Friday, September 24, 2004

Globalization: Good or Evil?

The Adam Smith Institute is a British economic think tank specializing in free market analysis; their blog has had an interesting thread on globalization. My wife, Sarah, and I have had several discussions about free trade vs. fair trade and the third world. Often enough, I fail to provide any salient points and end up playing the heartless capitalist. The Adam Smith Institute helps back up some of my viewpoints: that allowing the free market to control wage and price is more effective in the long run than enforcing a minimum fair wage and fair price. Fair trade can be described as a socially conscious effort that causes people in industrialized countries to pay a premium in order for the farmer/artisan in the developing country get paid a fair wage.

However, it is my contention that fair trade policies actually perpetuate poverty in developing countries. This is partially because fair trade requires the creation of protectionist policies such as tariffs. One of the arguments against free trade is that the relaxation of trade barriers causes unhealthy competition by enabling large corporations to invest in developing countries and driving the individual producers out of business. But if you have 500 producers and the company that comes in can provide 500 jobs don't you break even? I am very pro-business because I know who pays my salary. If my company goes out of business because I demanded a higher wage then I have to take responsibility for that. I would prefer to have a low paying job with a large corporation than no job at all. In order for developing countries to develop, barriers to corporate investment need to be removed, not added as fair-traders demand. India is an excellent example of a country that removed barriers to development and since 1990 has seen a strong 6% annual growth rate in GDP. And this from a country that is constantly struggling with overpopulation.

The coffee industry is a popular case study for the fair trade vs. free trade debate. As coffee prices in recent years have plummeted, it has become increasingly popular to purchase 'fair trade' coffee. The effect is that 'fair-trade' producers are getting a higher price for their coffee. This logically encourages them to produce more coffee, thereby increasing the supply of coffee, which causes a decrease in the price of coffee. This is just simple micoeconomic theory. The reason the price for coffee is so low has little to do with worker exploitation, but everything to do with an abundance of supply. Buying 'fair-trade' coffee causes an increase in supply by inflating the price. It also encourages producers to continue producing coffee when they could be producing an alternative crop that could provide them with an economically supportable wage. The blogger Oliver Kamm notes that "subsidizing enterprises that can never be profitable will prevent the development of new businesses which could be. A better scheme is to support farmers efforts to diversify production."

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