Can buying 'freely traded' coffee be socially just?

As the rise in Colombia's mimimum wage impacts the country's coffee producers, how can consumers support socially just production?

Alastair Michael Smith
9 July 2015
Colombian coffee farmer. CIAT/Flickr. Some rights reserved.

Colombian coffee farmer. CIAT/Flickr. Some rights reserved.In January 2015, the Colombian Government revised the level of the minimum wage. This was an important step for the 1.25 million Colombians vulnerable to poverty: that is, those not technically poor, but living at the lowest levels of what might be considered an acceptable standard of life in the national context. Such an event is at the heart of discussions around economic justice and is certainly pertinent for international consumers of Colombian goods.

The level of the Colombian minimum wage is re-evaluated every year by the tri-partite “Consultation Committee of Wage and Labor Policies”, composed of representatives of workers' organisations, employers and the government. In January this year, workers’ representatives proposed an increase of 9.5 percent while the representatives of employers proposed 4.2 percent. Eventually, the government mandated a 4.6 percent increase in the level of the minimum wage. The unions described this as insufficient, highlighting that 30.6 percent of the population are defined as poor (rising to 43 percent in rural agricultural areas) and national inequality is registered at 53.5 on the GINI index, making Colombia the twelfth most unequal country in the world.

Minimum wages in theory and practice

In principle, the minimum wage policy promotes the idea of a minimum income, and therefore is based on a socially aspirational aim: the belief that all human individuals deserve a minimal standard of life. However, the application of minimum wages within complex economies rarely produces universally positive outcomes; especially in economies such as Colombia where the informal sector, unprotected by legal minimum wages, provides around 55 percent of employment.

Indeed, when minimum wages are introduced, a number of potential outcomes emerge: some formal workers will keep their jobs and earn more under the minimum wage; others might be dropped from protected formal sector jobs and forced into lower paid and unprotected informal work; others might find themselves entirely unemployed; and those currently unemployed might have to wait longer for an opportunity to work either in the protected or the unprotected sector as overall economic activity might be reduced. One reason for the negative impact of minimum wages is that companies attempt to avoid increased costs by reducing their labour force. In some cases, this will result from efforts to maintain profits, but in others, where employers operate with small margins and profits, the overall sustainability of the company might be compromised when buyers are not prepared to pay more for the final products or services.

The potential impacts of January’s increase in minimum wages will have been felt across the Colombian economy. However, the negative impact of the minimum wage rise has been particularly apparent in the coffee sector. According to the US Department of Agriculture's bureau in Bogota, alongside a wholesale increase in production costs (some of which will have been precipitated by rising labour costs associated with material inputs), the direct labour costs associated with a unit of coffee have increased from 40 percent to 60 percent. The change in social provision has inflated labour costs and driven up the cost of coffee production.

The increased cost of coffee in Colombia might not necessarily be considered problematic. As can be seen by the lines of business people queuing every day in coffee houses across the capital city, coffee is somewhat a luxury good.  As such, price increases in a simple market — where the workers' wage as a percentage of overall unit cost has increased from 40 percent to 60 percent — can be seen as socially positive. As long as comparatively rich consumers continue to spend money on coffee, less well off workers are given an increase in nominal wages (although we have to remember that inflation is reducing the purchasing power of those wages).

However, when increases in wages are re-contextualised in real ‘world’ markets, increases in the labour costs of Colombian coffee reduce its competitiveness in both international and domestic markets. Domestically, prices have fallen from 400,000 pesos per 60-kilogramme bag in October 2014 to some 300,000 pesos, and therefore, below a break-even price estimated at roughly 310,000 pesos per bag. Therefore, if price sensitive buyers substitute away from its products, Colombian producers might see both their absolute volume and market share reduced. Less demand means less need for coffee to be produced, and less production requires less workers. The social principle of minimum wages may therefore result in job losses for some of those currently employed in coffee production. How can this be seen as a socially just outcome?

Moral considerations and free markets

At such a juncture, buyers need to make an important decision. In the normal course of life we base our purchasing decisions on considerations of our own welfare. As consumers, we feel an entitlement to choose goods and services that best suit our own purposes, and that can be purchased at the lowest cost for the quality that satisfies us. Intermediary traders working in the coffee sector want to obtain the product we can sell at a price that allows us to maximise profits. If we believe that equality is important, or that every individual deserves to be maintained above a minimum level of welfare, this is a rather problematic approach to consumption. An approach focused entirely on our own welfare ignores the impact our purchases will have on others, and therefore disregards any social responsibility.

Many will dismiss the idea that purchasing decisions should be embedded with moral considerations by arguing that market mechanisms are fundamentally moral given that they increase welfare in the long run: responding to market signals, actors who recognise their labour is not well invested will switch to supply other goods and services that are better valued, and therefore everyone will be better satisfied. Unfortunately, this theoretical possibility, which attempts to bypass moral considerations, is fundamentally flawed given its abstract and unrealistic set of assumptions and expectations. While these are discussed elsewhere, the point can be made through two self-reflective questions: Firstly, does your livelihood provide the highest possible income theoretically possible? As the inevitable answer is no, you should ask: why do you not simply respond to market incentives and reallocate your labour? If you answer this question, here you have the very real reasons why it is unrealistic to expect others to simply follow incentives. Moreover, you have an irrefutable case as to why your choice of coffee cannot be dismissed as morally neutral. Incentives are important in economic decision making, but so too are capacity and risk considerations.

Following the argument above, as a buyer — be it as a consumer or intermediary trader — it is therefore important to ask some fundamental questions about your entitlement to buy the best value coffee. How do you evaluate the acceptability of purchasing Colombian coffee, traded on allegedly free markets, which now costs more than its competitors? Are you prepared to prioritise your own wants and dismiss the new price as 'economically inefficient'? Will you therefore elect to buy coffee from a country where such basic social provisions are not in place, or set at lower levels? Or conversely, do you believe that despite your purchasing power, the principled fight for basic levels of welfare in other parts of the world should be part of your purchasing decision?

Social justice through fairtrade

We Are Neo/Flickr. Some rights reserved.

We Are Neo/Flickr. Some rights reserved.If you take the latter view, one option is to elect to buy coffee that has been produced and traded in a way that at least attempts to account for minimum levels of welfare for those involved in producing it. Here, the concept of ‘fair trade’, and its most well-recognised embodiment in the Fairtrade International certification mark, presents at least an option for the morally inclined.

It is true that there is a good deal of criticism surrounding the structures and outcomes of Fairtrade certification, which, like a government's implementation of minimum wages, finds its principled efforts compromised by a complex socio-economic system. However, the framework not only requires employers to pay minimum wages to coffee workers (and to work towards paying a ‘living wage’), but also that initial buyers in the supply chain pay enough to cover these expanded costs of production. As a result, traders and consumers are asked to pay more than they would for other alternatives. However, this should not be viewed as an overpayment, but more accurately, as a price closer to the true cost of environmentally sustainable and socially just production.

For this reason, consumers inclined to support social justice as promoted by minimum wages would do well to send a market signal, and make purchases in a way which votes against the setting of prices based on abstract and highly distorted dynamics that exclude questions of producer incomes. After all, one of the most fundamental problems with ‘freely traded’ coffee is that it does not exist. Coffee is not subject to the ‘perfect’ spot markets, where many buyers and sellers trade off their preferred prices, but is instead priced through a series of transactions undertaken by a limited number of intermediary buyers who set prices to maximise their own benefit.

Therefore, you can, as an ethical buyer, highlight a willingness to make some personal sacrifice and support an ethical principle. The next step is to apply economic citizenship to promote wider structural changes which would better promote aspirations for social justice around the world. While the Colombian Government faces calls to re-initiate coffee subsidies, thought might once again turn to how global institutions can better manage current levels of injustice in global agricultural markets.

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