Mar 04 2008

“Fair Trade” coffee and economic development

In recent years coffee consumers may have noticed more and more cafes are offering “fair trade” coffee as an option. Usually, for an extra 10 or 20 cents per cup, you can get a beverage made from beans that were grown by farmers earning living wages and working in safe and sustainable environments. In some cases, “fair trade” coffee is of higher standards, representing a higher quality product. The premium paid by consumers, in theory, will eventually result in better standards of living for coffee farmers and their families.

Mike Munger, chair of Duke University’s economics department, argues that “fair trade” products, while they may represent good intentions, probably don’t do much to help poor farmers. While the full podcast offers even more reasons, the clip below presents one clear explanation of why “fair trade” may actually make poor farmers worse off.

Another interesting point Munger goes on to make relates to one of the models of economic growth we have been studying in IB Economics: the Lewis dual-sector model of structural change. According to the model, the path towards economic growth, which should create conditions that lead to economic development, requires the transition of workers from the low-productivity agricultural sector to the capital-intensive, high productivity manufacturing sector.Lewis Model of Growth

China, in its own economic growth, has demonstrated the success of this model, which involved rural to urban migration, employment of surplus labor from the farming sector in the industrial sector, giving workers access to capital, increasing productivity, output, income, saving, and investment, putting an economy on a path towards growth and development.

According to Munger, “fair trade” premiums paid to poor farmers create a disincentive for a farmer to migrate to the higher productivity industrial sector that may be emerging in his country. In essence, coffee drinkers in the rich world are offering a subsidy to farmers in the poor world aimed at keeping them poor. If the path to wealth and prosperity requires the transition to a capital-intensive industrial economy, then subsidies to poor farmers are only reducing the likelihood that they’ll achieve significant increases in income and savings.

Munger’s views are compelling, if a bit hard for a socially conscious, well-intentioned coffee lover like myself to swallow. I like to think that I’m helping farmers in the developing world when I drink “fair trade” coffee. If anything, Munger has at least made me think a bit harder about the true impact of the premium I pay when I choose “fair trade” next time I walk into Starbucks.

For the full podcast, click here: Munger on Fair Trade and Free Trade – EconTalk with Russ Roberts

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

8 responses so far

8 Responses to ““Fair Trade” coffee and economic development”

  1. ElaineLungon 06 Mar 2008 at 12:36 am

    I'm not in IB, so I can't really comment on something I haven't learned, but this post makes me feel a bit guilty, too. I've been getting into gourmet chocolate recently — none of that Hershey's stuff — and had managed to find a good deal of great fair trade chocolate. Ouch, "marketing scam" smarts. I don't know though. If the higher productivity industrial sector is so fantastic in these countries, why would farmers stay in the position they're in now — probably just barely getting by? I guess I can see that they may be spending the majority of what they earn because of their low income. How mobile is it, and how able are they to move from one sector to another?

    Interestingly enough, though, a lot of the gourmet chocolate that I have — Vosges, Newtree, Nirvana, etc. — they aren't actually fair trade because they say that there aren't enough fair trade cacao beans and it doesn't necessarily mean it's the best quality. Hmm. And mmm mm, is Vosges's Mo's Bacon Bar delicious.

  2. Mike Fladlienon 06 Mar 2008 at 11:57 am

    the podcast was excellent…i'd like to add that growing coffee is a race to the bottom of a perfectly competitive market…

  3. Manon van Thorenburgon 06 Mar 2008 at 8:11 pm

    What Munger says is quite interesting. But I'm not quite sure I completely agree. He says that with the increase in the price of coffee, more farmers will want to supply it. But assuming that the only people who would possibly change the products they are producing are other farmers, wouldn't they be getting paid premiums as well? So as long as there are premiums on all the foods produced by these farmers, the supply for nothing will increase. I highly doubt workers other than farmers will leave their jobs to become farmers simply to receive a premium.

    And also, even if only a percentage of the premium goes to the farmer, isn't that still better than nothing? Say the farmer is producing coffee for 60 dollars, and the total price paid for this coffee by consumers was 100 dollars. Maybe 20 of these dollars are 'lost' when passing through all the intermediates (which, in either case, wouldn't exist since one of the policies of 'fair trade' products is that there's one intermediate max.). But even if 20 of the dollars were 'lost', that still leaves 80 dollars going to the farmer. Isn't that still far better than the 60 dollars the farmer was receiving in the first case? Okay, so all the extra money we pay isn't going to a good cause, but at least some of it is.

    Regarding the Lewis Dual-Sector model. I totally understand where Munger is coming from when he says that essentially, these subsidies we are paying to the farmers are taking away incentives to go work in the manufacturing sector. But even as surplus labor migrates to the cities to work in the manufacturing center, there will always be farmers left in the agricultural sector, for who else will produce the food? These farmers deserve to be paid the premium.

    That's that. I'm pretty sure i'm the only IB-er that commented on this. 🙂

  4. yunqimokon 08 Mar 2008 at 1:04 pm

    This is indeed, fascinating. Actually, I've never seen or heard about this "fair trade" business, but I feel that although Munger has tackled the problem solely through an economic point of view. It may be true that a few cents will not improve the farmer's life at all, but by having this "fair trade," the farmers lives MUST improve at least a little bit. Just like if everyone donated one cent, there would be over 6 billion cents, if everyone engaged in the "fair trade," these farmers would be more well off. Also, this raises awareness about the terrible poverty of many farmers around the world. The fair trade premiums also shouldn't provide disincentives for the farmers to to migrate to more industrial aspects of his nation, because as Munger said previously, the benefits are little.

  5. […] Jason Welker posted a good article a while back which critiqued the benefits of Fair Trade – link […]

  6. Pur Slimon 06 Mar 2015 at 2:19 am

    Pur Slim

    ?Fair Trade? coffee and economic development | Economics in Plain English

  7. ruddyfolks5518.skyrock.comon 25 Aug 2015 at 2:34 am

    ?Fair Trade? coffee and economic development | Economics in Plain English

  8. Full Recordon 20 Oct 2016 at 2:16 am

    Full Record

    “Fair Trade” coffee and economic development | Economics in Plain English