A realization-focused comparative - FAIR TRADE AND FREE TRADE,
An excerpt from a paper I just wrote for publication by the World Association for Political Economy.

 by Tamara Stenn

Nobel laureate economist, Amartya Sen, develops a realization-focused comparative approach to understand justice.  This  approach involves the examination of actual institutions and their outcomes (Sen, 2009).  By taking a realization-focused approach towards Fair Trade and comparing it to Free Trade, economic outcomes of both trade approaches can be analyzed and evaluated in regards to their justice.  

I worked in Bolivia from 1996 to 1998 as a small business consultant with the Chamber of Small Industry.  I was a consultant for several business owners in the processed food division a few years after the Coca Cola bottling company came to Bolivia.   The assumption with Samuelson’s theory was that Bolivia’s local refreshment bottlers would simply create a different or complimentary product as Coca Cola gained more market access.  What I witnessed though was something entirely different.

Looking at this more closely, according to Samuelson’s model, as new technology entered and industrial plants were built with foreign investment in developing countries, then new markets would also grow.  Citizens would be employed by the new transnationals as well as by their own local industries which would be steadily growing alongside those of the transnationals’.  The new local industries would supply the newly present transnationals with additional services and goods, filling in new market areas where the transnationals did not compete.  Industrialization, wage labor, and production would increase, helping to raise the countries’ gross domestic product (GDP) and to lift struggling nations out of poverty.  This growth would come mostly from the urban business sectors within the developing country as they adapted new technologies and innovations to participate in the new trade.  Labor would come from the countryside as people left subsistence farming for better paying wage labor.  In addition it was believed that as new import products flooded local markets and created competition for local industries these industries would then innovate to create new product for export to new markets (Stiglitz, 2009).

An example of Samuelson’s theory took place in Bolivia in the 1990s when the US based Coca Cola bottling company first came to the country and trained local people how to operate and manage their automated bottling equipment and plant.  A few particularly entrepreneurial Bolivian employees saw new opportunities for themselves as they learned these new production, processing, and management techniques.  After a while, they left their coveted positions at the bottling plant and contracted local businesses to help develop similar systems and equipment to start their own business, Del Valle, creating nationally distributed bottled fruit drinks (Stenn, 1996).  Del Valle is now a well established, local enterprise with international sales and hundreds of employees.

However Del Valle proved to be the exception to the norm.  When the foreign markets arrived and improved efficiencies through new technologies and techniques, they required less labor thereby eliminating, rather than creating, jobs in existing market sectors.  For example in the case of Coca Cola, though a few employees did successfully learn and apply new technologies to create their own bottling company, most existing refreshment makers did not.  They were not trained in Coca Cola’s new technologies and could not compete with the highly skilled transnational firm.  Within ten years, most of Bolivia’s independent refreshment bottlers were out of business, causing many more jobs to be lost than those gained by the larger, more efficient Coca Cola plant (Stenn, 2010).  The competition from foreign goods was so great that it closed local industries that were unable to innovate.  This led to higher unemployment. 

The developing world, economists learned, does not have perfect information to model risk.  There is instability in pricing because internal markets do not exist or work well owing to institutional factors.  This leads to a domination by global pricing as developing countries base their prices on the cost of goods entering into their country, rather than accounting for the real costs they assume in their own goods’ production.  In addition, the price of foreign goods do not always reflect true costs.

For example, Coca Cola dominated Bolivia’s local markets by providing free signs and display stands for hundreds of small neighborhood stores which could not afford these on their own.  The signage and displays were adorned with the Coca Cola logo as well as the store’s name.  The store owners had to commit to prominent product placement and enter into a purchasing contract with the company in order to receive the signage and displays.  Based on how much product was purchased, the store would receive a larger and more prestigious sign and more displays (Stenn, 1996).  There was extensive radio, television, and print campaigns supporting this as well.  Free wall calendars, glasses, and promotional items were given to a public which had little money to buy supplies with.  Soon every home seemed to have Coca Cola paraphernalia in it (Stenn, 1996).  Coca Cola operated this campaign at a loss as they assumed the costs for hundreds of signs being produced, promotional items, and advertising costs.  A local company could never have paid for this type of marketing.  Coca Cola’s highly subsidized imports undersold local products creating unequal competition leading to the closing of many local industries.  More than ten years later, Coca Cola dominates the entire Bolivian market with strong earnings and a virtual monopoly on the entire soft drink industry there.  Coca Cola is just one example of many in how transnationals in the Free Trade model do not create new markets but rather take over existing ones leaving people worse off than before their arrival.

There did not exist nor did there develop intermediate industries, as Samuelson predicted, which would have enabled local people to serve the new transnational investors.  For example a local car parts producer could have benefited from liberalized trade by obtaining contracts to supply car parts to the new transnational automobile company; except there never existed a local car parts producer in the first place.  So there were no businesses to step in as an intermediate industry.

Poverty, instability, a lack of capital and training, and the overwhelming competition brought in by foreigners prevent new Free Trade markets from developing.  Even worse as the labor markets do not evolve, unemployment raises.  There are no social safety nets such as unemployment insurance in the developing world.  Developing world governments simply do not have the funds, tax base, or infrastructure to develop and support social service programs (Stiglitz, 2008).  The unemployed are simply out of work with no source of income or social security.

In the end, large, wealthy countries benefited more from Free Trade than the smaller, poorer countries.  This resulted in an increase in inequality and trade injustice.  The United Nations has noted that after 40 years of liberalized (Free) trade, the gap between the rich and poor countries has widened.  When examined on an individual country level, in some cases GDP is increasing, though people as a whole report being “worse off” in these higher GDP countries (ie. China and India) as their quality of life deteriorates and growing inequalities are seen within their own societies (Stiglitz, Sen, Fitoussi, 2010)

Fair Trade in this realization-focused comparative approach has had the opposite effect by carefully creating jobs and stability in places where they were not present.  Fair Trade is certainly a restricted form of trade.  It goes completely against the Free Market ideal of liberalized trade.  Fair Trade favors price setting, and requires additional inputs such as extensive training, environmental considerations, long-term contracts, and high wages.  These restrictions do not exist in the Free Trade environments.  

The result is that while growth is more localized and specialized, it is also more sustainable and beneficial to producers.  Fair Trade it could be argued brings about justice through the purposeful creation of protected opportunities for producers.  Fair Trade producers are carefully educated, trained, and given access to long term, steady work and income.  They are shielded from market extremes though price guarantees and are taught to be competitive through careful product development and improved production techniques.  The environment and children are protected through Fair Trade practices.  Farmers are taught sustainable agriculture techniques and children are discouraged from working as agricultural laborers.  In addition the higher family income from Fair Trade results in better nutrition and education for the children.  They do not have to stay home and work on the farm since the parents have more financial resources and better management skills (efficiencies) from their Fair Trade participation (Arnould, Plastina & Ball, 2009).  Long term Fair Trade producers report feeling more hopeful, confident, and satisfied than their non fair trade counterparts in similar industries and countries (Arnould, Plastina & Ball, 2011).  Even so Fair Trade has not yet evolved to the scope of becoming a mainstream global trade practice.  The viability of Fair Trade as a mainstream global trade model has yet to be understood.

Arguments for Free Trade and Fair Trade in the style of realization-focused comparison are reflective of niti, sanskrit for of a narrow definition of justice.  The focus is looking at the organizational propriety and its behavioral correctness.  Realization-focused comparison provides a chance to see what might not be justice but it does not provide an opportunity to transcend that and discover something new. Realization-focused comparison results in a circle of arguments that do nothing to advance one’s understanding or attainment of justice.  It also reduces the actual nyaaya, Sanskrit for a broader understanding of justice, of fair trade and justice by rendering it to small arguable points when, as we saw before, Fair Trade is actually rather large, fluid, and not absolutely defined.  Looking outward at Fair Trade and considering it as a part of a theory of justice creates much more opportunity for building new understanding.

Sen pointed out that realization-focused comparison reduced rather than broadened our understanding of justice.  As seen in plural grounding, Fair Trade has a broad, open definition of trade, justice, and fairness; one that is not easily quantified nor congruent throughout the industry.  This also is what makes Fair Trade transcendental.  Taking a broad view and studying the diverse elements and outcomes of Fair Trade will deepen the understanding of Fair Trade as justice.  In the spirit of nyaaya a “comprehensive concept of realized justice” Sen embraces a vast, large, long, view of justice which includes past and future thinking. 

 Sen urges the consideration of not just what happens in society but also “an examination of the kinds of lives that people can actually lead given the institutions and rules but also other influences including actual behavior that would inescapably affect human lives.” (Sen, 2009, p. 10).  This, he writes is a “realization-focused” understanding of justice rather than a mere comparison. 

Looking at Fair Trade as a realization-focused institution, enables one to understand it in relation to people’s lives, to their emotions, rationality, and feelings.  It enables one to look at individual and societal choice, personal freedom, and capabilities.  The focus shifts from what Fair Trade is to the much larger what it can do and be.  To engage in a realization-focus one needs to look at the human side of economics and justice.