A Response to the Adam Smith Report & A New Way to Think About Measuring the Content of the Fair Trade Cup

Abstract

Overall the analysis in this paper agrees with the Adam Smith Institute in that: There is a serious need for ongoing research and evaluation of Fair Trade (and indeed any poverty reduction or developmental intervention) to ensure that resources are not wasted in well intended yet inefficient, or, utility reducing strategies. Fair Trade should not be accepted or promoted as, the only or the best consumption based strategy for alleviating poverty. There are many worthy certification schemes and charities that are well deserving of support. The provision of appropriate incentives for producers and consumers inside a regime of international trade is strongly linked to incidences of economic growth and poverty reduction. However, our own analysis leads us to seriously question other aspects of the Adam Smith Report in that: 1. The specific arguments against Fair Trade lack a credible basis in either empirical evidence or theoretical understanding because: Many of them are no more than assertions bereft of any attempt to cite evidence. While some points do reference appropriately rigorous academic and institutional research, other evidence is of a lower and arguably insufficient standard of credibility. 2. There is a lack of cohesion as many of the criticisms of Fair Trade contradict the suggestion that patronage is allocated to other mechanisms instead. 3. Any idea of positive benefit from Fair Trade governance remains unexplored. 4. The lack of sophistication extends to the evidence cited in support of the argument that universal liberalisation is the best way to reduce poverty. Ultimately it is suggested that the Adam Smith report: Fails to establish suitable grounds for the rejection of Fair Trade. Fails to establish an appropriately credible case in favour of trade liberalisation. Fails to take an appropriately rigorous attitude to the evaluation of what are incredibly important issues. In place of the approach taken in the Adam Smith report this analysis suggests that: 1. The cases of China, India and Hong Kong show that it is the appropriate management of local economies in their interaction with the wider world that is the best way to reduce poverty. Far from universal liberalisation this has often included the active management of price incentives as well as direct investment to build the capabilities of local business and the poor. 2. Financially poor actors should not always be expected to voluntarily respond to market incentives because: The developing world is characterised by levels of risk and instability that can make long term planning difficult to carry out. By definition the poor lack the capabilities necessary to meet the immediate and longer term costs of diversification into more beneficial incomes strategies. The developing world often lacks the market incentive structures necessary to promote the structural change that might be necessary to reduce poverty. 3. Poor commodity producers are likely to be assisted in their effort to make the necessary diversification decisions through the provision of: Prices that cover the cost of sustainable production for as much output as possible, with the aim of reducing immediate levels of poverty and building the capabilities of those unable to benefit from market discipline. Long term contracts that offer a more stable environment in which to make decisions about the diversification of income strategies. The payment of upfront credit and an additional social premium to build capabilities which can be used to facilitate diversification. Ultimately it is concluded that: The case against Fair Trade is not strong enough to recommend a rejection of such a well established mechanism which is empirically proven to help with the reduction of poverty in a significant number of cases. The management of market incentives systems cannot be rejected wholesale, but instead individual strategies must be evaluated on the specifics of individual cases and contexts. This applies equally to state intervention and the Fair Trade minimum prices. The most appropriate response to criticisms of Fair Trade is to continue a broad based program of research with the aim of making recommendations for reform of the governance mechanisms.