 51 fair-trade cooperatives; Ethiopia has four and Burundi just one.
And the main benefit flows to fair-trade cooperatives — groups of landowners, not laborers. The certification includes no incentives for the owners to pay higher wages to farmworkers, who tend to be poorer and more vulnerable.
It even tends to exclude the poorer landowners. Certification involves significant up-front costs — $2,000 to $4,000 — and annual inspections that require paying sizable fees. In a developing nation, that’s a big hurdle.
And the folks shut out of the scheme are worse off. With a minimum price guaranteed, the fair-trade insiders can produce more with lower risks — increasing the overall size of the crop and thus depressing prices for the folks who couldn’t afford to buy their way in.
Even fair-trade supporters must admit that the scheme doesn’t solve the problem of underdevelopment. No nation has become rich by earning a slightly higher return on a cash crop. Most developed countries have succeeded by allowing their economies to grow more sophisticated and diversified — adding areas of production that pay more to workers and owners.
That is, there’s more money in making chocolate than in growing cocoa — and 90 percent of the world’s cocoa, but only 4 percent of its chocolate, is produced in developing countries.
But “fair trade” — guaranteeing a minimum price for certain crops — locks part of the labor force into basic agriculture, discouraging it from moving “higher up the ladder” to better long-term opportunities in manufacturing, services or more sophisticated forms of agriculture. A study of Guatemala’s fair-trade coffee industry by the Mercatus Center at George Mason University concluded that fair trade strongly encouraged production mediocrity.
Finally, “fair trade” encourages a particular business model at the expense of others. To qualify for registration in the fair-trade scheme, farmers need to form cooperatives that satisfy certain requirements of communal decision-making and transparency. Why, exactly — other than badly dated ideology — should we prefer landowner cooperatives over private companies that adhere to high standards of workers’ welfare and social and environmental responsibility?
Ultimately, only private entrepreneurship and businesses can pull the developing world out of poverty. But entrepreneurs flourish only in a situation of good governance, stable property rights and business-friendly legal institutions. Rather than falling for marketing ploys that use poor people as pawns, we should work to improve the business environment in developing countries.
Low-income countries around the world don’t need our pity and handouts; they need economic policies that work. “Fair trade” may mean well, but that’s just not good enough.
Dalibor Rohac is a research fellow at the Legatum Institute in London.