World Development comment v4 web format

A comment on the economics of Fair TradeSummary. —LeClair (2002) concludes that in theory Fair Trade is a second-bestalternative to aid, may impose losses on non-Fair Trade producers and prolongsdependence on unsustainable modes of production. This paper shows how theseconclusions depend upon a particular definition of subsidy and upon the assumptions offull employment and that Fair Trade goods face price-inelastic demand. An adverseimpact on non-Fair Trade producers is possible but not intrinsic, and the claim ofeconomic inefficiency cannot be sustained within a more general analysis. — Fair Trade, developing countries, market efficiency, under-employment,Key wordslabor supply1. INTRODUCTIONIn his seminal article in this journal (2002), Mark LeClair concludes that Fair Tradeundoubtedly benefits a small but significant minority of low-income households in thedeveloping world. Nevertheless, Fair Trade “has two significant shortcomings: that itdifferentially assists one set of producers, potentially at the expense of others, and itpromotes continued reliance on products that are arguably poor prospects in the long-run”(p. 957). Behind LeClair’s conclusions lies a short section on the economics of FairTrade, which appears to demonstrate that Fair Trade is inherently inferior to acombination of free trade and direct aid, as a consequence of the distortion of productionresulting from the price premium paid by the consumer. The argument makes three ...