Archive for the ‘Trade’ Category

Fair Trade: from oppressed to oppressors?

Fairtrade accused of failing to deliver benefits to African farmworkers screams the Guardian headline. Alright, the headline doesn’t exactly scream, but if they can use journalistic clichés then so can I. Either way it’s certainly not good news for Fair Trade.*

So where’s that precious premium going, then, you might ask? Why into the hands of that holy grail of much development aid: the “rural capitalist” smallholder. That terminology comes from the conclusions of the the DFID-commissioned SOAS report behind the headline. That conclusion, however, switches the quotation marks, putting quotes around “smallholder” (presumably on the basis that are not all farmers so classified have operations that are especially small) and not around “rural capitalist”. It is an interesting indicator of possible cognitive bias.

But a premium for smallholder farmers is exactly what I always thought was the main point to Fair Trade, so what’s the problem? I see a whole raft of issues bundled up here, not all of which necessarily reflect badly on Fair Trade, but which nonetheless do lead to some uncomfortable questions about where now.

  1. Have FLO and their brethren just become too successful for their own good? The bigger you are, the harder it is to maintain the highest standards everywhere. Especially when you are relying on economies of scale to make the business proposition feasible.
  2. The myth of the noble peasant. I suspect most people in FLO know it’s nonsense, but their marketing plays right up to it.
  3. Even if they knew the myth is codswallop, how much did FLO, its senior people and backers, know about the high prevalence of wage labour in some of their agricultural producer sectors? Not much presumably because the report claims to demolish another myth: that “very little wage employment has been created by smallholders in Africa.” One might suggest that, given their business, FLO ought to have understood better, but it seems the failing might be rather more widespread than just the FLO.
  4. Who better to hold down the wages of casual labourers than people living in the same village, who know exactly how much work you can extract from someone for a few shillings, and know exactly how desperate their fellow villagers are for work?
  5. Lots of aid projects try to stimulate rural capitalists. Why? Because every project needs to identify local leaders and other agents of change: local entrepreneurs are highly prized. (Who do you think all those micro-financiers are lending to?) Plus, other things being equal, a greater proportion of profits earned by such people is likely to stay in and circulate within their communities. Newly minted capitalists may spot other business opportunities in their communities, and invest, which would be missed entirely by outsiders. Conversely, it is hard to design economic development projects that specifically benefit the poorest of the poor that aren’t either incredibly expensive or just hand-outs in disguise.
  6. What’s the counterfactual? According to the report many of these labourers are amongst the very poorest in local society, and often disadvantaged for other reasons. Maybe they struggle to get employment on other farms with better wages and employment conditions? They might be no better off as a result of Fair Trade, but it seems hard to argue they are any worse off.
  7. All of which might suggest a storm in a teacup were it not for the fact that the Fair Trade Foundation say fair trade is “about better prices, decent working conditions, local sustainability and fair terms of trade for farmers and workers in the developing world” (my emphasis added). Whoops! Did they over-reach?

So what now? The report contains a whole raft of recommendations for fair trade organisations, donors and governments, and yet many of these recommendations, especially to the latter groups, the authors themselves acknowledge are highly difficult if not downright infeasible to implement in the setting of smallholder agriculture. For FLO they include a bunch of technical corrections which may help to a degree, but which will probably also make the whole Fair Trade standard that much more complicated, and therefore more intimidating to smallholders.

The authors also suggest fair trade organisations should invest more in research (now there’s a surprise coming from a bunch of professional researchers!), and better monitoring. However, where will the money come from? The report implies where it thinks there is some fat that could be trimmed:

“These recommendations are unlikely to be welcomed by Fairtrade organisations, or by the supermarkets that profit from the important public relations and product differentiation opportunities that certified products provide.”

And so we’re back to one of the main criticisms of fair trade over the years: a great proportion of the consumer product price premium stays with supermarkets, and only a very small proportion makes its way back to the farmers. As indeed is true for the non-premium bit of the price. The trouble with much fair trade labelling, alas, is that it implies that this normal law of economics is somehow reversed in the case of the price premium on fair trade labelled products.

Would fair trade work without those excess profits for supermarkets? I know too little to tell, but one has to guess that market penetration would surely be lower if it were less profitable for the supermarkets, and so, at the very least, there is a trade-off that fair trade organisations need to weigh up.

Ultimately, the bigger problem seems to be the question: can fair trade live up to all its claims reliably on a tiny slice of the product price? If fair trade organisations take a bigger slice how ethical will that be judged? Do we view this as money taken from the consumers (who are paying more) or from the producers (who could receive more if the fair trade organisations’ slice was smaller)? Fair traders have a real problem any time the debate shifts towards the latter consideration.

Many economists think the basic premise behind ‘fair trade’, namely paying a higher price than you have to, is just plain poppycock. But the many achievements of the fair trade movement to date suggest that its rationale is no more poppycock than assumptions of rational economic decision makers, and indeed that it fits very well that gap between theory and reality. The problem is that those assumptions of economic theory work well enough in so many other cases to suggest the gap (and thus its market value) is quite thin.

That does not bode so well for fair trade, but I would not write off the power of human willing self-delusion so quickly. Yes we might all be better off buying the cheaper coffee and then sponsoring a child, but consumers like to think they are doing good when they buy ethically labelled products. It’s part of the modern feel-good sales pitch. If someone is going to trade off that, better they have the moral intentions of the FLO and its peers. The next time I have the option, I’ll probably choose to buy fair trade. There are far worse ways to indulge oneself in this world.

* The Fair Trade Foundation have their own response alleging some methodological flaws in the study. Through the grape vine I gather the researchers are pushing back strongly. I am not in a position to judge how serious is the flaw nor how significantly it might affect the final conclusions.

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More on monetising nature

Last week I blogged about how, despite all its drawbacks, monetising nature has a lot to be said for it in its ability to tap into the global system of values. As luck would have it I was not the only person pondering these questions that day; David Bent was also struggling with the challenges of lack of clarity over sustainability issues, but his dilemma was that of a consumer unsure as to which was the most “sustainable” carpet to buy.

David’s challenge was to determine which was the most sustainable carpet, what forms of sustainability were good value for money versus which primarily worked by appealing to middle class faddishness, and that the complexity in this field was such that the salesperson struggled to explain the differences and thus to make a well-informed recommendation. When confronted with these multiple interacting and complex variables on top of the standard set of consumer choices, such as colour, pile, look, pattern of the carpet, it is not surprising that even an expert can quickly become bewildered.

However, if each of these different variables could be priced then the problem would be rapidly reduced to the standard choice of which products do you like most (in a subjective sense) versus their respective prices. For instance if carbon were taxed or otherwise priced, those manufacturers who sought to reduce their carbon footprint would benefit from lower prices compared to their competitors. They need not directly reduce their carbon footprint, however, they might find it cheaper to buy offsets off the shelf, e.g. from forest protection. Water and biodiversity can be similarly priced and thus incorporated into our economic decision making. Yes having the wrong price can be harmful, but it is easier to adjust a price once you’ve agreed the principle, than it is to agree it in the first place as has been highlighted by the entrenched opposition to global climate change negotiations.

I think part of the problem is that many environmentalists hope or assume that biodiversity and landscape conservation can all be marketed like ecotourism. While some tourists will always opt for the simple pleasures of the Costa del Sol or the bright lights of the nearest shopping paradise, there is a very substantial market of tourists who want to go somewhere different, that feels a bit special, makes them feel a bit special, and is away from the beaten track. The hotels that appeal to such tourists are all unique in their own particular way, little of which boils down to price, although accessibility can have a big impact on the price at which services can be delivered in remote wild locations. Ultimately, such tourists are choosing a place, with all its attendant charms and flaws: more than anything else, it is an emotional choice.

A shopper in need of a carpet, however, is in a totally different position. They have no access to the sort of  detailed information about the sources of the products they are comparing or glossy photographs of the landscapes, and even if they did would unlikely to be motivated enough to want to peruse it all in detail. Instead they want a mechanism that makes their life easy. This doesn’t have to be entirely monetary, e.g. the energy efficiency star ratings system is rarely translated into the dollar cost to run the device concerned over its expected life span, but internalising such costs as carbon emitted or biodiversity lost into the product price, is the only guaranteed way to ensure the consumer pays attention (or pays the price for not).

Will monetising nature lead to distortions in how certain landscapes are managed? Without doubt. Will it be a shame if some unique characteristics are lost as a result? Yes. But if those unique characteristics are not sufficiently well appreciated to merit more stringent protection then that is s decision that society has collectively made. Moreover such distorted landscape management will almost certainly be better than converting the whole place to mechanised agricultural production.

At the end of the day the choice for society is very simple: pay for it, one way or another, or lose it.

TEEB: point & counter-point

Two recent opinion pieces for and against The Economics of Ecosystems and Biodiversity (TEEB).

Jennifer Morris of Conservation International is in favour:

I would describe it as the Rosetta Stone for natural capital —the key to understanding the benefits and services that biodiversity and ecosystems provide to people. TEEB is a tool that finally has enabled the environmental and the financial communities to start speaking the same language about how to value nature— an increasingly important issue that stands to affect every person on this planet.

CI see a huge benefit in the proper valuation of natural capital, and incorporation into business plans and accounts. In particular, they want to take environmental concerns out of the CSR and HSE departments, and into the heart of a business’s DNA, as overseen by the CEO and CFO. I agree. This kind of shift in how we assess the viability of business propositions cannot come soon enough.

Pavan Sukhdev, the father of TEEB, and now a board member of CI, has called for the cessation of “profit maximization at the cost of everything else”, but that is precisely what Frederick Kaufman, writing in Nature, fears will happen all over again with water:

Some environmentalists argue that putting a price on fresh water may be our best bet to save the planet’s supply. The more it costs, the less we will waste. In fact, the financialization of precious resources underlies the Economics of Ecosystems and Biodiversity (TEEB)

Lots of experts predict serious fresh water shortages in coming decades, and even some water wars. (Which, arguably, the Darfur conflict is.) Certainly Kaufman’s not short of a bit of doom-mongery. But rather than seeing economic valuation as the solution, he sees that heaping more misery upon us water users:

Investors of all stripes adore the apocalyptic vibe. Within the interstices of violence and chaos there will be money to be made. These days, the biggest profits do not come from buying or selling actual things (such as houses or wheat or cars), but from the manipulation of ethereal concepts like risk and collateralized debt. Wealth flows from financial instruments that are one step away from reality.

Making money come out of the tap means that fresh water must be given a price anywhere it is traded — a global price that can be arbitraged across the continents. Those in Mumbai or midtown Manhattan who understand the increasing value of water in the world economy will speculate on this undervalued ‘asset’, and their investments will drive up the cost everywhere. A water calamity in China or India — and the food inflation, political instability and humanitarian crisis that will surely follow — will reverberate in price spikes from London to Sydney. This is how bankers will profit.

The reverberations of a global water futures market can hardly be imagined. This much is clear: a water betting game will leave crops thirsting and push the global price of food far beyond the peaks of the past five years.

For what it’s worth, Kaufman does not object to the valuation process, just the commoditisation of a vital part of nature into just another asset class, complete with assorted derivatives, that will attract speculators chasing the latest opportunity for out-sized returns with little interest in its underlying nature. The Economist has repeatedly pooh-poohed the impact of speculators on global food prices (citing fundamental mismatches between supply and demand), and economists in general will point out that where shortages are anticipated in future, derivative markets are an excellent way of attracting the necessary investment today to offset that. The problem is the volatility, but that’s hardly unique to water. Not sure yet where I stand on this one.

Hat Tip: Alex Evans @ Global Dashboard

Ease of doing business is not the same as poverty alleviation

I am a little bit puzzled about the complaints listed in a Guardian piece last week criticising the World Bank’s rankings of the easiest countries in the world for doing business. Surely if such a ranking is to be meaningful it has to see the world substantially from the point of view of business people? I.e. fewer environmental rules, and lower levels of unionization will be just as much of interest to a businessman considering where to invest as the amount of red tape that s/he will have to deal with. Conversely s/he is unlikely to take much account of inequality and poverty indicators except where they may directly affect their intended workforce, so why should they feature in the rankings?

If the World Bank were not putting out these ratings, I imagine someone else would be by now. So, rather than shooting the messenger, complainants might want to focus on or more of the following solutions:

  1. Raising minimum standards worldwide so there can be less labour rights arbitrage.
  2. Simplifying regulations to focus on the important stuff.
  3. Improving consistency of implementation / enforcement.

Long rulebooks filled with obscure stipulations are a corrupt official’s paradise! (And civil society organisations are just as much affected by barmy employment law as businesses.) Furthermore, if implementation is uneconomic or enforcement uneven you can actually have a negative affect on workers’ rights and the environment since the more honest employers are put off from investing, leaving the field free for those who never have any intention of playing fair.

That aside, I can guess at one underlying cause of the complaints which is completely skated over in the article. Maybe the problem is not so much the rankings (which by increasing information flow can only be a good thing), but the emphasis put upon them by Western donors as a proxy for supporting the concerns of their own multinational firms, at the expense of broader development issues. E.g. the complaint from Zambian civil society that credit is only available to big businesses. Now it might be that national governments in places like Zambia are misinterpreting donor concerns (à la isomorphic mimicry), but it wouldn’t surprise me if, on this point, many donors were guilty as charged. Don’t expect too much altruism from Official Development Assistance aid.

Seeing the land for the jatropha

Amongst all the kerfuffle about biofuels a couple of years back I frequently found myself sub-vocalising good ol’ Pete Townshend:

Meet the new boss
Same as the old boss

And now Anna Locke over at ODI has written an excellent, balanced piece dissecting the real problem: land management and large-scale agricultural investment, of any stripe. She writes:

Among the incentives is the fact that land simply does not cost very much in many ‘land-rich’ African countries such as Tanzania and Mozambique, due to exceedingly low land rentals and taxes, which do not adequately reflect the true value of the land to the users. This means that companies can hold onto large areas of land without having to think too closely about the cost of doing so. Land is allocated on a first-come, first-served basis in many countries, prompting a rush by investors to get to the head of the queue and get as much land as possible. This also means that companies often try to secure larger areas of land than they can manage initially in order to guarantee taking the project to scale or for future expansion, or to get hold of an asset that they can sell on in the future.

Despite the above, cheap land and labour are often the cornerstones of governments’ investment policies. This has been encouraged by some of the international donor agencies and is seen by governments as a way to compensate for often difficult business environments with high costs in other areas. But how can this be squared with the rights of communities and local citizens to adequate compensation for their land and decent work conditions?

I have it on good authority that considerable effort by government and some CSOs was subsequently put into developing a Biofuels Strategy for Tanzania, when the country reportedly has some excellent land laws that are just not enforced very consistently. Maybe this was clever strategy by the CSOs – taking on land law enforcement generally might be too big a challenge – but it appears to be another case of mistaking a power/politics issue for a technical problem, for which, by implication, a technical solution can be found. Given that the biofuels revolution appears already to have faded, can lessons be easily transferred to other agricultural sectors? If the issue was framed as a technical problem in the first place that might be difficult.

I have some other observations cum recommendations:

  • Land is definitely cheaper in much of Africa than it is in developed countries. Any economic manager / adviser would be mad not to try to leverage that for the good of the country.
  • But navigating local community politics is hard. Investors are right to be wary!
  • Developing country governments can help most by establishing clear, transparent processes for handling this, and then following them properly.
  • Unfortunately, under misguided pressure by investors, they often appear to short-circuit their own rules which are usually put in place in the first place to protect local people from ‘evil investors’.
  • So to developing country governments I say: Yes investors may need help navigating your byzantine bureaucracy, and you should ensure no officials unreasonably hold up business. (Actually it would be great if you could do that for everyone else, but I understand you cannot do everything at once.) But please do not attempt to spike due process.
  • To investors I say: Face up to reality. This won’t be easy and you need to be prepared for the long haul. The best way to win over local people is to be good employers who respect the local environment etc. Don’t make promises of new schools etc that you cannot keep (unless/until you make millions). You’re a business not a charity, so just focus on being a good business!

That all said, any rich countries looking to trim some budget fat and maybe to make a nice deal at Durban next week should give the strongest possible consideration to ditching their “incredible and immoral [biofuels] subsidy” schemes. (Quote from Mark Lynas)

In which CORE bids to Stop the War on the Poor by declaring bizarre war on FSC

This has me much bemused. FSC could do with some tightening up on standards and procedures, that is for sure, but the Congress on Racial Equality’s conclusions leave me asking WTF? They claim to expose three myths:

  • Myth 1: FSC is Transparent – FSC created its own NGO-influenced certification system without regard for national forest management standards or international standards bodies. FSC therefore lacks the arms’ length separation and independence enshrined in more reputable certification systems, such as Sustainable Forest Initiative (SFI) or Program for the Endorsement of Forestry Certification (PEFC).
  • Myth 2: FSC Protects Endangered Species – FSC products contain tropical forest species such as red lauan (shorea), a species listed as critically endangered by the International Union for the Conservation of Nature (IUCN).
  • Myth 3: FSC Helps the World’s Poor – FSC labels increase the cost of otherwise low-priced goods in places like Wal-Mart for America’s disadvantaged, minority communities. Additionally, FSC certification is denied to goods produced from land converted from forests after 1994. This rule denies the developing world’s poor the opportunity of greater access to global markets.

It is questionable whether these even deserve the time of day to respond, but here goes:

  1. Quite apart from the fact that many people – myself included – might believe that FSC’s independence is a good thing, how is that not transparent? Transparency has nothing to do with the degree of separation between different entities. FSC certification is voluntary any way, so if you don’t like it, you can ignore it.
  2. CORE’s complaint here ignores the alternative. FSC is not perfect, but you can bet that FSC certified products have far lower proportions of such endangered species than non-certified ones.
  3. This is the most nonsensical allegation of the lot. FSC certification acts to ensure that environmental destruction costs are not externalised; such externalised costs fall predominantly upon the poor (e.g. as with climate change). Such externalities are far more common and typically more egregious in developing countries than in rich ones which have more robust institutions to police them. FSC also has significant safeguards to ensure local communities and the workforce get fair deals. As for the argument about the impact upon poor customers, one might as well argue that slavery should never have been abolished due to the impact on sugar and tobacco prices for poor, benighted consumers.

The longer report makes a smidgeon more sense, but is still a mix of confused arguments and contradictory positions: for instance it’s either a good thing to exclude endangered species from paper production or you can keep prices rock bottom for those poor American consumers (who aren’t half as poor as poor Indonesians suffering from respiratory illnesses due to out-of-control forest fires), but you cannot have both. I have previously argued that the barriers to entry for FSC certification should be simplified, and that would benefit poorer producers in developing countries, but let’s not hold any illusions, the vast majority of cheap wood and paper products are felled and manufactured by sprawling industrial empires; short of a penny or two to improve their operational standards they are not.

The Congress on Racial Equality is barely known in the UK, so I am unsure as to exactly how big a beast they may be on the other side of the pond, and how seriously they may be taken. But one look at their website tells me they are virulently against the environmental movement and firmly aligned with American conservatives (“Niger Innis [the author of this pathetic ‘report’] gets standing ovation at Conservative Leadership Conference ”). Have they received any donations from Asian paper barons recently, one wonders?

As for their report on FSC certification: tosh, utter tosh!

Certification: all things to all men?

IIED’s Sian Lewis has an intriguing piece on Fair Trade over at the Due South blog. My eye was particularly taken by this section:

Other participants shared Justice’s concerns over the infrastructure for fair trade certification. Jorge Chavez-Tafur, from the Centre for learning on sustainable agriculture (ILEIA), asked “Is it true that fair trade standards are so complicated that companies can’t cope?”

It seems the answer is yes. Even from within the movement itself, there were calls to address standards. Merlin Preza, coordinator of Fairtrade Small Producers in Latin America and the Caribbean, said “the problem lies not in meeting standards — of course producers can meet them — the problem is verification”. She explained that poor farmers, who are often illiterate and live in isolated rural areas, often find it very difficult to navigate all the ‘red tape’ involved in registering products and proving where and how products are grown.

“We are asking for simpler — not lower — standards,” said Preza. “They need to be regionally specific because local contexts and cultures can be very different,” she added.

The same problem pertains to forest certification by FSC et al, and I see similar dangers in the emerging standards and safe-guards for REDD+ schemes, especially in the voluntary market. (I’m not familiar with MSC certification of fisheries, but suppose there is likely to be similar issues.)

The dilemma for certifying agencies, I suppose, is that some investigative journalist comes along and exposes some, perhaps relatively small element of a certification supply chain for, say, having dodgy labour practices. The resulting negative publicity could tarnish the entire brand, so the certification standards bodies put in a rule about that.

Unfortunately this is a slippery slope to massive complexity. I’ve seen FSC certification checklists which extend to more than 200 items. Each criterion or sub-criterion on its own is reasonable and generally not too difficult to deliver, but put all together and it becomes immensely challenging. FSC-certified forest managers nearly always have several Corrective Action Requests on the go; failure to improve by the next inspection could see their certificate suspended.

All of this drives up costs. Sian’s post continues:

A bigger problem for fair trade — especially as it goes ‘mainstream’ — is competitiveness. Being able to compete with big business has always been a major challenge for small-scale farmers, who have fewer resources, less bargaining power and limited access to the latest technologies.

Big businesses are taking advantage of a scheme that was originally designed for small-scale producers and now compete with those producers, creating a major problem, said Preza.

This issue is magnified many times over for FSC certification, which was originally devised to reward sustainable management of tropical forests by or involving local communities, but most holders of FSC certificates are big companies, most either based in temperate zones and/or managing plantations not natural forest. Why? Because they have the resources to meet the myriad demands that forest certification makes, and secondly because if you’re running a pine plantation in Europe, you probably already meet 90% of the requirements as otherwise you’d be breaking the law. Conversely, even for big companies managing forest concessions in the tropics I hear that it is marginal as to whether it is profitable to get FSC certification. One could argue that is a market failure, but nonetheless it illustrates the size of the challenge.

So for anyone working on certification type issues, I have one big plea: keep it simple! Decide what are the most important criteria, and focus on them. If you want to add further criteria, then do it on a Bronze, Silver, Gold or similar type ranking (credit therefore to CCBA who’ve taken this approach), with ascending degrees of complexity. I’m all for setting the bar high, but don’t make it ridiculously high (otherwise you’ll limit take up), and don’t go for so many different bars that we lose track of what it is that we basically stand for.

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