Is Fairtrade Fair or Am I a Naive Do-Gooder Who is Hurting the Poor?

What do you do when you discover that the Bangladeshi woman who sewed your new T-shirt gets paid so little that she lives in dire poverty, or that the football you kick around was made by an Indian child whose entire family stitch soccer balls for the princely sum of 70 cents a day, or that Nike was at one point paying Tiger Woods more to promote its products that the entire Indonesian workforce making the goods but living in poverty? If you’re like me you will be disgusted and want to do something about it.

One of those things I do is buy Fairtrade goods whenever I can.

Fairtrade is a system that seeks to establish a fair relationship between industrial world buyers and developing world producers. Farmers form cooperatives in which they avoid child and forced labour and seek ways to improve their farming practices. Buyers in the Fairtrade scheme agree that they will always pay a price that covers the cost of production (labour, inputs, insurance, etc. If the market price falls below this level, the Fairtrade buyer will not. If the market price rises above this, the Fairtrade buyer pays the market price), provide affordable finance and, on top of the purchase price, pay the cooperative an additional amount, usually 10%, to be spent on community development initiatives.

Sounds great, doesn’t it? But is it naive? Does it in fact undermine long term economic development? That’s what fans of free market theory claim.

Free market theory is relatively straightforward. It says allowing people to buy and sell without interference from governments or do-gooders like me results in the most efficient use of society’s resources. If my business only generates enough profit to pay workers $20.00 an hour but yours can afford to pay them $40.00 an hour, I will struggle to find staff and you will not. Eventually businesses like mine, which cannot compete, will shut down and businesses like yours will grow. It sucks for me but overall the economy gains by ensuring resources like labour flow to the most profitable areas. Workers gain because they get better paying jobs, the government gains by receiving more in tax, and we all gain as those taxes pay for better roads, hospitals and schools. Should some kind-hearted person artificially prop up businesses like mine, it may make them and me feel good, but it stunts the shift of resources to more profitable businesses. 

So on this theory, when do-gooders like me want to pay coffee farmers in Nicuragua more for their beans than the wider market is willing to pay, we upset the free market coffee cart. Instead of those farmers realizing their coffee is substandard and working hard to make it better so they can get a better price, they depend on my largesse to stay invested in a substandard product. Or when I insist on paying above market prices for cocoa, I unintentionally contribute to a situation where the cocoa growers stay in cocoa rather than investing in bananas where they could generate a better return. Fairtrade might sound fair, but it is naive and will only slow the economic development of poorer countries.

Mmmm…who is right? Maybe a free market is the most fair market?…Or maybe not. What all those free market fans forget to tell you is:

1. Their theory assumes perfect markets exist. They don’t

For example, the idea that free markets will push people into the most profitable jobs assumes a world where there is full employment. This means employers have to compete for workers which will push wages up until they reach their maximum affordable level. I will sell to the highest bidder, and those less efficient businesses that can’t afford me will fall by the wayside.

The problem is that these sort of employment markets don’t exist in poorer countries. In the world’s poor countries you have a huge labour force competing for a small number of jobs. Rather than driving wages up to a fair level, workers are forced to accept poverty level wages.

2. Their theory has never been tried in the real world. Fair trade has and it works.

Free markets have never existed anywhere in the world. “Hang on” I hear you say. “Isn’t ours a free market?”. Well, no, it’s not. We interfere in markets in all kinds of ways. Here’s just a few:

• immigration laws that restrict the free flow of labour (Imagine what would happen to wages if we opened our borders. There’d be a massive influx of skilled people from poorer countries and wages would fall until a new equilibrium was reached. Can’t see that happening in a hurry);
• minimum wage laws;
• workplace health and safety laws.

The reality is that free markets don’t exist and never have. We interfere in markets all the time to protect ourselves and to protect the vulnerable.

3. They underestimate the place of power

Blind Freddy can tell you there’s something perverse about a system that sees garment workers in Bangladesh mired in poverty while the corporations that buy from them make massive profits. In the perfect world of free trade theory everybody is able to negotiate the price they want for their services and product and to walkaway if the price is not right. In the real world the woman working in the garment factory doesn’t have this power and gets exploited.

So it seems to me I may not be the naive one, that just maybe it is the free market ideologues who are naive. The Fairtrade system may not be perfect, and it may not be the model we eventually need for the global economy, but for now it’s the best option we’ve got if we want to ensure our trade is fair.