Ethnocentricity and Free Trade

Der Speigel recently printed a poll of former East Germans. In it 49% say: “The GDR had more good sides than bad sides. There were some problems but life was good there.” Another 8% say “Life there was happier and better than in reunified Germany today.” A full 57% defend a totalitarian, police state!

Typical of those polled is Thorsten Schon a 51 year old master craftsman who lives in Strasland on The Baltic Sea. Since reunification he has purchased a Porsche, traveled to Africa and by all measures has benefited from the fall of communism. “I’m better off today than I was before, but I’m not more satisfied” he says. He misses “that feeling of companionship and solidarity” and laments the rise in crime. “People lie and cheat everywhere today” and “today’s injustices are simply perpetrated in a more cunning way than in the GDR.”

Are these opinions merely looking back thru rose colored glasses? Or do they represent real questions we need to consider when assessing capitalism’s benefits and weakness’s.


Living in the southwest I’m often in contact with native American cultures. I once asked a Navajo gentleman what his definition of success was. A new car? A big house? “No” he said. His definition of success was to be “a good member of my clan.” Material things meant little to him. Family, friends and community were far more important.

He also felt that democracy was a mistake in native cultures. The corruption of so many tribal officials was a result of it. He felt native peoples would be better off if they returned to the old system of chieftains. His answers are remarkably similar to those of the former citizens of the GDR.

The poll reminds us not to be so judgmental when assessing a trading partners economic and political system. While human rights need to be adhered to, values may be very different. Modern capitalism has many benefits, but they come with a high price, a price that others with different value systems may not be willing to pay.


Reader Poll on Fair vs. Free Trade


What are your thoughts on free versus fair trade?

Is free trade fair?

Is fair trade free?

Weigh in with your point of view:

Take Our Poll (opinion)

Simpfendorfer’s Book: New Silk Road

Ben Simpfendorfer’s book, The New Silk Road (2009, Palgrave Macmillan), fills a critically needed gap in the international public policy literature on the implications of the new trade and economic alliances now being formed between China and several Arab nations.  His personal accounts documenting his extensive residency and travel in Amman, Beirut, and Damascus in the 1990s and Hong Kong after 2000 tell a story rarely told in the developed world.  His fluency in both Arabic and Mandarin Chinese give him a rare, unfiltered look at the emergence of both the Arab world and China as powerful global financial giants in the 21st century.

SilkShopVivid in its accuracy, without being ostentatious, Simpfendorfer leads the reader on a journey through the streets and bazaars of many cities as a way of conveying the pulse of the Arab and Chinese streets.  His book captures the grit and grime of the cities while, at the same time, fixing the scenes he describes within the socioeconomic context of the events he bears witness to.  As someone who is documenting the global shift of power from the post Bretton Woods Western world to the locale of the ancient Silk Road, he outlines the reasons for this rebalancing in clear and lucid terms.  He goes beyond the simple explanations stemming from oil geopolitics and explores the historical roots of the relationships between China and Syria, China and Egypt, and China with her other important alliances in Africa and the Middle East.

As a thoroughly wired economist who plays the role of participant observer he offers subtle insights into why this global power shift is taking place and how the West can best prepare for the diminution of influence that will inevitably come as a result of this shift.  His well researched and well documented facts and figures reveal the stark truth about the lack of language and cultural preparedness that is existent in America, and how that has worked to reduce her influence within these important regions.  He also shows how poor policy decisions by U.S. leaders to cut budgets for peace time efforts to win the hearts and minds of the Arab world have contributed to misunderstandings that have undermined our foreign policy interests and contributed to the rise of Islamic fundamentalism in the world.

People rushing through train station 4What becomes clear in reading this insightful book is that it is a story only beginning to be told.  This is just the first chapter of a very long tale about the transformation of the global balance of power.  He only touches briefly on such issues as currency reserves, national debt, and military strengths and weaknesses, among other things.  How these issues will factor into the equation are, of course, of paramount importance as the U.S. moves forward with her foreign relations in the Middle East and China. However, as a book that focuses on the trade aspects of these important countries, it gives some foreshadowing of issues to watch for as a newly emerging sea lane-based Islamic corridor is defined and the ancient Silk Road is reestablished.

The West would do well to heed the warnings set forth in this book.  A ‘Go Global’ initiative, much like the one advocated by China in the 1990s, and described in the book, would be a path worth emulating in order to curtail the current global economic crisis.  It strikes a hard blow to the arguments for protectionist policies by showing how these two important regions are passing by the old powers.

The world should listen to those that speak the languages, along The New Silk Road.

Is Fair Trade Really Fair? Does it Matter?

I recently got into a debate with someone that argued that the fair trade movement is really just a marketing ploy that preys on the goodwill of consumers in an effort to increase sales.  Importantly, I noted the important work of the Fairtrade Labelling Organizations International (FLO) in Bonn, Germany as a counter to the critic’s points.[i] Upon reflection, I realized that the assertions of this critic should be closely examined.  It has been recently reported by FLO that world fair trade products expanded by 22% in 2008 despite the onset of the global financial crisis.  If there is a growing demand for these products, while demand for many other products is either leveling off or declining, then there must be something important happening at the international level.

In truth, the fair trade movement has led to many unique unconnected, nonetheless, worldwide initiatives that seek to advocate for workers being paid a fair wage.  Furthermore, the advocacy doesn’t end there.   The World Fair Trade Organization (WFTO) audits their members to ensure that, not only the producers, but everyone along the supply chain, all the way to the ultimate consumer is being adequately compensated.  And, it is true in some cases, as some critics of fair trade point out; the end price to the consumer is generally higher than prices on similar items sold without the certification of fair trade.

But the questions remain:

  1. Are these efforts by a growing number of businesses from around the world making an impact on the lives and fortunes of those they are seeking to represent?
  2. Is the new so-called “LOHAS” consumer group, just that; a marketing ploy to those who live Lifestyles of Health and Sustainability (LOHAS)?
  3. Is there truly a growing worldwide demand for fairly traded products?

The Institutional Framework

Some of the most important organizations that are leading the fair trade movement worldwide are as follows:

  • The WFTO, based in the Netherlands, has developed a set of 10 principals that have become the de facto charter for fair trade organizations around the world. [ii] WFTO is over 20 years old and maintains the FT100 list; a list of member companies that are fully committed to creating a sustainable future.
  • The Fair Trade Federation (FTF), based in Washington, D.C., serves as a resource for organizing trade fairs and conferences for U.S. and Canadian wholesalers and retailers who are working with producers from around the world. [iii]
  • FLO, mentioned above, is made up of 24 member organizations from around the world. It has developed a trademark that only its member organizations can use when selling products on the open market.  It has established both generic and product standards, and maintains a standards evaluation unit for ongoing review of members.
  • The Fair Trade Resource Network (FTRN), based in Philadelphia, is an information hub that serves the worldwide fair trade community with educational materials and networking ideas.[iv]

These organizations, as well as many other industry-specific or region-specific non-governmental organizations (NGOs) are the thought leaders of this worldwide grassroots movement.

Is Fair Trade Making An Impact on the Lives of Producers?

HappyKidsGift2Testimonials given on hundreds of corporate sites of the members of the FTF and WFTO seem to suggest that the movement is, indeed making an impact on the lives of producers.  For example, FTF member Baladarshan, based in Chennai, India sells handmade objects through a storefront and on the Internet.  Handicrafts are constructed in vocational training programs supported by the SPEED Trust (Slum People Education and Economic Development).  SPEED is also involved in microfinance, elementary education, and prenatal education for members of the community.

optGroupSimilarly, in Luang Prabang, Laos, the storefront Ock Pop Tok is providing employment for a group of about 40 weavers and trainers and shop-keepers, all involved in selling the masterful weavings that characterize the traditional arts of Laos.

ThaiCraft1In Thailand WFTO member Thai Tribal Crafts brings together the traditional crafts of the Hmong, Lahu, Mien, Karen, Akha, and Lisu tribes to sell to the growing tourist traffic in Chiang Mai.  These artisans produce a wide range of products from silversmithing, to baskets to wood and stone carvings to beautiful weavings.

As encouraging as these isolated examples are, it remains to be seen whether or not many small-scale, regionally focused initiatives can make a dent in the profound need for jobs in the developing world.  To address this on scale large enough to matter, traditional news outlets and political pundits need to forego the call for protectionist policies in developed world countries and start educating people on the systemic benefits of a trading system that holds all its producers in esteem.

Until then, this question remains unanswered.

Is Fair Trade Just A Marketing Ploy?

The LOHAS magazine defines LOHAS as: a market segment focused on health and fitness, the environment, personal development, sustainable living, and social justice.[v] According to researchers at the WorldWatch Institute, the LOHAS market was estimated to be worth $300B in 2006. [vi]

Big corporations are also moving aggressively to market to this segment.  For example, eBay (NASDQ:EBAY) has formed a joint venture relationship with World Of Good to launch, a web-based auction and product sales portal that only sells LOHAS products.

Furthermore, in specific market segments, peer-reviewed, scientific publications are beginning to emerge that suggest that this is an increasingly important phenomenon, and that, beyond the hype, there is some validity to it.

In the agricultural sector, for example, the World Bank published a Working Policy Paper on Fairtrade coffee in Costa Rica.[vii] The abstract states:

“This paper concerns an NGO intervention in agricultural commodity markets known as Fairtrade. Fairtrade pays producers a minimum unit price and provides capacity building support to member cooperative organizations. Fairtrade’s organizational capacity support targets those factors believed to reduce the commodity producer’s share of returns. Specifically, Fairtrade justifies its intervention in markets like coffee by claiming that market power and a lack of capacity in producer organizations ‘marks down’ the prices producers receive. As the market share of Fairtrade coffee grows in importance, its intervention in commodity markets is of increasing interest [emphasis added].

Using an original data set collected from fieldwork in Costa Rica, this paper assesses the role of Fairtrade in overcoming the market factors it claims limits producer returns. Features of the Costa Rican input market for coffee permit a generalization of the results. The empirical results find that market power is a limiting factor in the Costa Rican market and that Fairtrade does improve the efficiency of cooperatives [emphasis added], thereby increasing the returns to producers. These results do not depend on the minimum price policy of Fairtrade and therefore can inform on its organizational support activities…..”

It would appear then, from this initial study that there is more to the Fairtrade agenda then a marketing ploy.  Indeed, many opportunists will be tempted to take advantage of the vulnerability of buyers seeking to do well with their purchasing decisions.  However, as Paul Hawken points out in his book Blessed Unrest: How the Largest Movement in the World Came into Being and Why No One Saw It Coming (2007), there is documented evidence that a major global shift in awareness is taking place by millions of people in many different locales.

I would give a tentative no in answer to this question.  Fairtrade is not just a marketing ploy; it is a genuine global movement with advocates all around the world whose actions are aimed at making world markets fairer to those who produce the goods for the consumers.
Is There a Growing Worldwide Demand for Fair Trade Products?

A survey, carried out by the Dutch Association of World Shops, in 28 European countries plus the United States, Canada, Japan, Australia and New Zealand, showed that global fair trade sales in 2007 reached a record figure of $3.61B.  When coupled with the 2008 Alter Eco consumer attitudinal survey which showed that 65.31% of those surveyed in the US had previously purchased fair trade products, this seems to confirm the trends, at least in the developed world. [viii]

To supplement these findings FLO conducted a global survey in 2008 which reveals that support for Fairtrade is on the rise.

“Ahead of World Fair Trade Day on May 9, 2009, this global consumer survey on Fairtrade shows that shoppers increasingly expect companies to be more accountable and fair in dealing with producers in developing countries. The survey by GlobeScan was commissioned by Fairtrade Labelling Organizations International (FLO) with a sample size of 14,500 in 15 countries. Among those surveyed, almost three quarters of shoppers believe it is not enough for companies to do no harm, but that they should actively support community development in developing countries. Consumers are calling for a new model in trade in which justice and equity are integral parts of the transaction. ‘Active ethical consumers’ make up more than half the population (55%) in the countries surveyed.” [ix]

As useful as these data are, these survey data are missing the added benefit of standard definitions for cross-border measurements.  One has to conclude that the most effective way of answering this question is to conduct statistical analysis on macroeconomic and trade trends at the global level.

This is, in fact, what the Global Trade Analysis Program (GTAP) at Purdue University is doing.  The problem is that the raw data that is analyzed from all of the countries of the world does not yet differentiate between widgets made using sweatshop labor, and widgets made by fair trade producers.

The UK-based New Economics Foundation (NEF) is not waiting, however.  They have recently published the 2nd Annual Happy Planet Index (HPI) report.[x] In this analysis they use a number of indicators including the United Nation’s Human Development Index (HDI) and other measures of ecological balance and social welfare.

As useful as this index is for developing an understanding of the state-of-the-art in quantifying these global economic trends, the only real remedy to this would be a world-wide effort to incorporate fair trade measures in standard census counts and industrial activity surveys.  An agency such as the World Bank would be appropriate for this task; and the surveys could be conducted by all its member countries.  Countries would benefit from the standards definitions work that has been conducted to date by FLO and insight about the synergistic effects of fair trade on other measures of welfare from the members of the WFTO and FTF, among others.

Once standardized data were being collected the researchers of the GTAP project, NEF and others would be able to evaluate the true nature of the economic trends that fair trade advocates are documenting through regional analyses and case studies.  In this way, this final question could be answered.

In the end, NEF’s Happy Planet might just turn out to be very happy indeed.


[ii] See these principles here:




[vi] Halweil, Brianink =; Lisa Mastny, Erik Assadourian, Linda Starke, Worldwatch Institute (2004). State of the World 2004: A Worldwatch Institute Report on Progress Toward a Sustainable Society. W. W. Norton & Company. pp. 167.

[vii] Ronchi, L. (2006). “Fairtrade” and Market Failures in Agricultural Commodity Markets. World Bank, Policy Research Working Paper # WPS4011




Supply/Demand and Profits: The Case of Oil

The most fundamental thing we all understand about economics without taking a course, the law of supply and demand, is flawed and incomplete. We intuitively feel that increased demand bids up prices, which then brings on new supply. Other things being equal, this works reasonably well. Other things are almost never equal.

Let’s take oil and gasoline as an example.

Gasoline prices may be rising, but if crude oil prices are rising faster than gasoline prices no new supply will come onto the market.  OilPumpSmallIt is even possible that supply may be reduced because crude prices rise so rapidly that refining and distribution costs are not covered, resulting in losses for gasoline producers. So, in order for rising prices of gasoline to bring on a rising supply, producers must be showing a profit.

This is not good enough. Hefty profits alone are not sufficient to bring on rising supply or increased competition. Wal Mart makes huge profits, but we do not see competitors flooding into the market to compete with them. The reason is that Wal Mart works on razor thin profit margins.

If prices are rising while profit margins are declining it is unlikely that new supply will be forthcoming. Therefore, new supply may be expected only when rising prices signals entrepreneurs to take a look, and rising profit margins induce them to wade in. In fact, there are plenty of examples where increased supply keeps coming even in the face of declining prices such as in the computer industry today. The higher the profit margins the greater the flood of new supply. I call this The Reiss Rule of Obscene Profit Margins: Relatively high and rising profit margins (not rising prices) result in increased supply.

Profit margin analysis is old hat to financial professionals, but apparently alien territory for economists. As proof I cite the windfall profits tax enacted under the Carter administration and recently re-proposed by certain policy analysts when oil prices were soaring. On the other side of the ledger I cite the special tax breaks enacted early in W’s administration when oil was in the $25 range. If you had any clue about what you just read, then it would have been obvious that we did exactly the wrong thing in each case.

When oil soared and profit margins rose for oil production in the 70’s the market signals screamed for more supply. By enacting a new “windfall profits” tax on producers plus a raft of onerous and costly regulations we did more than punish success. The windfall profits tax had a devastating effect on production because it led to sharply shrinking profit margins and severely dampened the market’s signals to potential investment by new oil producing entrepreneurs. This only exacerbated the problem.

Dollar sign 50

This is just one example of how those with the hubris to believe they know better than everyone else how the markets should behave actually do things that distort market signals and make things worse. Prices, profits and losses are the market mechanisms that transmit the information necessary for producers and consumers to make decisions that most efficiently allocate available resources. All the smartest guys in the room armed with all the computers in the universe can do no better.

Parenthetically, if one must interfere with the market when oil prices are high, then it follows that measures taken should increase incentives to produce more oil, not less. Therefore, reducing taxes on oil producers would be a better policy response to high oil prices than the typical, politically motivated, knee jerk reaction for higher taxes.

Is The U.S. Doomed To Years Of Slow Economic Growth?

Maybe not!

shoppingMallGreenFor decades the US consumer has fueled the fires of economic growth. Spending like drunken sailors the consumer has drained savings and run up a mountain of debt. Today with their savings depleted, their investments pillaged and their homes devalued, it will take a decade before they can spend again. We must pay the piper and are doomed to a lost decade. Or so goes the current economic mantra.
But in a new report entitled “The New Normal Will Likely Be ….Normal“, Wells Fargo’s Chief Investment Strategist Jim Paulson argues our economic recovery will be far better than expected. Paulson argues the seeds of our recovery were planted in the midst of our decadence. In short:

A: For almost two decades US consumers have spent far beyond their means. But that spending has helped jump start third world economies around the globe. We helped create a new world of consumers who have jobs, savings and aspirations for a better life. As we destroyed our savings, we created an emerging class of consumers around the world.

B: During the last expansion (2003-2006) overall real GDP growth averaged 3 to 3.5 percent. That was comprised of about 3% from the household sector, 1% from the business sector and a “net loss” of about 1% from our trade deficit. Let’s say that in the next expansion consumer spending drops to 1% of GDP. Business still contributes 1%, but rising exports now contribute 1%. Overall, GDP growth still remains at 3%, but its composition has changed.

Paulson argues several things must be put in place to make this happen:

1. Emerging world economies must no longer be allowed to continue currency pegs at cheap (below market) levels. Many emerging nations currencies are undervalued and would appreciate considerably were this to happen. China immediately comes to mind.

2. Emerging economies must no longer be able to treat workers like indentured servants. Worker protections, minimum wages and benefit packages must be enforced.

3. Environmental laws will need to be enforced worldwide.

A more level playing field will be created.

Should these things happen, the absence of the US consumer need not be a “death knell” for future economic growth. To read the article in it’s entirety, go to

Open Source Society

Reprinted from First Published June 25, 2009

In case you missed it, history was made last week.  The street uprisings in Iran, and the role that technology has been playing in that grass-roots democratic movement, has signaled a very important shift in the socioeconomic and geopolitical landscape of the planet.  What is this technology I’m referring to?  Actually, I’m referring to two: the open source paradigm and the web-portal, Twitter.

twitter-bird-1There are now an estimated 15 million members of Twitter, a web-based social networking site that is built entirely using open source software [more on this later].  In addition to the massive popularity it has gendered, it has also spun off hundreds of start-ups based on the publically available application interface (API) the founders made available to the developer community.  It was reported by blogger Brian Solis last week that, in addition to the core site, it has generated 3,500 new start-ups that have gendered over US$23M in investment capital (see: ).

But what do APIs, open source code and a bird-named web service have to do with a democratic uprising in the streets of Tehran?


When it became apparent to the people in the street throughout Iran that their recent election for a new President was rigged there was a general uprising.  For days there were thousands of people in cities across Iran that risked life and limb to openly defy the authorities.  Some video footage smuggled out of Iran of the shooting of a 26 year-old woman known as Neda became an instant YouTube phenomenon.

Even this week with a much more vicious crackdown there has been a call for a general strike.   The dissemination of this call has come primarily through the use of Twitter, which can operate through cell phone devices as well as the Internet.  And, according to an in depth look  by the Wall Street Journal at the Internet traffic going to and from Iran, it became clear to the world that the authorities tried to ratchet down the access of their citizens shortly after the election.  To counter this, cyber-warriors and hacktivists from around the world started using many sophisticated techniques to protect their sources inside Iran and maintain access to credible sources of information on the extent of the human rights abuses.

The demographics of the Iranian Twitter users might also lend some insight into this phenomenon, as well.  According to the Economist’s 2009 ‘Pocket World in Figures’ approximately 28% of the 70.3M people in Iran are under 15 years old.  This could be contrasted with the U.S. figures for 2009 which are 20.8% under 15 years old in a population of 301M.  And, according to many researchers in the management sciences, advanced technologies tend to have higher levels of adoption rates among younger generations.   This could account for some of the citizen journalist-type press coverage that was generated by the protests in Iran.

The Islamic fundamentalist Mullahs that run the country above and beyond the control of electoral politics are backing the incumbent, President Ahmadinejad.  According to former insiders like Mohsen Sazegara that had suffered the wrath of the hard-liners, there is great cause for concern that human rights are regularly being violated under this regime.  [See his opinion piece in the June 11 edition of the International Herald Tribune.]  Detainees from the uprising this week are likely to suffer the same fate he did with imprisonment and long term solitary confinement for openly defying the conservative fundamentalist regime.


Although most of the Western mainstream journalists have been banned from reporting on the events in Iran, many brave Iranian men and women are continuing to inform the other citizens of the world about the situation through their Twitter accounts on their mobile phones.

So here, now, in 2009, in the post 9/11, post Iraq-war, post economic crash of 2008 world, we have a country whose citizens have had the fortitude to stand up to a corrupt authoritarian regime that appears to be seeking to consolidate its own power at the expense of truth and transparency.  And, furthermore, they are generating support among the world community by using a technology that was spawned in the land of the devil incarnate, i.e., the United States of America [remember the rhetoric of the 1989 Revolution?].

The world is being turned on its head.  The effect of Twitter on the activities of the past week cannot be undone.  It makes a profound statement in support of grass-roots movements and the quest for democracy in the modern world.

Now, what of this ‘open source’ paradigm?  How does it relate to the issue at hand?

Ahhh, here is where it gets interesting.  In the world of technology and software engineering there has been a decade-long battle waging.  This battle has been between large (and small) companies that operate using two opposing revenue/business models.  On one side you have a group, most effectively represented by Microsoft and IBM, that I will call the ‘proprietary’ model users.  On the other side you have a group, most effectively represented by Sun Microsystems and Google, that I will call the ‘open source’ model users. [OK, OK, look at the Google developer release of the Wave beta to see the open source approach.]

Companies using the proprietary model have, for years, used a black box approach to developing and releasing software and proprietary hardware systems.  Their revenue model was based on the assumption that if they sold a certain number of units at a certain price, they would be able to make money and grow profitable.  OK, so far, so good.  I think most computer users understand this concept.  The down side to this is that there are only a limited number of people that can get access to the ‘code’ and therefore write new and exciting software that extends the capabilities of the original code.  Therefore the use of a proprietary model is not as ‘extensible’ as the use of an open source model.

In contrast, the open source model was based on the assumption that by generating code that was freely available to a wide array of developers they would be able to continually improve the efficiency and effectiveness of the code, thereby generating a greatly extensible product.  As a result, many innovative and ‘extensible’ applications have come out of this free market of ideas.  In the case of Twitter, the extensibility of the code to the mobile phone market was what gave the software its power when the Mullahs tried to muffle the voice of the youth.

Earlier this year Savio Rodrigues, writing for InfoWorld ( argued that the decade long battle on the most effective business model for the Internet  was a truce. Some argued that the open source model has won the battle.  Rodrigues argued, however, that both models triumphed in that they both became stronger and more robust as a result of the competition.

I’m not so sure I agree that it was a truce.  What we have seen in Iran, given the role of Twitter, an open source technology, is truly revolutionary.  The old hierarchical reporting lines are breaking down.  We see this in our modern world in everything from the operations of General Motors, to the loss of credibility by the ruling elite in Iran.

A new open source, truly democratic movement is taking hold; and it is worldwide.  It is one that rejects the corruption and self-interested usury of the past and adopts a more transparent model of decision-making, governance and control.  The mullahs are seen by the youth and forward-thinking individuals in Iran as self-serving ideologues that have no role in a future society where mutual respect and good governance is key.

I wonder if the parents of the people that have died in the Iranian clashes this week know anything about open source software.  I wonder if the uncounted people that have been detained as the behest of the Iranian secret service were using their Twitter accounts before their phones and rights were stripped away.  We’ll never know.

In any case, let’s hope that the open sourcers continue to use Twitter to let the rest of us know about the outcome of their revolution for accountability and truth.