The Rise of an Alternative to Free Trade

We’ve spent the last few weeks talking about the impact of globalization on developing countries, but this final blog is going to examine an alternative to free trade. Many people have argued that free trade has allowed producers in developing countries, especially in the market for agriculture, to suffer from insufficient wages and safety hazards. The theory of Fair Trade attempts to solve these labor issues by encouraging local production of goods through government assistance.

The main mechanisms for Fair Trade, as explained in the Journal of Economic Perspectives:

  • A price floor is set so that there is a minimum price that a Fair Trade buyer can buy from a Fair Trade producer. Prices can be negotiated higher when considering the quality and other aspects of the goods. This price floor also acts a cushion for when economic recession occurs and there may be cause for worry about being able to sell goods. Only in very recent years has the market price actually exceeded the fair trade price for coffee.
  • There is a Fair Trade premium that is paid from the buyer to the cooperative in addition to the price of the good being sold. The premium is supposed to be used by cooperatives in a democratic style to determine how to enhance production or community infrastructure.
  • Fair Trade buyers gain stable access to credit by agreeing to a long-term contract of at least one year and must “provide some advance crop financing to producer groups (up to 60 percent if requested”.
  • “Free Trade workers must have the freedom of association, safe working conditions, and wages at least equal to the legal minimum. Some forms of child labor are prohibited.”
  • Farmers are encouraged to organize democratic associations or cooperatives that can facilitate sales and manage the premium received from sold products.
  • Fair Trade production prohibits harmful chemicals from being used in food production to maintain a healthier environment. Producers are required to provide basic environmental reports that describe their impacts on the environment. Genetically modified crops are not allowed.
  • For a product to be sold under the mark of Fair Trade, both the buyer and seller must be Fair Trade certified. Standards vary on the particular crop being produced and are analyzed by different Fair Trade leaders such as Fairtrade International and FLO-CERT. Organizations obtain a Fair Trade certification by successfully applying to FLO-CERT and passing an initial inspection. Certifications can only be maintained by renewing with FLO-CERT and allowing for another inspection of the Fair Trade organization. (Dragusanu et al., 219-221)

The Institute for the Study of Labor, a non-profit project that allows scholars to engage in research about labor economics, conducted a study on the economic impact of Fair Trade. The findings, although still in its earliest stages, suggest that there is a positive impact on the prices and income of producers. In contract, the Fair Trade premiums were only earned on a fraction of the producers’ output due to the limited world demand of Fair Trade buyers, and thus the average amount of premium per producer is fairly small. Unfortunately, many other attempted empirical findings from the study were said to come inconclusive, which has become standard due to the inconsistency of studies trying to quantify the negative and positive effects internally and externally of Fair Trade policies and the growth of cooperatives (Dammert and Mohan, 24-25).

Fair Trade has been on the rise over the past couple of decades. In 2006, consumers spent $2.2 billion on Fair Trade certified products, which was a 42% increase over the previous year, ultimately benefitting over seven million producers in developing countries. 3.3% of all coffee sold was Fair Trade certified in 2006 which was eight times the amount sold in 2001 (Downie). Mexico examined its own use of Fair Trade policies and determined the main obstacles to the economic reform are its lack of power in the current world market, its lack of participation from small farmers, unawareness by consumers, and a necessity for more government aid. Regardless, Mexican farmers have expressed optimism in regards to the implementation of Fair Trade throughout the country, which has already developed largely in its market for coffee (Godoy).

Fair Trade is definitely an innovative way to challenge some of the labor issues that plague the current neoliberal practices in agricultural markets. The word of certified Fair Trade companies and foods has spread all over the world, and it has become part of a growing discussion in development and labor economics. If there were enough room in this blog post, I would’ve described a real life example of how Fair Trade has been implemented in the coffee industry for decades and how it compared to similar markets that participated in Free Trade. Thank you for taking a look at the impact of globalization on developing economics with me over the last few weeks.

Sources:
Dammert, Ana C., and Sarah Mohan. “A Survey Of The Economics Of Fair Trade.” Journal of Economic Surveys 29.5 (2014): 855-68. Web.

Downie, Andrew. “Fair Trade in Bloom.” NY Times. 2 Oct. 2007. Web.

Dragusanu, Raluca, Daniele Giovannucci, and Nathan Nunn. “The Economics of Fair Trade.” Journal of Economic Perspectives 28.3 (2014): 217-36. Web.

Godoy, Emilio. “Fair Trade Will Become Major Trend, Say Mexico Growers.” Banderas News. Inter Press Service, 12 Oct. 2009. Web.

South Korea: An Economic Development Success Story?

As a development scholar, my primary interest resides within the influence of international trade on developing economies from a financial and humanitarian standpoint. The following blog posts will attempt to analyze examples of this dynamic by taking a closer look at case studies of developing economies that rely heavily upon exports, imports, or both. First, we will examine a success story of the rapidly developing country of South Korea throughout the past several decades and how it was able to successfully utilize its export-centered economy in a global setting.

Originally South Korea did not have the capability to compete in a global economy until the 1960s when it transitioned from a market focused on domestic products to an export-reliant economy. Prior to this change, the Korean economic system was heavily characterized by its agriculture and mining industries, while manufacturing only consisted of primary products that amounted to 3% of the country’s GNP. However, by expanding its manufacturing sector to simple products like textiles, and eventually sophisticated goods like automobiles and computers, total exports represented over 40 percent of Korean GNP. A result of this was that “the compound annual growth of per capita income was well in excess of 7 percent, making it one of the fastest growing economies in the world during this period” (Westphal 43).Screen Shot 2016-03-17 at 9.07.37 PM

South Korea has earned its rank as the eleventh largest global trading nation, exploding in trade value from $134.9 billion in 1990 to beyond $857.3 billion in 2008. Trading partners of the country originally included Japan, Europe, and the United States, but eventually a large percentage of total Korean exports ended up in China. By 2008, Korea had trade agreements with over 220 countries. The sophistication of the manufactured exports of Korea has increased over time, resulting in a current primary export market of chemicals, automobiles, computers, and other forms of high-level technology (Bark 24-36).

With the rise of corporate manufacturing in South Korea, many family-controlled conglomerates have risen with the aid of government policies that allowed them to benefit from tax advantages, exceptional loans, anti-labor policies, and various government contributions. A prime example of this consists of the dominant presence of Samsung in Korean economic activity and daily life. Aside from the penetration of Samsung in Korean education, electronics, amusement parks, life insurance, medicine, and housing, the company accounts for twenty percent of Korean exports and roughly seventeen percent of the annual GNP (Estrin).

When examining the success of Samsung in Korea, it is also important to assess the level of corruption that may be occurring within the realms of labor and management. In 2013, it was found that the Samsung Electronics factories had been contributing to various diseases of former employees. The corporation provided compensation to the workers who protested about this very issue, but Samsung refused to acknowledge any blame (Estrin).

Samsung demonstrates the power that multinational corporations have on an export-based economy like South Korea. “The former chairman of Samsung, Lee Kun-hee, was convicted of tax evasion and breach of trust in 2009, but he received a presidential pardon and returned to the chairmanship” (Estrin). The essentiality of Samsung to Korean economics can actually be deemed as frightening. It can be difficult for one to say that it is moral that the needs of the corporation outweigh the governmental law considering how fundamental Samsung is to Korean wealth.

Another problem that has emerged through the rapid development of South Korea is the massively increasing problem of income inequality. According to the IMF, forty-five percent of total income was being shared by the top ten percent of Korean earners. This percentage was the highest among its Asian-Pacific counterparts, with Singapore coming close at forty-two percent and Japan at forty-one percent (The Korea Economic Daily). This shouldn’t come as too much of a surprise considering most of the labor in South Korea is being focused in manufacturing while the top earners reside in the conglomerates that have been aided by government policies for decades.

This leaves the question then whether South Korea can be presented a successful model for export-driven developing economies. The empirical data demonstrates immense prosperity over the last three decades, especially when looking at the country’s change in GNP and global trade relations. However, when looking from a humanitarian lens, can we look past the increasing income gap, poor labor conditions, and the crippling power of large multinational corporations? It is important to assess all sides of the situation and weigh the pros and cons to international trade and its impact on developing economies. The blogs that follow will hopefully allow readers to examine the many outcomes, both expected and unexpected, of utilizing international trade as a method of participating in modern development.

Sources Cited:
Bark, Taeho. Ed. Byongwon Bahk and Gi-Wook Shin. Shorenstein APARC Working Papers. Stanford University, Feb. 2012. Web.

Estrin, James. “Samsung and the South Korean Success Story.” Web log post. NY Times Lens Blogs. NY Times, 13 Nov. 2015. Web.

“Korea’s Income Inequality Largest among Asian Nations…IMF Report.” The Korea Economic Daily. 16 Mar. 2016. Web.

Westphal, Larry E. “Industrial Policy in an Export-Propelled Economy: Lessons from South Korea’s Experience.” Journal of Economic Perspectives 4.3 (1990): 41-59. JSTOR. Web.