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Pundit’s Mailbag — The Tyranny Of
Economics And The Goals Of Fairtrade

Jim Prevor’s Perishable Pundit, January 12, 2007

Our piece reporting that a chain in the United Kingdom had announced a decision to go 100% fair-trade on bananas, entitled Sainsbury’s Commits To Fairtrade But Is It Fair For Everybody, continues to draw letters.

In fact we published a letter from Marc De Naeyer, Managing Partner of TROFI in The Netherlands that pointed us to a lengthy piece in The Economistanalyzing not only Fairtrade but organics and the concept of food miles.

Now, one of our regular correspondents happens to be a “Fair Trade Certified Importer” and he sends us a letter:

In the 12/22 Pundit’s Mailbag — Fairtrade From A European Perspective, the argument that customers’ choosing to pay more, in order to better compensate farmers, is contributing factor in depressing prices seems a bit far-fetched.

Isn’t it possible that if the Fairtrade idea gets to the point where it represents a significant part of the overall production of a crop, and growers are all trying to get on board, producing beyond the demand, that this diversification into other crops — or other occupations — will occur as a natural development?

Is the Fairtrade movement encouraging farmers to grow more high-priced bananas that they can’t sell? Or more lower-priced bananas that they can’t sell?

Maybe Marc De Naeyer sees it accurately. I’ve never gotten a very good handle on economics. It just didn’t quite sit right — Also — can’t seem to resist splitting hairs — A European Perspective seems like a somewhat misleading title, since isn’t Fairtrade considerably more pop ular in Europe than in the US? There are bound to be people in Europe who don’t approve of the Fairtrade movement, but are they concerned for the plight of the poor farmer? Maybe…

— Bob Sanderson
Jonathan’s Sprouts

Alas, the economics are unassailable here. Of course, paying more to an individual farmer helps that particular farmer. So, assuming, and it is a big assumption, that the money actually goes to the farmer — not the retailer, importer, exporter, corrupt local kingpins, etc. — doing Fairtrade will help some individuals.

We should caution though that our belief is that only a fraction of the money intended will wind up with the farmer. The problem is that paying above market to some farmers and not to others transforms them into lottery winners. And corruption is almost inevitable.

The Pundit has a friend who handed a landlord $50,000 in “key money” in order to get a lease on a below-market rent-controlled apartment in New York City. In other words, the guy who gets to decide who gets to win the “lottery” of getting a rent-controlled apartment demanded a share of the winnings. It is illegal. But almost certain to happen. And note: there are no records to prove the corruption.

Yet, even if the money somehow reached the farmer, it would help that farmer, but not the world.

The reason farmers get substandard returns is because production is too high compared to demand. What we need is for the least efficient producers to go out of business, reduce the available supply of bananas and thus lead to a rise in prices to a sustainable level. Yet the very purpose of Sainsbury’s effort is to keep in business Caribbean banana growers who otherwise are so inefficient they would go under. This increases world banana production from what it would have been, yet does nothing to increase demand. So, inevitably, it impoverishes farmers in other banana growing regions.

That is not the end of the sadness. If this extra money now being paid to the Caribbean banana growers were not spent that way, it would be spent on something else: So some poor guy in Bangladesh loses his job making socks because people buy less since they spent their money on expensive bananas. Now the Caribbean banana growers (or whoever actually gets the Fairtrade premium) will spend more but the net is likely to be highly negative because the transfer is to support an inefficient enterprise.

Bob asks if the potential growth of the Fairtrade movement might ameliorate these effects? In fact the growth will compound the effects. The more Fairtrade dollars out there, the more overproduction there will be.

Just look at the EU and US and the effect of price supports on agricultural commodities. This is how we got warehouses of cheese, lakes of wine, storehouses of grain.

And the whole thing, incidentally, only benefits those individuals who happen to own property when the regime is put in. If the whole world decided to guarantee profitable banana production, the effect of this would be capitalized in the value of land suitable for banana growing. So any new entry into the business would have to pay a price for land or for a lease that assumes this guaranteed profit. That new farmer would benefit little, if at all.

That European critics of Fairtrade are less deeply concerned for poor farmers around the world seems unlikely to the Pundit. The Pundit doesn’t give money to street people not because we don’t care but because it encourages people to live on the street — a position from which advancement is difficult. But we support other efforts to help people.

Equally, encouraging people to produce products they can’t produce economically is not likely to help people or countries in the long run.

Very often people like to feel good about themselves by doing what is considered to be the right thing. Whether it actually is the right thing is another question entirely.

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