International Economics

The Course

International Economics

The international economics course provides a presentation of the international economic theory with an emphasis on current applications, issues and policy questions. The course highlights six themes that are widely discussed by the news media: (1) globalization of economic activity; (2) free trade, fair trade, and “quality of life” issues; (3) trade conflicts between developing nations and industrial nations; (4) liberalizing trade- the WTO versus regional trading arrangements; (5) the dollar as a key currency, and (6) the impact of the economic crisis on the world as a whole. The relevance of theory will be demonstrated in the course through real-world economic issues. The material is covered through verbal presentations assisted by graphical methods and media resources, making it highly accessible to students with little economics background.

The Project: The Impact of Fair Trade on Participating Artisans in Africa

The concept of free trade has been at the forefront of U.S. economic policy for many decades and benefited from support through regional trading agreements such as the North American free Trade Agreement (NAFTA) with Mexico and Canada. While this has opened up many trading opportunities all over the world, smaller artisans in developing nations seem to have been left out of the positive aspects/impacts involved in free trade agreements. However, there are “trade operations which strengthen the economic position of small-scale producers and landowners in order to ensure that they are not marginalized in the world economy.” This is what the concept of fair trade applies to. It relates mainly to developing countries and covers mainly the following aspects. First, is making sure that producers receive a share of the total profit proportional to their input, and second, refers to improving social conditions for the artisans.

Since its early days after WWII, fair trade has continued to develop and has become a growing phenomenon in the world involving westernized countries such as the United States partaking in fair trade practices with regional organizations in developing nations to provide these producers with fair prices for the goods they provide. While trading between nations can greatly help all parties involved, on occasion small producer get pushed out of their market by bigger corporations that can afford to offer lower prices. Through organizations such as Ten Thousand Villages, artisans in developing nations are now able to promote and sell their goods on the global market while being paid a fair price for their work.  As fair trade itself and fair trade practices gain more importance in todays’ world, as global citizens, we feel that it is imperative to look into its origins, advantages and disadvantages, and to gain a better understanding of this process and how it can affect our lives and those of others in developing countries.

About Anca Voicu

Anca Voicu studied at the Academy of Economic Studies in Bucharest, Romania where she earned her bachelors degree in Economics in 1990 and the University of Birmingham, UK where she earned her PhD degree in Economics in 2000. She is currently an Assistant Professor of Economics at Rollins College, Winter Park, Fl.

Anca Voicu’s teaching has been chiefly in International Economics, European Emerging Markets and Intermediate Macroeconomics. She also taught courses in Principles of Macro- and Microeconomics, Statistics for Economics, Mathematics for Economics, Intermediate Microeconomics, An Economic Analysis of the Great Recession. Anca has a passion for teaching community engagement (CE) courses. Her students in the most recent CE course that she taught partnered up with Ten Thousand Villages and researched on fair trade issues in Africa.

Anca’s research interests include area studies with emphasis on Central and Eastern European economies, trade and trade modeling and forecasting, environmental economics and economic education.

Anca speaks four languages, loves to travel and experience different cultures.

Fair Trade Effects on Community Building Paper

Fair%20Trade%20Final%20Draft

Fair Trade Effects on Community Building paper

Fair Trade Clothing in Africa

Fair Trade Clothing Production in Africa 2
A PowerPoint presentation by Taylor White, Andrew Post and Scott Lamb

Click HERE to view.

 

The Socio-Economic Consequences of Fair Trade Agriculture in South Africa

Introduction

South Africa is a country on stuck between its history and its future. It is a vibrant emerging economy still restrained by an ugly legacy of racial segregation and oppression. From this dark past it has emerged onto the international stage as the strongest African economy, leading the African Continent in global economic integration.  Despite this apparent economic achievement the nation still suffers from terrible and widespread poverty among the disenfranchised workers and farmers that constitute a large portion of its population.  Fair trade has emerged as catalyst for change, hoping to combat widespread poverty and empower the poorest members of society to improve there the quality of their lives. These Fair trade organizations seek to improve the life of the South African farmer by investing in community and empower the worker to strive for a better life.  Socially these programs allow communities to flourish and create an environment in which the worker or farmer receives wage that allows them to live comfortably. However, the Fair Trade is not an end all to the social woes of the nation and the long term effects of such programs may be less than beneficial.  Fair trade is a policy motivated by compassion and as such does not necessarily lead to economic well-being on the large scale and in the long term.  In South Africa Fair Trade agriculture has led to better living and working conditions for a select group of individuals but has failed to produce any widespread or long lasting improvements in the quality of life for the majority.

Fair Trade and Agriculture in South Africa

South Africa, being a net exporter of agricultural goods, is a country in which the overarching effects of fair trade can be interpreted and understood on a larger scale. The agricultural sector in South Africa not only makes up a large part of their economy but it has steadily been growing in recent years and has contributed to the overall economic stability of the country through a global recession that has adversely effected nearly all economies. This growth however has led to a significant increase in the price of land making it less obtainable to smaller farm cooperatives and individuals.

This large domestic focus on agriculture is made more complicated by the lasting effects of apartheid. Right after the South African apartheid ended all but 15%[1] of the arable land in the country was owned by white farmers leaving that meager portion left over to the far larger black population. As a result most black farmers were relegated to either working as wage laborers on the farms owned by whites or by farming personal small plots of land, usually allowing for subsistence agriculture but not providing enough land or capital to turn that farm into a profitable enterprise. This paired with the fact that of all agricultural land in South Africa only 22% of it is “high-potential arable land”[2] due to a lack of water and irrigation in other areas. It also stands to reason that the more arable and irrigated plots of land would be owned by large corporations or white landowners and would not end up in the hands of fair trade farmers. The South African government has already implemented policies and programs to try and assuage the inequalities that exist within the agricultural sector by redistributing land and implementing policies that no longer favor the white majority. Though these programs have proven to be helpful it is obvious that the these policies could be, and most likely are, assisted by the fair trade co-operative farms that operate within South Africa and aim to make all of the workers a part owner of the enterprise.

 

Fair trade in the South African agricultural sector has been growing and has become more influential in recent years; however they still only make up about 2% of the agricultural sector with over 300 smallholder farms and over 15,000 workers. Like most fairly traded agriculture South African fair trade is more focused around cash crops instead of staple crops. While sugar and grain remain the two largest portions of the agricultural economy of South Africa the top fair trade product is wine and grapes followed by citrus then tea, with almost all of the rest of the fair trade production being in fruit. This is important to note because those crops that are grown for fair trade purposes have higher profitability and lower inputs. It is also due to the fact that people are more likely to buy a wine bottle that is fair trade as opposed to a sack of grain that is labeled as fair trade. This leads to the problem that fair trade is only helping farmers that work in particular industries. Being that these agricultural products are all subject to the climate and thus the area that they are grown the focus of South African fair trade on less vital sectors of production leads to improvements in some parts of the country but not in others.

Fair trade producers in South Africa however have to conform to more scrutinizing and rigorous standards set by the government in accordance with the post-apartheid policies noted earlier. These policies are not regarding the product but rather the enfranchisement of the farm worker by management control, employment equity, and skills development. Fair trade in South Africa plays a wider role relative to some other countries in which it has been implemented because of the legacy of apartheid and thus the dire need to create equity, both economically and socially. This greater need for equality and justice has led to a greater social acceptance of the practices of fair trade and the goals they represent in that they are cohesive with the goals of South African Society as a whole and serve the dire social needs that exist in South Africa to an extent not realized in most other countries.

The benefits realized by individual fair trade farmers in South Africa through the organizations and farms that they work for are considerable. They earn wages higher than the federally mandated minimum wage for farm workers of less than 50 cents an hour[3] and they also enjoy a number of social benefits resulting from fair trade initiatives. Fair trade farmers have seen steady growth in their wages and have also proven not to be totally economically insular, with wages rising along with world food prices. The fair trade organizations that work in South Africa also have prescribed a long list of requirements regarding the general working conditions and social welfare of the farm workers. These regulations require that the health and safety of all workers is insured through extensive training as well as the provision of equipment that would be otherwise inaccessible to the average farm laborer.

On these fair trade farms the farmers usually get to decide over the expenditure of the fair trade premiums which are usually used to build more advanced and efficient facilities making their jobs easier and safer as well as increasing the productivity of the farm. While many opponents of fair trade argue that the system has a negative impact on other farmers in the agriculture industry there is some evidence to the contrary in the case of South Africa where “the presence of Fairtrade has had an indirect positive impact for workers on neighboring non Fairtrade certified hired labor farms where management have been pressured into providing similar improvements including working conditions and wages for their workers to match those of Fairtrade certified farms.”[4]  To a certain extent this refutes the argument that fair trade can have negative overarching economic impacts, however the extent to which these improvements happen in relation to the economic harm that it may cause are not easily measured and are far more complex than any number could indicate. By all indications the fair trade movement in South Africa has generally succeeded in improving the wages and working conditions of farm laborers and is continuing to work towards the eventual re-normalization of the country from the legacy of apartheid.

Fair trade organizations in South Africa also work to make the workers that they aim to assist a bigger part of the farms on which they work. As a result of the effects of apartheid many South African farm laborers feel ostracized by the inequality as well as their relative lack of power and influence within the agricultural sector. Fair trade aims to assuage this by creating a system that enfranchises the worker and creates a bond between the worker and the employer through a variety of practices. One way that they do this is by giving workers free access to skills training, opportunities for advancement, and means by which they can air their grievances and have their needs met in the workplace. Another facet of fair trade that accomplishes these goals is the implementation of smallholder cooperative farms in South Africa in which each worker technically owns a share of the farm and thus is intrinsically linked to the business, enfranchising them both economically and socially. In South Africa these cooperative farms represent more than just a way to combat the income inequality present in the system, it is a means to bring the country to a social balance that has been reinforced by economic and societal norms that have systemically resulted in vast amounts of inequality.

The Economics of Fair Trade

The South African economy is one with almost unlimited potential for growth.  It has expanded at an exponential and near constant rate for the majority of the last decade making the nation the strongest economy of the African continent. South Africa goods can be found from North America to Australia, much of it agricultural products. The lush lands of South Africa yield an annual cornucopia that is the envy of its neighbors.  However the economy is far from reaching its full potential, particularly in the agricultural sector.  The majority of farmers are small time farmers who barely make enough to support themselves and their families and much of its labor population is unskilled and unable to find a decent wage for a day’s works. The fair trade initiative seeks the combat these economic woes through promoting fair compensation for goods produce in accordance with the organization standards.  Although this practice is beneficial for a minority of impoverished farmers its long term effects on an economy is unknown.  However, if theoretical economic frameworks such comparative advantages and economies of scale are applied to the practice the end result would most likely be less than beneficial and limit the south African economies ability to produce in the long term.

In order to properly examine fair trades affect upon the South African economy it is necessary to establish the size and scale of South African agricultural industry and the market share controlled by fair trade farmers.  For much of its history the South African agricultural sector was one of the largest and most important for the countries prosperity. Large estates were owned by wealthy farmers who used the poorer members of the population as labor.  The majority of land nowadays is owned by independent farmer; however it is important to note that most of the profit is made by corporations. This is an indicator of an agricultural sector that is dominated by large agribusiness, who are able to use economies of scale to maximize production and small individual farmers who are producing at a much smaller scale.
Fair trade is not an economic principle, instead it is one based upon ideas of social justice.  It is not meant as a process to allow the market to produce at greater efficiency, instead its goals area to increase the livelihood of impoverished individuals. It is a charity above anything else. According to the economic theory of equilibrium price artificially setting a price at a value higher than the one found at the equilibrium point will in the long run cause market failure.  As price increases, demand decreases for the good, by increasing the price for a fair trade good you are causing this to happen. A counter argument for this is that a fair trade grape is the same product as a normal grape. The higher price of a fair trade product reflects that you are helping another human being and the sense of goodwill that comes with this, although intangible, may be enough justification for the increased price.  This concept is further reinforced by the continued solvency of the fair trade companies who despite selling at above market price remain solvent and profitable enterprises. In the 2010 South African Baseline report, the BFAP noted an increase demand for “Fair Trade” style products on a global level.[5] As global demand for products increases, the differences between free trade products and fair trade products will decrease as firms move to capitalize on this trend.  A large scale producer can attain Fair Trade status for the purposes of obtaining, “greater added economic value than common products, and to be a marketing strategy for differentiation among international competitors,”[6] charge and keep the premiums from the sale as profit while only paying his workers slightly more than before therefore making fair trade a product that is not much different than the free trade alternative

Fair Trade encourages lower income farmers to remain farmers at an inflated income level. Although, in the short term, this idea is wonderful for reinvigorating impoverished farmer communities it may cause problems in the long run. Real wages in a market reflect the value of labor in relation to the economy as a whole. When real wages are low there is a surplus of labor in a market that producers can use to increase their level of production.  As production increases so does demand for additional labor and the long run outcome is an economy that is producing at a greater level of efficiency. Almost all developing nations undergo a transition from agriculture to manufacturing in which the real wage is very low. However as we have seen in the example of the US and Europe these low wages eventually increase and the economy is in the long run better for it. Fair Trade, by encouraging farmers to remain on smaller scale farms, may be holding the economy back.  An alternative, that fair trade has explored, to a limited extent is the establishment of larger scale cooperative farms. These large scale farms allow production at greater efficiency because of economies of scale while simultaneously keeping wages at acceptable levels.  However, it can also be argued that such large scale farms would not need the cushion of fair trade pricing as more efficient and larger scale production would allow them to be competitive on a global market without the need for fair trade protection.  Equivalent large scale commercial agricultural has been seen as an excellent opportunity for farmers in Africa to improve the economy of the continent as a whole.[7] Furthermore, a fair trade organization would make larger co-op farms less competitive by inflating prices.

Although we have seen the success of export oriented markets in the Asian Tigers danger still exists for the fair trade farmers of South Africa. By basing their livelihood on exporting highly specialized luxury goods to more developed nations they have made themselves economically dependent on those markets. As their products cost more than most substitute good they are not a very competitive good. Purchasing a fair trade good is not a purchase based on economic rationality, it is motivated by charity.  On the free market goods are competitive; they attempt to maximize profit by reducing costs and increasing profit. This completion leads to better prices for the consumer and increased revenue for the producer. In fair trade this competition is almost nonexistent. South Africa is rapidly becoming a very well developed nation with strong political, physical and financial infrastructure. In the long run, the entire nation would be better served in open competition on the world markets as this would encourage efficient growing practices and a maximization of inefficiency and gains from agricultural markets. By tying up resources in producing luxury goods for western charity they are limiting their ability to interact with other emerging markets and created a robust and durable private agricultural center.

Fair Trade in the Community

Fair trade is also greatly involved in increasing the quality of agricultural communities through education, health benefits, and a focus on the environment. Although fair trade focuses on fair wages for farmers, a focus on improved education has also become an important part of the process. Inadequate educational facilities for black people during the apartheid era left middle-aged and senior members without sufficient education. “Among the twenty farmers interviewed, only three had attained secondary level school leaving certificates. This low level of education inevitably places them at a disadvantage, particularly in terms of how they run their farms as efficient businesses.[8]” Several organizations allocate premium funds towards educational funding within the community, endowing future generations with the opportunity to become successful and productive members of South African society. Some of the organizations require that the children of the workers are provided with a safe environment with access to education materials, toys and bedding. Vuki, one of the South African fair trade organizations, allocates funds to develop an aftercare program that allows children at the farm to receive regular schooling from a paid teacher. “In 2008 and 2009, approximately R30,000 was spent on bursaries for workers’ children to obtain tertiary education.2” While this is only around $4,000 many children have benefited from this opportunity that would have otherwise not been available to them. Fair trade has also enabled organizations such as Sun Orange to implement an in-house skills training program, allowing farmers an opportunity to increase their education with Adult Basic Education and Training courses (ABET). Fair trade premium funds have been used to build and equip a training center and to pay the salary of an ABET trainer who conducts training on three days a week using computer-based audio-visual tools.

Health and the environment play a key role in fair trade as well. Upgrading local health clinics are a great priority among most fair trade organizations. Vuki, for example, invest greatly in the local health clinic, which provides a base for a private nurse who visits the farm two mornings a week. Without community water pumps farmers have to walk long distances to fetch water from the canals. Fair trade provides funds for communities to afford water pumps, supplying them with clean, disease-free water from the canals. Vuki and SunOrange have taken the initiative to improve the health of their communities as well as the environment. By using less hazardous chemicals and following fair trades improved protocols for storing and handling chemicals as well as the disposal of used containers, the overall health risk for the community is reduced. To continue to be environmentally friendly, Vuki and SunOrange also converted 70Ha of their land so that it was ‘biologically sustainable.’ This means that fewer agro-chemicals are applied on the trees and soil structure and fertility is improved through green technologies, further contributing to the productivity of individuals.

 

Conclusion

Fair trade is South Africa cannot categorically describe as a failure or a success. On the individual level fair trade can cause positive changes for involved on the community level but it has failed to achieve any large scale categorical change. In a nation like South Africa it almost feels that fair trade is redundant when compared to the myriad of governmental programs already in place to help alleviate the social problems of wealth distribution and wealth inequality. These programs operate on a much broader scale and without sacrificing market intuitions such competition and economies of scale. Furthermore, fair trade has been marginalized in many ways by large agribusiness that use fair trade labels as a way of green washing their corporate identity while producing minimal change for the average South African farmer.  In short fair trade is one possible way to alleviate the problems of developing nation but is far from the only or best option.  Its goals are admirable but the path to them could be better walk in a number of other ways.


[1] Economic Statistics The Department of Trade and Industry of the Republic of South Africa

[2] South African Agriculture SouthAfrica.info

[3] Sectoral Determinations Department of Labor

[4] Impacts of Fair Trade in South Africa Fairtrade Foundation

[5] http://www.bfap.co.za/FINAL%20Agricultural%20Outlook.pdf

[6] http://www.irsa-world.org/XII/papers/3-8.pdf

[7] http://siteresources.worldbank.org/EXTARD/Resources/336681-1231508336979/SleepingGiantFinal.pdf

[8]http://www.fairtrade.org.uk/includes/documents/cm_docs/2010/f/finalimpactreport.pdf

Women Empowerment in Africa through Fair Trade

Women Empowerment: Fair Trade’s Economic, Political, & Social Effects on African Women
A PowerPoint presentation by Annie, Jessica, & Nathan

Click HERE to view.

Fair Trade Labeling: Current Conditions & Future Ambitions

The Impact of Bead for Life on Ugandan Communities

Bead for Life: The Impact on Ugandan Communities
A PowerPoint presentation by Seonag Doherty, Mackenna Bowles, and Kelci Reyes-Brannon

Click HERE to view.

The Realities of Fair Trade on Cocoa Production in Ghana

The Realities of Fair Trade on Cocoa Production in Ghana
A Powerpoint presentation by Sarah Edlen, Elin Marcsdottir, Elena Anemogiannis, and Greg Smith

Click HERE to view.

Impact of Fair Trade on Community Building in Kenya

Fair Trade on Community Building in Kenya
A Powerpoint presentation by Alexander Robbs, Grigorios Sarantis, and Galo Palacio

Click HERE to view.

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