Shaky economics should not turn us all into cynics

HISTORICALLY, the term "fair trade" has meant many things. The Fair Trade League was founded in Britain in 1881 to restrict imports from foreign countries. In the US, businesses and labour unions use "fair trade" laws to construct what economist Joseph Stiglitz calls "barbed-wire barriers to imports''.

Such dark protectionist thoughts are far from the minds of the organisers of the UK's annual Fairtrade Fortnight. Their worthy aim is to raise the price paid to developing country farmers for their produce by excluding the inflated profits of the middlemen on whom they depend for getting their goods to distant markets.

This is how it works: in exchange for being paid a guaranteed price and meeting "agreed labour and environmental standards" (minimum wages, no pesticides), poor country farming co-operatives receive a Fairtrade mark for their products, issued by the Fairtrade Labelling Organisation. This enables supermarkets and other retailers to sell the products at a premium. Developing world farmers get a boost to their income, while first world consumers get to feel virtuous: a marriage made in heaven.

The fair trade movement, launched in the 1980s, has been growing rapidly. But Fairtrade-labelled products still represent a very small share - typically less than 1 per cent - of global sales.

The economic rationale for guaranteed prices is well known: stabilising the prices of primary products, which are subject to sharp fluctuations, stabilises their producers' incomes. This argument inspired proposals - most famously by John Maynard Keynes in 1942 - to create "buffer stocks" for the main commodities, which would take supply off the market when prices fell, and add to supply when prices rose. Keynes' proposal never made it into the Bretton Woods agreement of 1944, and, while buffer stock schemes resurfaced in the 1970s, they, too, went nowhere.

Left-wing economists such as Raul Prebisch, moreover, later advanced the theory of "declining terms of trade" for primary products: their prices' long-run tendency to fall relative to the prices of manufactured goods. This tendency seemed to be at work from the mid-1980s, as commodity producers experienced a persistent decline in prices. In addition, price fluctuations throughout that decade were huge.

Since then, the price decline has been reversed. Food commodity prices have increased 150 per cent since 2001. This has raised farm producers' income independently of the fair trade movement's efforts. The "declining terms of trade" argument has collapsed.

But primary product prices remain much more volatile than the prices of manufactured goods and services, causing large fluctuations in producers' incomes. This exaggerates the effects of booms and busts. So the issue of price stabilisation has not gone away.

It is difficult to see how the fair trade movement can contribute much to solving this problem, because the only serious policy for stabilising producers' incomes is to control supply.

The target of all versions of fair trade is "free trade" and the most damaging attacks on Fairtrade have come from free traders. In Unfair Trade, a pamphlet published in 2008 by the Adam Smith Institute, Mark Sidwell argues that Fairtrade keeps uncompetitive farmers on the land, holding back diversification and mechanisation. According to Sidwell, the Fairtrade scheme turns developing countries into low-profit, labour-intensive agrarian ghettos, denying future generations the chance of a better life.

This is without considering the effect that Fairtrade has on the poorest people in these countries - not farmers but casual labourers - who are excluded from the scheme by its expensive regulations and labour standards. In other words, Fairtrade protects farmers against their rivals and against agricultural labourers.

Consumers, Sidwell argues, are also being duped. Only a tiny proportion - as little as 1 per cent - of the premium that we pay for a Fairtrade chocolate bar will ever make it to cocoa producers. Nor is Fairtrade necessarily a guarantee of quality: because producers get a minimum price for fair trade goods, they sell the best of their crop on the open market.

But, despite its shaky economics, the fair trade movement should not be despised. While cynics say that its only achievement is to make consumers feel better about their purchases, this is to sell fair trade short. In fact, the movement represents a spark of protest against mindless consumerism, grassroots resistance against an impersonal logic, and an expression of communal activism.

That justification will not convince economists, who prefer a dryer sort of reasoning. But it is not out of place to remind ourselves that economists and bureaucrats need not always have things their own way.

? PROJECT SYNDICATE, 2012.

Robert Skidelsky, is professor emeritus of political economy at Warwick University.