Bellerbys Economics - Mr Stephenson

Wednesday, November 22, 2006

Black Gold - No, Not Texas Tea!

There's another excellent movie circulating at the moment that will help you to pass the time between now and that commercial trap we call Christmas - it's called 'Black Gold'. It's perfect for Module 1 revision.

Multinational coffee companies dominate the coffee industry which is worth over $80 billion, making coffee the second most valuable trading commodity in the world after oil.

However, whilst we continue to pay ridiculous prices for the equivalent of two beans in a cup in Starbucks or Coffee Republic, the price paid to coffee farmers remains so low that many have been forced to abandon their coffee fields.

This is because of what economists sometimes call the agricultural paradigm. The more farmers who are encouraged to produce cash crops like coffee - often to help pay off the international debts of their governments - and the more efficient they become at it, the more that supply increases. As the supply curve shifts to the right, the price falls and falls until the equilibrium point is reached at subsistence level. Many farmers see no hope for the future and simply give up.

Of course, there are ways to overcome the problem - agricultural policies, buffer stock systems and so on - but many governments don't have the money or the organisational skill to run these.

What happens when the farmers give up? Well, most of them will migrate to the local city. In theory this might not be so bad if their labour could be used productively - adding value by providing work in factories or in infrastructure products - as in the Lewis Theory of Development (Module 6) - but in practice, this often doesn't happen. They may end up living in shanty towns, scratching around for odd jobs in areas where they have no specific skills (productive and allocative inefficiency), sometimes filling their time on the margins of the black economy (module 6) - crime, drug-running and so on.

The film, which has been heavily criticised by Starbucks, focusses on Tadesse Meskela from Ethiopia - a man on a mission. He is trying to save 74,000 struggling coffee farmers from bankruptcy in his home region. As his farmers strive to harvest some of the highest quality coffee beans on the international market, Tadesse travels the world in an attempt to find buyers willing to pay a fair price. It doesn't sound very promising as a movie - but believe me it's as gripping as any thriller.

Against the backdrop of Tadesse's journey to London and Seattle, the enormous power of the four multinational companies that dominate the world's coffee trade becomes apparent. They form a classic oligopsony extracting abnormal profits from both the suppliers and the consumers. New York commodity traders, the international coffee exchanges, and the double dealings of trade ministers at the World Trade Organisation reveal the many challenges Tadesse faces in his quest for a long term solution for his farmers.

As always, you should analyse economic movies in a critical way - how good is the economics in the movie, what are the benefits and the costs to each of the stakeholders from the situation described, what opportunities exist for increasing economic efficiency and so on - but believe me, you will never be bored by this movie - and the next time you drink a cup of coffee, you will think carefully about the long chain of events that brought those two beans to your cup.

The directors are Marc and Nick Francis.

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