FLO Fair Trade Diversification and Structural Chan

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FLO Fairtrade, Diversification and Structural Change: Building an alternative theoretical argument : 

FLO Fairtrade, Diversification and Structural Change: Building an alternative theoretical argument Alastair M. Smith, ESRC Research Centre for Business Relationships, Accountability, Sustainability and Society. School for City and Regional Planning. Cardiff University.

Key Points: 

Key Points Diversification is essential in economic development - Fair Trade must consider this issue carefully However, idea that FT retards diversification: Fails to recognise the importance of agricultural investment and need to build economic capability Compares FT to idealised theoretic models not real world alternatives (ignores risks and capability constraint) Under alternative analysis critique can be strongly questioned

Diversification: 

Diversification Change the organisation of current activates to increase efficiency and rise prices ‘Upgrade’ in the existing value chain by moving into higher value processing activities Move into a new value chain where incomes are higher Diversification Structural Change

And the best governance to promote change?: 

And the best governance to promote change? Supply and demand provide price signals Price signals indicate what to produce, where and when Distorting signals lead to misinformation and inappropriate decisions States facilitate market operation – but must not intervene in price levels Markets are useful However, markets are not complete and coordination failures mean desirable outcomes do not necessarily emerge States should intervene to enhance market incentive systems Fair Trade: Critics argue market realities are at the root of producer problems – essentially commodities are over supplied, thus producers need to diversify… Fair Trade: Supporters argue norms based governance needed to produce desired outcomes as markets fail Self Regulating Markets Governed Markets

The Critique of Fair Trade: 

The Critique of Fair Trade Paying guaranteed minimum prices: “retards the diversification of production that is fundamentally necessary for the economic advancement of developing countries”, by blunting incentives, and, “promotes continued reliance on products that are arguably poor prospects in the long-run” (LeClair 2002, p. 957)

Diverging International Prices: 

Diverging International Prices

Building a Response to the Critique: 

Building a Response to the Critique

Agriculture is not a dead-end: 

Agriculture is not a dead-end Price trends are market determined and not fixed by physical characteristics e.g. textiles Some agricultural goods offer greater levels of value added (horticulture/organic/Fair Trade). Agricultural ‘development’ builds economic ‘capability’ (financial, human, social, physical) Successful diversification comes in economies with better capabilities Many countries have no choice anyway (Africa).

Not a choice between FT and perfect markets – but FT and ‘conventional governance’: 

Not a choice between FT and perfect markets – but FT and ‘conventional governance’ FT critique compares FT governance to theoretical market operation I know everything! I’ll convert my farm to grow avocados and sell them to the local avocado exporter!! Oh wait – no I don’t I know growing coffee is not a great life, but what else should I grow? I’d like to grow avocados'. But where do I get the seeds? And no one buys avocados around here! Thank goodness I didn’t get involved in that FT system! I’d still be growing coffee!

Prices are not everything!: 

Prices are not everything! (Assuming diversification options exist): Prices only indicate theoretical return Prices are not the only factor in decision making: Potentially I can get a better return for other activities But what are the chance of failure? Do I have the capabilities that I need to fellow the incentives? Price incentive +Perception of Risk + Capability

Who puts their wages all on red?: 

Who puts their wages all on red? Not a problem for those with capabilities to smooth consumption (An option FT provides) But less possible for those without resource (like poor agricultural producers) New activities have to be learned – efficiency and profits not instant Agriculture is risky, more so in the developing world, and subject to time lags

Further Capability Constraints: 

Further Capability Constraints I’m poor! By definition I lack the financial, social, human and physical capital needed to diversify Conversion of assets is not always possible and is certainly not free or cheap So I’ll consistently opt for possible, more stable but low return activities (i.e. forgo profit for security) “They didn’t have the resources or finances for diversification, so bananas were the only game in town”

How FLO Governance Contributes to Diversification: 

How FLO Governance Contributes to Diversification

Avoiding Intensification & Promoting Diversification : 

Avoiding Intensification & Promoting Diversification ‘Fairtrade will only get involved if it thinks that what it does can help the organisation improve the business and the lives of the producers’. Organisations must actively plan Demonstrate that it has developed ‘creating and maintaining good quality’ Diversification away from monoculture is a Process Aim in some standards Certified producers still subject to market forces Other incentives still exist around them

FLO certified producers have diversified!: 

FLO certified producers have diversified! Improving profit in current activity Efficiency and quality gains. E.g. investment in cupping facilities, application of technology Upgrading through value chains Coffee producers moved to roasting and wholesale of branded ready to use coffee Shifts into other value chains Other agricultural (organic) products Eco-tourism, craft (soap making) Industrial clothes making Developed their own certification systems

Key Points: 

Key Points Diversification is essential in economic development - Fair Trade must consider this issue carefully However, idea that FT retards diversification: Fails to recognise the importance of agricultural investment and need to build economic capability Compares FT to idealised theoretic models not real world alternatives (ignores risks and capability constraint) Under alternative analysis critique can be strongly questioned but empirical work is essential

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