Does Fair Trade Coffee Help the Poor? Evidence from Costa Rica and Guatemala
Mercatus Policy Series, Policy Comment No. 11
39 Pages Posted: 14 Mar 2009 Last revised: 13 May 2018
Date Written: June 29, 2007
Proponents of Fair Trade claim it improves the lives of farmers in developing countries by providing them a higher sale price for their crops, allowing for a higher standard of living, and offering the opportunity to escape the vulnerability of poverty. Drawing on field work conducted in Costa Rica and Guatemala, the author examines the observed effects of Fair Trade and finds it is unclear whether Fair Trade actually delivers on its promise. Rather, it may actually harm the long-term interests of small farmers in high-cost production areas. Some small farmers adopt Fair Trade primarily because it provides a cheap way to hedge against swings in market prices that would otherwise be unavailable to the poor. In other words, when the institutional environment does not provide the conditions for the development of complex contractual arrangements for all producers, Fair Trade can be a useful institutional surrogate.
In the long run, however, Fair Trade represents, at best, a Band-Aid solution to the problems a deficient institutional structure creates in coffee-producing countries. Reforming the institutional framework to foster entrepreneurship and trade can better address the main problems Fair Trade attempts to resolve, such as low pay for the poorest segment of the population and the erratic business cycle.
Keywords: Fair trade, coffee, economic development, Costa Rice, Guatemala
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