Connect with us

Economy

Fair Trade – an alternative made to Aid and Free Trade?

Published

on

“Trade not Aid”: this used to be the slogan of third-worldist movements in the mid-1960s, an epoch when intellectual figures in the Third World were denouncing the unequal exchange between the capitalist Center and the Periphery.

The aim was then to challenge the capitalist system at its very basis. Forty years later, in a global neoliberal context, it seems that the issue of unequal exchange has resurfaced through the Fair Trade movement, a movement which purports to help the poorest and most marginalized producers of the global South. Based on the perceived failures of aid and free trade paradigms, the Fair Trade protagonists count on the generosity and solidarity of Northern consumers in order to achieve fairer trade relationships between the North and the South.

The Fair Trade movement is not monolithic however. There are at least two conflicting visions inside the movement. First, there is “historical” or “alternative” Fair Trade. In this approach, economic intermediaries are specialised in the distribution and/or sale of ‘Fair’ products – agricultural products or handicrafts – which are purchased from producers in the South by specialised group purchasing organisations in order to be sold in dedicated shops in the North. The rationale here is to create alternative trade channels operating outside standard distribution networks and where agrifood giants are excluded. At the global level, the World Fair Trade Organization (WFTO) federates specialised/alternative Fair Trade organisations.

Since the 1980s, another approach, the labelling one, has progressively imposed itself. It is epitomized by the Max Havelaar/Fairtrade label. Unlike the previous approach that certifies “organisations”, the labelling approach only certifies “products”. As there is no requirement to be ‘100 per cent fair-trade specialised’ in order to obtain a licence for the sale or distribution of Fair Trade products, the sale/distribution of certified products is in theory available to all corporations, provided that they comply with specific standards and pay their annual licence fees to the label holder (namely the national labelling initiative). As a result, the classical sale and distribution channels can be more easily integrated.

In this approach, producer organisations in the South that wish to sell their products under Fair Trade conditions must first of all obtain certification, which is subject to complying with the standards

defined in this respect by the certification organisation. It is also important to point out that the label holder does not buy or sell any product. It rather trades the use of the said label. At the international level, Fairtrade International is the federating entity whose mission is to promote the Fair Trade label. Created in 1997, Fairtrade International is based in Bonn, Germany.

The evolution of the Fair Trade movement from an “alternative” approach to a “product certification” approach has sparked many debates. The Max Havelaar/Fairtrade approach has often been accused of having betrayed the original mission of the Fair Trade movement. By working with agrifood giants and standard distribution channels, evolution that has helped boost his sales to unprecedented levels (4.9 billion euros in 2011), it would provide an opportunity of “greenwashing” for these controversial actors.

I will not follow this line of argumentation here. Rather, I will try to defend the idea that the Max Havelaaar/Fairtrade approach (abbreviated by FT), as it is currently conceived and as it currently works, is an alternative neither to aid nor to free trade. In some ways, as we will see, it tends to reproduce their shortcomings.

I – The Fair Trade economic model in theory

Developing countries producers face generally three kinds of interrelated issues in conventional markets: the price of their product are often very volatile; the price they receive for their products tend to be low, sometimes below the cost of production, and non-sustainable ecologically and humanely; due to the influence of middlemen and inequalities of power, their share of the added value created in agricultural value chains tend to be low, even in the circumstances when the price of their products is booming.

To address the issue of price volatility, the FT economic model sets for each product a guaranteed minimum price. The second issue is addressed by making sure that the guaranteed minimum price covers the cost of a “sustainable production” (that is a production which is environment-friendly and which is associated with decent working conditions for producers) and by the payment of an additional premium (which amounts to a pre-defined fraction of the FT volume sold by each producer organisation). As for the exploitation of producers by “unfair” middlemen, the issue is supposed to be tackled by the certification process (only buyers complying with FT standards are able to enter FT value chains).

The crucial element of the FT economic model is however the availability of “ethical consumers” from the North who are ready to pay a higher price for products labelled FT. This element of solidarity forms the basis without which the model is simply impracticable. The growth of FT markets is ultimately dependent on the growth of the population of “ethical consumers”. Hence the strong need for the FT movement to have recourse to awareness and marketing campaigns.

This is in a nutshell the logic, or the spirit, of the FT economic model.

Though the rhetoric of FT activists might sound progressive and opposed to free trade, as a matter of fact, the FT economic model obeys in practice to a neoliberal logic. I must add that this unexpected and unfortunate outcome derives from the premises of the FT economic model itself.

II – Some limitations of the FT economic model

For the FT economic model to be efficient and to be considered as a superior alternative to free trade, it has at least to provide to producer organisations better outcomes in terms of prices and market access compared to conventional international trade. However, owing to the way in which it has been conceived, there is no guarantee a priori that producers involved in the FT movement should be better-off than conventional producers, or at least that the FT economic model can help stabilise or improve the revenues of FT producers.  

First, there are limits to the “generosity” of the FT minimum price. If it is too high relative to standard price observed in conventional markets, there is the risk that consumers will be discouraged to buy FT products. However, if the FT minimum price is not generous enough, it will probably not have a significant effect on poverty. In other words, there is a trade-off to be made between the need to ensure the growth of FT markets and the need for the FT movement to have a significant economic impact for the producer organisations involved. Given the high level of competition in the field of “ethical consumption” (with the proliferation of “ethical labels” with varying standards), there is a growing tendency in the FT movement to privilege FT sales growth, tendency which implies to lower standards and to align FT prices more closely to conventional market prices.

Second, contrary to a popular belief, the disposal of a FT label does not guarantee producer organisations that they will be able to sell all of their FT production at FT conditions. Labelling initiatives can just simply define the rules of the game for FT markets (certification, minimum price,

pre-financing, traceability, etc.) and try to ensure that standards are enforced. They cannot guarantee that each producer organisation involved in the movement will have access to FT markets. They cannot guarantee either that buyers involved in the movement will pay a price higher to FT minimum price. In other words, as in conventional markets, market access and prices are also determined on a competitive basis in the FT value chains. Free trade logic takes place once FT rules and standards are accepted by the different protagonists in the FT value chains. As underscored by one author: “Fair Trade does not pose any challenge to the free market system; rather it is a part of that system that increases the welfare of a target group through a speciality market” (Mohan, 2010: 45/6).

Following this free trade logic, it is not a surprise that FT producer organisations are generally recruited not from the most marginalized but from the better-off among them. Producer organisations that have some “social capital” and some international ties are those that are more likely to enter the FT value chains.

“Over-certification” is the other unfortunate implication of this free trade logic. “Over-certification” means that some FT production (production obtained by following FT standards) had not been sold according to FT conditions. According to estimates from F air t r a d e I n t e r n a tio n al (FLO), over- certification concerns on average 30 per cent of the volume produced by producer organisations and up to 70 per cent in the case of “hired-labour” (that is plantation wage workers) organisations. Note however that some case studies tend to report higher over-certification rates. Whatever the case, one scenario must be borne in mind: as FT producer organisations tend to have higher costs on average, they might incur huge losses in the case where their “over-certified” production is sold on conventional markets at prices below their costs.

These limitations regarding price-setting mechanisms and market access explain why the local impact of the FT movement is generally mixed. In some circumstances, involvement in Fair Trade has proved beneficial for producer organisations. In other circumstances, this had not been the case.

III – The global impact of FT

If the evidence regarding the local impact of the FT label tends to be mixed, it is all but unambiguous regarding its global impact. It is at this latter level of evaluation that the shortcomings of the FT economy are more apparent. We must say that if Fair trade has been a huge marketing success (revealed by the important sales growth rates recorded until now), it remains until now a very insignificant part of the world trade system.

As an alternative economic model which aims to supersede aid and free trade, the FT approach tends to generate low average revenues for producer organisations involved in it. In 2008, the gross average revenues that accrued to producer organisations amounted to 74 Euros annually per worker. This figure which represents 16 per cent of the average GDP per capita of the Least Developed Countries in 2008 is not measured net , i.e. costs are not deducted.

As a transfer mechanism, the FT economic model seems also to lack efficiency. To take the case of the United States, for each dollar paid by “ethical consumers” to buy a FT coffee product, only 0.03 dollars are actually transferred to producer organisations. This low rate of transfer is illustrative of the fact that the surplus paid by consumers is appropriated by intermediaries, including the labelling initiatives.

If the FT economic model is supposed in principle to benefit producers in the poorest countries, in actual practice, the FT movement targets more those in the richest developing countries. The Least Developed Countries are for example underrepresented among FT producer organisations (13 per cent of the total). This outcome derives from the bias associated with the FT certification model. To be involved in the FT value chains, producer organisations have to pay for the certification (which is to be renewed annually). Given that the certification process is relatively costly, this tends to favour producers in countries with a higher level of development. There is also the fact that the offer of certification by labelling initiatives is biased towards products exported by Latin America countries (coffee and bananas for example), a region which is on average richer than Africa and developing regions in Asia.

Besides excluding producers in the poorest countries, the FT movement tends also to marginalise the countries which are the most dependent of the revenues obtained from the exports of primary products. To illustrate this, let’s take for example the case of coffee, the FT flagship product. Ethiopia and Burundi are the two countries most dependent in the world on coffee revenues which account respectively for 34 and 26 per cent of their export revenues. Until 2009, there were only three FT coffee certifications in Ethiopia and none in Burundi. Paradoxically, Mexico and Peru which are not dependent at all on coffee exports (less than two per cent of their export revenues) accounted for 31 per cent of the total FT coffee certifications, that is a share superior to those of Latin America countries like Honduras and Nicaragua which are much more dependent on coffee exports. For products like bananas and cocoa, the same pattern can be observed. In these different cases, the geography of trade flows obeys the classic determinants of conventional trade flows: development level and distance. American buyers of FT products will prefer to buy FT coffee in Mexico at lower costs than to travel until Burundi just to make the world trade exchanges “fairer”!

Conclusion

Despite the generous intentions of its protagonists, the FT economic model is not in practice an alternative to aid and free trade. It tends rather to reproduce their deficiencies, those of free trade notably. If the FT label has been more successful than previous attempts (“historical” Fair Trade) in terms of sales, it owes that performance to its association with standard distribution networks and the giants of the agrifood business, i.e. the same actors who are considered by many as responsible for a non-negligible part for the “unfairness” of the international trade system. Looking at its global socioeconomic impact, the limits of the FT economic model are certainly illustrated by the way in which it marginalises the poorest producers and the most dependent countries as well as it low average returns.

However, the most important criticism that can be levelled at the FT movement is that it does not challenge the current structure of the international trade system. Its acceptance of the current global division of labour is a serious impediment to the achievement of fairer distributional outcomes. For producer organisations in developing countries are not poor because they receive low prices. The fundamental reason is that they are trapped in low-productivity economic activities. Unless developing countries change their economic specialisation, by starting to process locally their own primary products, it will be in vain to expect a strong economic development. Centuries of history within the capitalist global system show that specialisation in the exports of primary products is not conducive to economic development. That lesson is still to be learnt by the FT movement.

The current challenge is not to adapt to the current neoliberal order (what the FT movement does) but to transform it. This radical idea of “alternative” Fair Trade remains relevant more than ever. Its practicability will no doubt necessitate stronger mechanisms of international solidarity between peoples.

References

Mohan, Sushil (2010) Fairtrade without the Froth: A Dispassionate Economic Analysis of ‘Fair Trade’ (London: Institute of Economic Affairs).

Sylla, Ndongo Samba (2014)

The Fair Trade Scandal. Marketing Poverty to Benefit the Rich (Pluto

Press; Ohio University Press).

Continue Reading
Comments

Economy

The suffocating economy of Iran

Published

on

Iran’s economy is on a roller coaster. The past year saw a dramatic rise in inflation rates and a historic fall in the value of the rial. The protests which followed the death of a 22-yar old Kurdish woman Mahsa Amini have magnified the creaks in the country’s economy.

On  January 22, The Iranian rial was selling at an exchange rate of 450,000 against the greenback, an all-time low. The rial has lost 29% of its value since the time the protest started. Iran’s statistical agency reported an inflation rate of 48.5% in December 2022, the highest level since 1995. November data recorded food inflation of above 70% in 12 provinces of the country.

Reports from the country suggest that more than half of the population is living below the poverty line due to spiraling prices. As per the latest forecast, the World Bank predicts a GDP growth of 2.9% for Iran in 2022 which will slow down to 2.2% in 2023 and 1.9% in 2024 owing to “slower growth in key trading partners and new export competition from discounted Russian oil”. However, the government’s response to the bleak economic indicators so far had been subtle and unperturbed.

Causes

The unilateral withdrawal of the US from the nuclear deal in 2018 and the sanctions that followed on oil exports and international banking has put heavy stress on the country’s economy.

 The country’s government debt-to-GDP ratio rose to 45% in 2020. According to World Bank, Iran’s unemployment rate reached 12.2% in 2020 before narrowly dipping to 11.5% in 2021. Iranian daily Etemad had reported that at least 23 workers have committed suicide since March 2022 in the country due to reasons like dismissal, punishment, or threats.

The government lifted import subsidies for essential goods in April 2022, to ease the pressure off the strained government budget, which subsequently triggered rapid spikes in food prices during May-June.

The Federal Reserve in November tightened its control over Iraqi commercial banks to restrict the illegal siphoning of dollars to Iran and other Middle-East countries. The new regulations blocked a huge chunk of daily dollar wire transfers to Iran. The Taliban takeover in 2021 had previously blocked access to hard currency to Iran via the Afghan route.

Amid the uprising, European Parliament approved a resolution designating the Iranian militia, Islamic Revolutionary Guard Corps (IRGC) a ‘terrorist’ organization. It also called for sanctions on Supreme Leader Ayatollah Ali Khamenei, President Ebrahim Raisi, and others. The US and UK too imposed fresh sanctions on Iran.

Response

Iran retaliated on January 25th by imposing sanctions on 34 British and European individuals and entities.

Former Central Bank of Iran governor Ali Salehabai had been sacked in December due to failure to control the rapid depreciation of the rial. According to analysts in the region, the Central Bank is injecting dollars into the market to thwart further depreciation.

In late January, the Central Bank decided to raise the maximum amount of currency that can be sold to individuals annually from 2000 euros to 5000 euros, to instill confidence and ward off fears about the availability of currency. The cap was initially introduced to stabilize the currency after the US pull-out of the nuclear deal in 2018.

Iran has not resorted to austerity to tide over the crisis. Instead, President Ebrahim Raisi presented a noticeably enlarged national budget in January to boost growth. Valuing 21,640 trillion rials, the budget is 40% larger than the previous one. The Islamic Revolutionary Guards Corps (IRGC) was allocated $3 billion registering a 28% rise over the last year, in a taunting message to the west.

Recently, Iran introduced gold coin certificates in the stock market to raise cash and mitigate inflation. The government is desperate to raise cash as the government budget is posting a deficit of $9.75 billion. Critics point out unrealistic revenue estimates riding on oil sales and over-optimistic tax collection figures.

To raise revenue, Iran has increased its oil exports to China to more than 1.2 million barrels per day over the past three months. The sanctions have in effect caused Iran to warm up to western rivals like China and Russia. Iran and Russia are reportedly in talks over the introduction of a stablecoin, backed by gold, to bypass western sanctions in cross-border transactions.

Iran’s response to the looming economic crisis was devoid of any extreme desperation. The government took all necessary steps to keep the dread within bounds. The present security situation in the country could go haywire if the economy collapses.

It remains to be seen how fast the government can ensure reliable alternate arrangements in place to sustain the economy. If not immediately, chances are high that the country may drift to panic mode.

Continue Reading

Economy

Prospects of Vietnam’s Economic Growth in 2023

Avatar photo

Published

on

The ongoing  war in Ukraine and increasing commodity prices across the world have impacted the developing countries. Countries in Asia which were recovering from the COVID-19 impact on their economies have to rework their recovery process by looking for alternate supply chains and reducing their financial responsibilities towards social sector through budgetary management. Among the developing economies in Asia , Vietnam showed an economic growth of nearly 3 per cent  even when many of the countries were witnessing  recession and reduced production because of adverse impact of COVID-19 .The stimulus packages that the governments across the world have to give to the manufacturing sector to accelerate production and meet the demands of the people. In a report released by World Bank in August last year it was stated that the Vietnamese economy is likely to grow by nearly 7.2 per cent in 2023 and it is going to sustain itself in 2024 with a likely growth projection of 6.7 per cent. These are encouraging signs .Few of the sectors which might be accelerating the growth process would be in the field of footwear and electronics. Vietnam itself has been undertaking strong anti corruption measures so as to facilitate stronger economic fundamentals and recovery from the COVID-19 impact.

The economic growth of Vietnam has been accelerating and the agricultural sector has been productive in ensuring food security for Vietnamese citizens. As per one of the estimates this sector contributed more than 14 per cent in national gross domestic product and has engaged more than 35 per cent of youth in the year 2020. This sector also earned valuable foreign exchange of more than U.S. dollar 48 billion. One of the interesting achievements of Vietnam has been increasing life expectancy, and its universal health coverage which covers more than 87 per cent of the population.

As per the plan of action which has been envisaged  for Vietnamese economy by its leadership it aspires to become a high income country by the year 2045. It is expected that with the sound economic fundamentals and more than 5.5 annual average per capita growth for the next 2 and a half decades it can reach that milestone. Vietnamese population is also young and is adapting itself for digital economy and building core fundamentals for its membership in different regional economic organisations such as RCEP and CPTPP.The bilateral free trade agreement with EU is also facilitating its growth in several sectors.

There have been significant structural improvements ushered through policy documents in terms of improving financial architecture, accepting global norms related to climate and environment, comprehensive security for population against poverty , and extensive investment in infrastructure development both in rural and urban areas.

In one of the articles written  in Bloomberg it has acknowledged that Vietnam is  now is one of the Asia’s  fastest growing economies which has grown to 8.02% last year and it even surpassed  government assessment of 6 to 6.5 per cent growth. The article also acknowledged the fact that manufacturing has been growing to near 10 per cent mark in comparison to last year and there is strong development in the services sector as well. Among the economies Vietnam’s  inward foreign direct investment has also been doing quite well and it has received nearly US  $27.72 billion last year .Asian Development Bank has forecasted that Vietnam is going to grow at the rate of 6.3% in the year 2023. Also the unemployment rate has reduced and with inflation clearly under 5 per cent , showcases that the long term decisions which we have taken with the initiation of Doi Moi(economic liberalisation process )  in 1986 has been bearing fruits.

In terms of sectoral assessment, the real estate as well as construction  sector ,the growth was about 7.78 per cent last year and the services sector growth was closer to 10 per cent. There have  been increase in exports last year as well and an increase of 10.6% was noticed. One of the core arguments which have been given with regard to Vietnam’s impressive growth has been related to trade liberalization, increased deregulation and improvement in the ease of doing business, investment in human resources and stable government were seen as critical attributes for this impressive growth in Vietnamese economy.

Major companies in footwear, electronics, and mobile production have invested in Vietnamese economy and few of the companies have shifted base from China to Vietnam. Improved  congenial economic environment has been appreciated by companies such as Adidas, Nike and Samsung to list few.

Owing to the development of new kind of digital technologies and better consumer awareness Vietnam is preparing itself for a major impetus in the E- commerce sector and therefore has been making extensive changes in digital based economy and more stress on science and technology development. Vietnam has acknowledged the fact that with the changes in sectoral composition of the economy, it is pertinent to develop necessary skill power and human resources which can seamlessly integrate Vietnam into global value chains and also help the services sector in exploring new markets.

Continue Reading

Economy

The Crippled Economy

Published

on

Lack of money is the root of all evils. Facts do not seize to exist because they’re ignored.

Lack of money is what Pakistan is experiencing and dealing with every now and then for the major part, since it came into existence either due to incompetence of our political leaders, their corruption, fighting wars of someone else or due to lack of long-term vision. Pakistan is currently in the middle of a turmoil trying to recover from devastating floods of 2022, facing the after effects of the withdrawal of USA from Afghanistan in the form of resurgence of terrorism, dealing with the political chaos created by the politicians who claim to be leaders of the state. Another yet most important, severe and devastating challenge that Pakistan is facing is its economic downfall. In one sense the lack of money is the root cause of all the problems mentioned above except the political chaos.

The economy of Pakistan, like a battle-hardened warrior has built resilience battling several challenges over the course of seventy years and is trained to survive but the recent political turmoil and the difficulty caused by nature (Floods), the burden of debts repayment, the threat of resurgence of terrorism and international indicators pointing towards an economic recession in 2023 has almost crushed the backbone of Pakistan’s economy.  

World bank has recently released its latest report forecasting Pakistan’s Gross domestic product (GDP) to grow at only 1.7% for the fiscal year (FY) 2023 that is less than the half of what it predicted to during last June (4%). It has also predicted a near to recession economic situation of the world economy characterized with high inflation, increasing interest rates and the circumstances caused by the Russian Invasion of Ukraine.

Pakistan must reportedly payback 73$ Billion in the next three years till the end of FY2025 and central bank of the country also known as State Bank of Pakistan currently has Foreign exchange reserves of about only 5.6$ billion. This debt repayment is the key challenge for Pakistan’s economic survival and other challenges such as ever-increasing inflation, high interest rate, the growing unemployment, the decrease in imports are all byproducts of the main challenge. The threat of a possible default is becoming evident and is looming over fiscal horizon.

Monsoon on Steroids, a phenomenon directly linked with climate change played havoc with Pakistan. These floods added a profound risk to the country’s economic outlook. The country lost infrastructure worth of billions of dollars and floods effected 33$ million people and 1700 people lost their lives. According to Ministry of Planning and development of Pakistan, Pakistan has faed the loses of more than an estimation of 10$ billion. The catastrophe of floods also played with agroeconomics as crops were destroyed causing destruction of agriculture sector which makes up to 24% of country’s GDP. A comprehensive recovery policy is needed and with the helped promised by international community at Geneva, government has passed one hurdle but to make the sustainable recovery abundance of resources, capacity and transparency is needed.

The policy uncertainty has been a major cause in creating a mistrust among investors and has almost ceased foreign direct investment in Pakistan. This policy uncertainty is due to lack of will of national leaders to take tough decisions. For Example, former prime minister of Pakistan rolled out of International Monetary Fund’s (IMF) program fearing his ousting and to gain public support he reduced prices of commodities such as Petrol & Gas and took country almost on the verge of default.

The policy uncertainty is caused by Political uncertainty which in turn lead towards economic uncertainty. Economic stability can only be achieved by political stability and there’s no other way around. Political stability can be achieved through free and fair elections and elimination of the role of establishment in political process of Pakistan. And if a government takes long-term policy goals into account while formulating a policy rather than short-term goals to gain public support and trying to keep hold on the reins of Government. The selfish politicians have to play selfless and put Pakistan’s benefit before their own benefit to get Pakistan out of this political and economic turmoil.

The only solution in sight for Pakistan is to carry on with the 6$ billion IMF program and to try for rescheduling of depts repayment as it owes more than 70$ billion to be paid by the end of 2025 that is currently not possible. Another step from international community can also help Pakistan that is if a country makes an investment of 10-20$ billion directly rather than in the form of loans as happened in CPEC. Moreover, help from rich friendly Muslim countries can also provide an array of hope for Pakistan.

But these steps won’t address the clear underlying malaise of the economy and the fact that something fundamentally will need to change, in terms of how much the economy produces versus how much it spends, to avoid default down the road. But none of Pakistan’s political parties seem to have the political will or ability to bring about such change. Priorities needs to be shifted from personal interest of political elite to national interest. They must be ready to sacrifice their political image and interest for the greater good and to save the country from default down the road.

Continue Reading

Publications

Latest

Trending