Sunday, May 08, 2005

Third world gets help to help itself

*Zees thing call fair-twade. Vat iz it?*

If you shop or actually go to something we like to quaintly call a shopping centre (I know not what these things are, they were related to me by my special invisible friend Mr. Fluffy), there's a shop called the BodyShop where you can shop for products which they have shopped all around the world for to give their suppliers better value than you the shoppers.

Unfair? Not really, welcome to the world of fair-trade and ethical shopping. The idea I THINK is that the suppliers are not getting a fair deal. They never really explain how the amount paid to the suppliers is not fair and we will analyse possible reasons for it further on in this article. But because they are not getting a fair deal, they pay these suppliers more than market value and pass on the cost to us consumers.

Now before any Conservative readers of mine (of which I seriously doubt would read my blog) get into a tizzy and whose head starts spinning like Linda Blair in the Exorcist, these suppliers are normally poor women in the 3rd World and the consumers rich affluent in the 1st World who want to make the world a better place. That was sarcasm by the way.

However, before you anti-globalist nuts go wild at the prospect of doing good this way, consider the following.

1. Is the market value unfair? This is the biggest assumption that worries me. Fundamentally, the market prices goods via the mysterious market forces of something Economist like to call Demand, Supply and Marginal Utility. So people pay for a good what they think is a good value to them individually. Aggregated, they give a very very good indication of what the fair price is. Hence as a result, why are we essentially being forced to pay a premium for the goods?

Now, the major wrinkle in the sanctity of the market is the following. Every good free-marketer also knows that the market is not always perfect, often businesses and governments with their good (or nefarious) intentions muck it up. Or as William Blake puts it, the road to hell is paved with good intentions.

So market failures do occur which could artificially depress the prices that the suppliers might otherwise get. The best example would of course be protectionims, ranging from embargos to import restrictions to import taxes. By artificially reducing the total demand, the price that one might otherwise get, falls. Also, even if it were not a total embargo but merely restrictive, the price is then artifically raised via import taxes (these suppliers do not have the ability to force the importers to absorb the price and simply push the import taxes straight to us, instead the suppliers have to absorb the cost) and this depresses the amount they would otherwise make.

Another market failure that would conceivably screw them might be market volitility. Every reasonable person would agree that prices espeically in primary products are particular volitile (not as bad as semi-conductors but bad enough). The problem is that these suppliers e.g. shea butter sellers in Nigeria are strictly small time and do not have the capability to dictate the prices to the market (or to hedge against it) and are at the mercy of the international markets.

2. But even if the market hits a snag, is it all that bad? I think that while theoratically the above arguments are logical, they don't quite appear to be so dire if dire at all they are in the real world.

Protectionism sucks we all agree, they hurt everyone except the industry they coddle. But at the same time, the kind of goods that we see fair trading in (coffee, shea butter, various primary goods) are on a scale so small that even where protectionism exists (and for many of these goods they don't), the market is still large enough to absorb them without forcing down the prices that the suppliers could otherwise get. The world is huge and the 1st World affluent. I think we need to find another reason for fair trade.

On market volitility, fair trading as you should have inferred by now is a very selective and small scale. Giving them the benefit of the doubt, we'll simply attribute them to initially teething problems (as opposed to we randomly like some 3rd world industries over others or this is simply a marketing ploy). But even so, it is very questionable whether market volitility is the reason why these suppliers are supposedly being screwed over. After all, many of these small time primary producers are getting into cooperatives (the huge ones can take care of themselves as it is), furthermore many countries attempt to protect their small scale producers.

So even if the US or the EU is acting bad, the US or the EU does take sides to protect their favoured trading partners against the other super power (see the Banana trading wars between the US-Carribbean v EU-Africa). Furthermore, technological advances on the buyer's side (market liquidity and risk allocation) as well as on the supplier's side (simple handphones to call ahead to the market or radios to get information) are smoothing out this volitility.

3. Does Fair-Trade help the suppliers? Remember, fair-trade (as if free trade weren't fair already) means paying a premium for which we as the consumer foot the bill. Increased cost means that this must be somethign we would pay a premium for. Guess what? Consumers aren't really biting. Yes we may be socially conscious (whatever the hell that means) but it doesn't mean we're stupid. Consumers may say one thing in a survey but do another when their dollar is at stake. The rise of Walmart is testimony of our desire to get massive discounts on basic goods! But fortunately for them, it seems that if packaged right i.e. as a luxury, we might be willing to pay more for them.

But seriously, why bother? Trade isn't a bad thing. If we're all so willing to give aid to Africa, why do we block their goods or artificially inflate their prices? It's exactly the same thing! The more we buy the better off those people will be. So stop using these fuzzy math and voodoo economics and start acting rationally. We'll all be better off for it.



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