The International Coffee Industry - Essay Example

The International Coffee Industry Executive Summary: The coffee industry is one of the truly global industries of the world. However, it is also one of the industries where is a sharp economic inequity between coffee growers in developing and poor countries vis a vis multinationals in the developed countries who market the coffee and reap much of the profits from it. While the benefits of globalization are being touted by many, all international trade models do not support its beneficial effect. Moreover, the development of the legal identity of the corporation as a person, with limited liability of shareholders has only increased the profit making incentive that has become the driving factor of corporate business and only promotes economic inequities. In specific reference to the coffee industry, the profit motive of corporations only worsens the conditions of poor coffee farmers who are not compensated in roportion to their hard labor. Introduction: According to Thomas Friedman, globalization is the “inexorable integration of markets, nation states and technologies…..the spread of free market capitalism to virtually every country in the world.” (Friedman, 2000: 7-8). In reference to the international trade facilitated by globalization and the diffusion of geographical boundaries, Mittelman refers to globalization as a historical transformation - “a political response to the expansion of market power” resulting in a transformation “in the economy, of livelihoods and modes of existence” (Mittelman, 2000: 6). McMichael also corroborates this market oriented view, seeing the process of global integration taking place on the basis of “market rule on a global scale”(McMichael, 2000:149). The belief in the beneficial effects of free trade that exists today is largely a function of the theory of comparative advantage that underlies the Ricardian model of international trade (Henderson, 1993:827). Comparative advantage is the ability possessed by a particular country to produce a particular good at a lower cost relative to other goods and as compared to other countries that produce the same good. Therefore, comparative advantage possessed in one area of production indicates that the country has some favorable factors working on its behalf or has perfected specialized techniques in the production of that good, so that it is able to produce it more efficiently (Mankiw, 2007: 52). According to Porter (1996:64), “Competitive strategy is about being different.” Porter also states that “Strategy is the creation of a unique and valuable position, involving a different set of activities……different from rivals.” (page Porter 1996: 68). Applying this in the case of the coffee industry, it may therefore be noted that certain countries such as Brazil or Uganda may possess a comparative advantage in terms of production of coffee since location and climate favor the growth of coffee beans, while cheap labor further aids in economies of scale in production. However, the beneficial effects of international trade through the possession of such comparative advantage as posited by the Ricardian model do not appear to apply in the coffee industry and this may largely be caused by the profit making force driving corporate activity. Stopler and Samuelson (1941) have examined the Hecksher-Ohlin model in the case of imposition of import tariffs on those goods which are labor intensive and therefore imported by the developing countries. When such a tariff is imposed, it successfully raises the price of the imported good that utilizes the scarce factor of labor exhaustively. As a result the price of the labor factor will rise, thus tariffs in fact favor the factor that is scarce in the country that is importing. The Hecksher-Ohlin model predicts the balance of trade between two countries on the basis of a composite set of factor endowments and the differences present therein. Thus, the H-O model differs from the Ricardian in that it makes assessments on the basis of composite factors rather than just one, and it is the intensity ratio of the factors which is the determining criterion. Hence the H-O model differs from the Ricardian in that it also takes into account the impact of changes in prices and redistribution of incomes and production patterns. This model may therefore be more relevant in the case of the coffee industry, since the lack of fair trading in coffee has been largely responsible for the disparities in the prices of coffee sold by the farmers and that sold by the large corporations in developed countries. The profit making motive of corporations: Korten D (1995:1-2) has pointed out how the corporation evolved as a means to limit the liabilities of individual investors to the extent of their investments while also imposing obligations to transfer a share of its profits to the crown. The corporate veil has been zealously guarded thus far, since the facility of limited liability available to a corporation has been deemed fundamental in the propagation of a capitalist economy (Watson 2002:201). The case of Solomon v Salomon & Co Ltd established the corporation as a distinct legal entity in common law, with an existence and personality separate from the people that comprise it. This has provided the facility for small agencies and businesses to assume a corporate form, functioning as a front that shields the agency/individuals from creditors rather than being purely directed towards raising capital for risky business purposes (Villata 2000). The extent of an individual shareholder for a Company’s debts is restricted to the extent of amounts unpaid on their shares or a pre-arranged contribution and the limited liability aspect has been deemed beneficial for the improved efficiency of the securities markets. The facility provided to a corporation for fundraising by selling shares to outside investors has resulted in stock speculation that has bred stock market crashes as greedy individuals use the cover of the corporation to trade shares and make profits while riding the wave of market speculation. Corporate powers have aggregated such that they are “creatures of money” against whom action becomes difficult and obscure.1 In a report prepared by the Institute of Chartered Accountants of England and Wales, the ultimate profit objective of corporations has been clearly identified: Since profits are, in part, the reward for successful risk-taking in business, the purpose of internal control is to help manage and control risk appropriately rather than to eliminate it (Institute, 1999). However, by limiting the power and discretion of the directors and decision makers of the corporations and constraining them from acting outside the best interests of the corporation, the net result is often a sacrificing of pure altruism at the altar of corporate profit making. In the zeal to accumulate profits, multinational corporations may often sacrifice the interests of poor coffee farmers. Corporations are primarily profit motivated and characterized by formal structures and rules which limit the moral autonomy of decision makers. According to Nesteruk, a corporation does not share the same moral status as that of individuals, since corporate speech is in the context of the corporation’s commercial interests, rather than the dynamics of reason and desire which constitute individual moral choices (Nesteruk, 1988:701). A corporation’s survival is based upon the generation of profits from the financial markets, thus fundraising will take precedence over human interests. Moreover, corporations are likely to pose precisely the kind of oppressive threat that the law aims to protect individuals from in order to protect their liberties (Mayer 1990). In the single minded pursuit of corporate self interest and the constant need to raise funds to replicate itself, corporations would not even be reluctant to create artificial shortages or exploiting poor farmers in the interest of gaining profits. Therefore, a corporation is unlikely to function in a moral manner. Relevance in the coffee industry: Coffee farmers in Uganda and other coffee growing countries rarely receive any of the profits that accrue from coffee sales worldwide, since coffee giants such as Nestle, Kraft and Sra Lee are accruing huge profits at the expense of the farmers. In the words of Lawrence Seguya of Uganda, “We grow it with our sweat and sell it for nothing.” (Wunderlich, 2006:7) The charity organization Oxfam, which is focused on development has been working on behalf of coffee farmers since 2001, helping them to negotiate higher prices for the coffee they produce. With more consumers focusing on ethical shopping and being willing to pay higher prices to ensure that poor farmers receive better returns, this has put pressure on multinational corporations to ensure a measure of corporate social responsibility in their operations. In keeping with this trend, Nestle has for example, introduced a fair trade instant coffee and claims that it is a commitment to help poor farmers, however organizations such as the World Development Movement have characterized it merely as a move to cash in on a growing market (BBC News Report, 2005). Proctor and Gamble has also launched a fair trade coffee in 2004 in the United States. Efforts to promote sustainability have also been advocated by the Kraft Company which now pays a premium of 8 to 12 cents per pound of coffee that is grown in accordance with standards of sustainability set out by the Rainforest Alliance.(Wunderlich 2006:11). In partnership with this organization, Kraft is promoting sustainability in the coffee market by (a) providing funds for technical assistance and training to farmers to improve their living and working conditions (b) purchasing increasing quantities of certified coffee for incorporation into its European brands and (c) enhancing consumer demand for certified coffee. Conclusions: In the coffee industry, the need of the hour appears to be the introduction of fair trading and equitable terms for farmers in poor countries. Measures being mooted towards the promotion of sustainability in the coffee industry may be beneficial, especially when combined with foreign direct investment to improve the training of workers and technology infrastructure in poor coffee growing countries. An increase in the level of international trade results in an increase in foreign direct investment by one country into another, as well as technology transfers between two countries. The import of technology may be beneficial, resulting in the availability of intermediate technology inputs that can be accessed by domestic firms (Rodriguez-Clare, 1996) since workers originally hired by MNE firms may be attracted to the domestic firms and provide the benefit of their specialized knowledge.(Fosfuri, Motta and Ronde, 2001). However, Aitken and Harrison (1999) found a different result in Venezeula, where with an increase in foreign direct investment, productivity was actually reduced since the MNEs in fact pull away the most skilled workers from the domestic firms by offering them higher wages or benefits. Similarly, other recent studies that have been conducted have found that there is little or no technology spillover benefit accruing to a recipient country through the entry of multinational firms and foreign technology, and in some cases the effect was even negative.(Konings 2001). Therefore, in conclusion, it would appear that to a large extent, corporate profit making needs to be attacked by prevailing negative public opinion, so that the multinational firms are able to provide better terms and training to poorer developing countries, in order to introduce greater levels of economic equity. References: * Aitken, B. and A. Harrison, 1999. “Do domestic firms benefit from foreign investment? Evidence from Venezuela” American Economic Review, 89(3). * BBC News report, 2005. “Nestle launches fair trade coffee” [online] available at: http://newsvote.bbc.co.uk/mpapps/pagetools/print/news.bbc.co.uk/1/hi/business/4318 * Fosfuri, A., M. Motta and Rønde (2001), “Foreign Direct Investment and Spillovers through Workers’ Mobility”, Journal of International Economics 53: 205-222. * Friedman, Thomas L, 2000. The Lexus and the Olive Tree New York: Anchor Books * Henderson, David R, 1993. David Ricardo. The Fortune Encyclopedia of Economics. * Institute of Chartered Accountants in England & Wales, (1999), Internal Control : Guidance for Directors on the Combined Code, London : Accountancy Books, at pp 5, para 13 * Konings, J, 2001. “The Effects of Foreign Direct Investment on Domestic Firms: Evidence from Firm Panel data in emerging economies.” Economics of transition, 9(3): 619-33. * Korten, D, 1995 When Corporations rule the world San Francisco: Kumarain Press, at pp 1-2 * Mankiw, N. Gregory, 2007. “Comparative Advantage: The Driving Force of Specialization.” Principles of Economics. (4th ed) Thomson learning * Mayer, C.J. 1990. “Personalising the Impersonal: Corporations and the Bill of Rights.” 41, Hastings law Journal, 557 * McMichael, P, 2000. “Development and Social Change” Thousand Oaks: Pine Forge Press, pp xxiii, 149 * Mittleman, J.H., 2000. “The Globalization Syndrome: Transformation and resistance.” Princeton: Princeton University Press * Nesteruk, Jeffrey, 1988. “Belotti and the question of corporate moral agency” 3, Columbia Business review, pp 701 * Porter, M.E. (1996), What is Strategy? Harvard Business Review, Nov-Dec.: 61-78 * Rodriguez-Clare, A, 1996. “Multinationals, Linkages, and Economic Development”, American Economic Review 86. * Solomon v Salomon & Co Ltd (1897) AC 22 * Stopler, Wolfgang F and Samuelson, Paul A, 1941. “Protection and real Wages” Review of Economic Studies (November). * Villalta G, “A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine” (2000) 7(3) Murdoch University Electronic Journal of Law, at p 5, [online] available at: http://www.murdoch.edu.au/elaw/issues/v7n3/puig73a_text.html * Watson, S, 2002. “Who hides behind the corporate veil? Finding a way out of “the legal quagmire” 20 Company and Law Securities Journal 198 at p 201 * Wunderlich, Christopher, 2006. “The sustainable commodity initiative: coffee activities.” UNCTAD Expert meeting at pp 7 Read More