ABSTRACT
Ropi is a village situated in southern Ethiopia, about 320 km from the capital of Addis Ababa and 70 km from the town of Shashemane. The farmers of Ropi produce wheat during the wet season that they are forced to sell below the seasonal (low) market price to local intermediaries who bring the product to the Shashemane market. In the dry season, these farmers run out of wheat and have to buy it from the same traders at the seasonal market price, which is about double the wet season price. This story of lack of bargaining power and dependence upon intermediaries is strikingly similar for Kenyan farmers on Mount Kenya’s eastern slopes, for Peruvian handicraft producers in towns near Titicaca Lake, and for Thai organic rice producers in Yasothon Province. In many situations similar to these throughout the developing world, extreme poverty depends, among other factors, upon insufficient market access, weak organization and cooperation among producers, and lack of bargaining power with intermediaries. The goal of fair trade is to address these and related issues. Fair trade is an original value chain created by alternative trade organizations to improve the welfare of marginalized producers in developing countries by selling goods in developed countries that have been produced according to social and environmental criteria. Fair-trade schemes have been devised to foster inclusion of poor and marginalized workers in global product markets via consumption and trade. The mechanism for achieving this goal is a package of benefits that include anti-cyclical markups on prices, long-term trade relationships, credit facilities, and ‘business angel’ consultancy that aims to strengthen the capacity of producers. This meaning of fair trade is quite different from how the term is used in the field of industrial organization. This earlier meaning dates back to the 1930s and refers to schemes by industry trade associations to regulate competition among members, usually by requiring that prices be posted in advance and that no transactions take place except at the agreed prices. During the Great Depression of the 1930s, such schemes were part of the National Recovery Act in the US. More recently, fair trade has been used to specify the conditions under which trade should take place (Maseland and de Vaal 2002). In this framework, fair trade generally refers to the absence of duties, controls, and dumping practices in
international trade. For a similar use of the term, see also Mendoza and Bahadur (2002), Bhagwati and Hudec (1996), Stiglitz (2002), and Suranovic (2002). By contrast, the term fair trade as used in this book refers to food and artisan goods that have been produced according to strict criteria of social responsibility and environmental sustainability (Moore 2004; Hayes 2006). These goods are certified as fair-trade products and are promoted and distributed by networks of fair-trade importers and retailers. A useful way to understand what is meant by fair trade is to examine the price breakdown of a typical fair-trade product. Table 7.1 presents in absolute value and as percentages the revenues going to the various actors involved in the production and distribution of a 250-gram packet of coffee produced by a cooperative in Mexico and distributed by world shops in Italy. Farmers get 22.6 per cent of the final consumer price, which is around twice the standard share for a non-fair-trade product. The impact of fair trade is not limited to the producer price. Three components of the final price-general expenses (6.4 per cent), social projects (5.5 per cent), and the organic premium (3.4 per cent)—are effectively transfers to the firstlevel producer organization that markets the coffee and provides technical and social services to the farmers. These transfers include contributions to the provision of local public goods (technical assistance and capacity building) to affiliated farmers. Note that two important components of the value chain-transportation and processing-are not under the control of fair-trade producers or importers. This feature is also common to other agricultural products and is an important issue since the high value-added activity of product transformation does not contribute to farmers’ incomes. The reason is both technological and commercial: on
the one hand, the skills and economies of scale required to operate these transformative activities are often not available to producers; on the other, escalating tariffs and non-tariff barriers create insurmountable obstacles to the start-up of transformation activities in countries where the products are produced. A comparative examination of fair-trade and market prices helps to clarify the price difference between the standard and ‘alternative’ remuneration for farmers. Figure 7.1 refers to market prices of cocoa beans and Figure 7.2 to market prices of Robusta coffee; these figures illustrate that the fair-trade price is a sort of anticyclical markup on the commodity stock market price. The latter price is inherently volatile due, among other factors, to speculative trading, rigidities of supply in adapting to demand, and meteorological supply shocks. In times of commodity market lows (generally due to overproduction or shocks caused by the entry of new producers), the markup goes above 100 per cent. In times of commodity market highs (typically caused by climatic shocks which destroy part of the crop), the markup is reduced to a much smaller margin. Figures 7.1 and 7.2 show that fair-trade importers fix a lower threshold for the price (which ideally coincides with the minimum earning needed by local producers not to fall below the poverty line), and maintain a slight markup on the market price in its upturns.
