Oxfam is full of beans

A few days ago, a donkey train laden with sacks of coffee beans made its way though London's streets to the Stock Exchange. It was part of a public relations extravaganza by the Third World aid group Oxfam, which is blaming 30-year low coffee prices on--yes, you guessed it--multinational companies.

To round out the stereotype, Oxfam's campaign is calling for governments to spend up to $100 million to destroy "surplus" coffee and prop up prices, and wants the International Coffee Organization to force multinationals to abide by "fair trade" coffee standards. Yep, Oxfam wants taxpayers to cough up in order to pay more to drink coffee.

No campaign of this sort can do without a rock star these days, so of course Coldplay's lead singer Chris Martin was on hand to admonish, "If a few companies were less greedy the people at the bottom would have a lot more. We can do our bit by pressuring politicians to change their insanity."

Far from the intended consequences, government intervention and "fair trade" standards would only worsen the problem for coffee farmers, however. Though it is trendy to blame multinationals for every ill, the real problems that poor farmers face are caused by a lack of infrastructure, distorted EU and U.S. agricultural markets and unheeded economic signals.

Still, Oxfam serves up a strong brew. It has released a report called "Mugged: Poverty in your coffee cup," in which it claims that the world's 25 million coffee farmers are in dire straits because of oversupply by new producers, and new processing technologies. Anyone else looking at these facts might say just the opposite: New producers and new technologies have found more efficient ways to make a product, which makes it cheaper for the consumer--progress!

Oxfam's campaign fundamentally misunderstands the workings of the coffee market, however. Coffee is native to Ethiopia, but it is now grown all around the world as a commodity crop. In the past 10 years, even Vietnam has entered the market, producing an inexpensive variety of Robusta beans. Some of the new technologies in question have allowed multinationals to process lower quality beans, benefiting producers such as Vietnam.

At the same time, many of the world's poor farmers entered the coffee market around four years ago, when the price was high. However, coffee bushes take longer to mature than a perennial crop such as cotton, which leaves farmers more exposed to market fluctuations.

A farmer who invests in a crop that takes a few years to mature might seek insurance by selling his crop on a futures market. Forward market prices would act as a self-regulating mechanism: as more farmers switched to a crop, prices would fall, discouraging further investment.

But futures markets almost never benefit small farmers because of the size of the contract is too small. Middlemen buying from several growers do benefit from the price signals sent by futures markets. To add to their woes, coffee farmers often live in countries that have weak or corrupt governments and weak protection of private property, and thus a limited ability to make and enforce contracts. In such an environment, shady middlemen are able to take advantage of the ignorance of small coffee farmers.

Coffee farmers also suffer because of huge subsidies to farmers in Europe and the United States, as well as import tariffs. Processed agricultural products such as instant coffee are subject to very high import tariffs. The price signals these restrictions send mean less investment in processing technologies and factories in Third World countries, fewer exports of finished products, and less economic development. Reducing tariffs on instant coffee or other processed coffee products would have an adverse effect on European and American employment at companies such as Nestle, but would be a boon to producers in poor countries.

These are some of the most important problems facing coffee growers. How would Oxfam propose solve them? First, by spending $100 million of governments' aid money to destroy five million bags of existent coffee. This sounds like a boon for coffee farmers, but as we have seen, any temporary increase in the price of coffee might only incite more farmers to join the ranks of coffee growers, sowing trouble down the line.

Second, Oxfam suggests that governments or the industry should manage the coffee market by guaranteeing "fair" and "decent" prices. Aside from all the other attendant ills that would come from artificial prices, this too would only lead to overproduction. Coffee marketing boards were dismantled in poor countries for precisely this reason.

Oxfam also recommends that multinationals follow "fair trade" quality standards, to drive low-quality coffee out of the world market. Some smaller European and American coffee firms like Holland Coffee and Hamburg Coffee came out in support of Oxfam, and Oxfam itself has a 25% stake in a U.K. fair-trade coffee scheme. Even Oxfam admits, however, that this would drive lower-cost producers such as Vietnam out of the market, forcing them into even worse poverty. It would also cause multinational coffee companies to invest less in manufacturing facilities in poor countries.

Moreover, these standards would cause coffee prices to increase, possibly deterring people from drinking coffee, hurting demand and poor people in advanced countries.

"Fair trade" is defined as "fair" because an intervening party--whether an NGO, a government, or a competing business--decides that someone needs a higher or lower price, or that someone should abide by quality or labor standards. In this case, smaller coffee producers would impose standards on multinationals through the International Coffee Organization, to raise costs and therefore make themselves more competitive in the U.S. and Europe. Oxfam's campaign gives moral credence to their protectionist interests.

The upshot is that rock-star economics and the good intentions of development charities would hinder real economic development for all poor farmers, because they shift the blame onto multinationals rather than to the real perpetrators: the European Union and United States, whose subsidies and tariffs prohibit a true market in agricultural goods. One place to start would be to scrap subsidies and tariffs, and open our doors to the world's farmers.

Ms. Okonski is a research fellow at the London-based International Policy Network.

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