It’s a super mark-up

Observations on fairtrade

The customer isn’t always right, but he is turning righteous. Sales of fair-trade goods – products that aim to pay a sustainable price to farmers in developing countries – are booming. The Fairtrade Foundation’s blue and green certification mark appeared on £700m of foods sold last year, up from £62m in 2002. Increasingly, shoppers are taking their principles to the supermarket with them.

But should we be asking who really benefits from this collective attack of conscience? In one leading supermarket, for example, decaffeinated ground coffee sells at £1.95 for a 227g bag. The Fairtrade version costs £2.69. How much of the difference goes to the farmer?

About 10 per cent, according to Eamonn Butler of the Adam Smith Institute, a free-market think tank. The rest, it would appear, goes to the retailer – or at least that’s what we must assume, as supermarkets do not declare their margins.

This raises the issue of what is driving the boom in fairly traded goods. “You have to ask yourself how much of this is responding to customer demand, or pushing a premium product and taking a big margin,” says one City retail analyst. “I’m very cynical. What the supermarkets want to do is have many, many tiers of own-label products that they can then put a Fairtrade tag on and charge a whopping great margin for.” It goes without saying that Fairtrade products also boost supermarkets’ public image.

Still, does any of this matter when, according to the Fairtrade Foundation, some 7.5 million people across the developing world benefit? Not only do farmers get a guaranteed price for their produce, the local community gets a sum of money – a “social premium” – to invest in facilities such as health centres and schools. There is no doubt that these individuals gain a great deal. The problem is that the overall impact is more debatable.

Critics argue that such subsidies misdirect the resources of a society towards agriculture. “We are trying to create a human zoo where happy, simple peasants live as they always have, harvesting coffee in the mists, rather than having the economic incentive to try and develop their economy,” says Michael Munger, a lecturer in economics at Duke University in North Carolina.

And perversely, those extra few pence a bag might actually be making things worse. Why? Because the guaranteed price paid to Fairtrade producers encourages increased output – even if demand isn’t there. World coffee production in 2008-2009 is forecast to hit a record 138.4 million bags, up from 120 million last year. That oversupply could make things worse for most farmers, who don’t have a Fairtrade deal.
So, what’s the alternative? Free trade, not Fairtrade, says Franklin Cudjoe, head of the Ghanaian think tank Imani. Removing trade barriers would help the developing world more than anything else – as the Fairtrade Foundation freely admits. The biggest obstacle for developing-world farmers is the EU’s Common Agricultural Policy, says Harriet Lamb, the foundation’s executive director. Dismantle this obsolete system of subsidies and import quotas and everyone would benefit.

But the end of that system may be a long way away, and Africa’s insistence on waiting for the developed world to move first is making things worse, says Cudjoe. Barriers within African borders are as much of a drag on its economies as those outside. Shipping a car from Japan to Abidjan, Côte d’Ivoire, for example, costs $1,500, according to the Commission for Africa Report 2005. Shipping the same car from Abidjan to Addis Ababa, Ethiopia, costs $5,000. Removing regional trade barriers would earn Africa an extra $1.2bn a year, according to the World Bank.

Sadly, campaigning against trade barriers is more difficult, and less instantly gratifying than picking a packet with a smiling peasant on the front. “It makes [consumers] feel good,” says Munger, “and the grocery store is happy to provide that warm and fuzzy feeling.” Whether it’s in the farmers’ long-term interest is another matter.

This article first appeared in the 27 April 2009 issue of the New Statesman, Rise of the Geek