An Economic Assessment of 'Fair Trade' in Coffee

The price of coffee plunged by more than 50 percent between 1997 and 2001, driving millions of growers into poverty. Fair Trade is a much-heralded micro-economic response that allows coffee-producing cooperatives to sell directly to importers and roasters in the consuming countries, bypassing the customary network of middlemen in their own countries. Consumers of Fair Trade coffee typically pay a premium, and cooperatives are guaranteed a floor price. In this paper, the author argues that Fair Trade is unlikely to improve growers???????????? standard of living in the long term: As a subsidy it is inefficient, and it distorts growers???????????? incentives to upgrade and diversify. The real problem is imperfect competition in intermediary markets; interventions should address the causes of this phenomenon rather than the symptoms.