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The Coffee Crisis Essay

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Introduction In 2011, Diego Comin, Associate Professor of Business Administration at Harvard Business School, revised his 2009 case study on the Great Moderation (reproduced by permission for Capella University, 2011). The case explores whether or not the Great Moderation, defined by investopedia. com as “the period of decreased macroeconomic volatility experienced in the United States since the 1980’s [during which] the standard deviation of quarterly real GDP declined by half, and the standard deviation of inflation declined by two-thirds (para.1)” is still in effect.

This paper will use evidence from research in a draft by Pancrazi and Vukotic (2011) that proposes “macroeconomic variables in the last thirty years have not only experienced a reduction in their overall volatility, but also an increase in their persistence (p. 2). ” The 2011 research paper also purports that “by using a New-Keynesian macroeconomic model… the responsiveness of output variance to changes in the monetary policy decreases with an increase in the persistence of technology (p. 2). ”

The result, according to Pancrazi and Vukotic, is an “overestimate” of the monetary influence and authority to “smooth out the real economic dynamics (p.

2). ” The Great Moderation and the The Great Recession. Comin, in “The Great Moderation, Dead or Alive? ” (Capella, 2011), quotes Ben Bernanke, Chairman of the Federal Reserve: “reduced macroeconomic volatility has numerous benefits. Lower volatility of inflation improves market functioning, makes economic planning easier, and reduces the resources devoted to hedging inflation risks.

Lower volatility of output tends to imply more stable employment and a reduction in the extent of economic uncertainty confronting households and firms. The reduction in the volatility of output is also closely associated with the fact that recessions have become less frequent and less severe (p. 17). ” Comin points out that these conditions existed until the Great Recession of 2007 when the U. S. and other countries experienced the longest period of recession and “ the largest GDP contraction in the U. S. since the Great Depression (p. 17).

” In “Overlooking the Great Moderation, Consequences for the Monetary Policy” (2011), the researchers hypothesize that the “Great Moderation might have been fertile ground for the recent recession (p. 3), in that technology caused an “increased persistence in the macroeconomic variables (p. 4). ” Macroeconomic Observations. To summarize Comin’s (2011) account of macroeconomic activity in the U. S between 1930 and 2010, when observing the GDP during this period, he says, “it is clear that since around 1984 it has been harder to observe large deviations from the average growth rate (p.17). ”

When examining other macroeconomic variables, Comin says that hours worked, consumption, investment, labor productivity, and total factor productivity (TFP), have, for the most part, “experienced stabilization by roughly the same magnitude, [where] the stock market has not stabilized significantly. If anything, it has become more volatile over the last few decades (p. 18). ”

Pancrazi and Vukotic focus their research on “studying the behavior of the total factor productivity (TFP) before and after the Great Moderation (p.4)…[by] using a basic New-Keynesian model featuring imperfect completion and price stickiness, [to ascertain] whether a change in the persistence of TFP affects the responsiveness of the real variables to the monetary policy (p. 6). ” Their observations include an examination of the stability of TFP and an assessment that “a higher Microeconomic impact of the coffee crisis. The case study conveys that “coffee was the main source of income for roughly 25 million farmers, mostly small land holders, in Latin America, Africa, and Asia (p.1). ”

The coffee crisis created immense hardship for these small producers; “in some countries, farmers had been forced to take their children out of school and put them to work (p. 1). ” One of the consequences of the coffee crisis that was less publicized was how larger farms and their workers were devastated. Large farms generally do not use non-cash family workers, like many of the smaller farmers do; as a result of the crisis, many workers were laid off, subsequently putting larger farms completely out of business.

(Price, 2003) Where some producers chose to get out of the coffee business and venture into unknown territory with a new crop, others either attempted to break into the coffee “niche” market or decrease their outputs. (Line & Tickell, 2003) In the ICO report on the impact the coffee crisis has had on poverty, the socio-economic impact reported by the respondent countries is filled with narratives that describe families and farmers who worked in the coffee industry unable to pay for medicine, food, and other essentials.

Families are also reported to have migrated to cities, where there is typically no work for skilled farmers; some countries report that workers have migrated leaving their families behind. (Osorio, 2003) Solutions for long term sustainability. The case study presents an outline of solutions recommended by the ICO, Technoserve (as reported to the Inter-American Development Bank) and Oxfam. “The Coffee Crisis” states that, according to Oxfam, “the long run solution…was a commitment to ‘fair trade’… a system in which a buyer in the first world agrees to pay third-world producers enough to support a decent living (p.5). ”

Oxfam says that “the fair trade movement was designed to provide an assured income and other benefits to the farmers associated with it (Line & Tickell, 2003, p. 8). ” Technoserve believes the following “three areas offer the highest potential for sustainable impact: 1. Increasing coffee consumption in producer countries and emerging market countries; 2. Assisting unprofitable producers of high-quality Arabica to move into higher-priced “specialty” coffees; and 3.

Helping regions with a high concentration of “marginal” coffee producers — who cannot differentiate their product or compete on price — to diversify into other products and industries (para. 15 &16). ” In June, 2004, Nestor Osorio of the ICO presented to the United Nations Conference on Trade and Development (UNCTAD) a report titled: “Lessons Learned from the Coffee Crisis: A Serious Problem for Sustainable Development. ” In it he outlines the economic strategies he believed would prevent a future crisis and assist coffee producer toward long-term sustainability.

Two proposed policies address the supply-demand problem: 1. To use the experience of the coffee crisis to create awareness – best achieved through the ICO – in national and international bodies of the danger of embarking on any projects or programmes (sic) which will further increase supply; and 2. Working to increase the benefits accruing from value-added products rather than traditional bulk commodity exports. Osorio recognizes the importance of “the need for market development to increase demand (p. 5)” also.

He says that projects intended to benefit the supply chain should include actions from farmer to consumer, as well as farmer to exporter. These include: 1. “Support for the ICO’s Quality-Improvement Programme as a means of improving consumer appreciation and consumption of coffee; 2. Action to increase consumption in coffee-producing countries themselves, which should have a number of positive effects such as providing an alternative market outlet, increasing producer awareness of consumer preferences, stimulation of small and medium enterprises, etc. as well as acting to increase demand;

3. Action to enhance knowledge and appreciation of coffee in large emerging markets such as Russia and China, following the successful ICO campaigns in the 1990s; and 4. Protecting consumption levels in traditional markets through quality maintenance, development of niche markets and dissemination of positive information on the health benefits of coffee consumption. (p. 5-6). ” Conclusion The coffee market has been described as an “imperfect market; a market that in recent years has failed – both in human and economic terms (Lines & Tickell, 2003, p. 8).

” The coffee crisis illuminated the impact the market had on international trade, national economies, businesses and families – many in underdeveloped, low income countries. Because the regions where coffee can be grown are also many times third-world or repressed countries, coffee production is considered a humanitarian concern as well as an economic issue.

Where an organization like Technoserve may lean toward business partnership solutions for the coffee industry, and Oxfam may concentrate on the humanitarian perspective, the International Coffee Organization appears to have taken a balanced approach in presenting the plight of coffee producers from both altruistic and economic perspectives.

Where it is understood that many depressed areas and nations depend on coffee crops for sustenance, the ICO has taken a stand that the lessons learned from the coffee crisis must be solved with the tenets of economics, coupled with social responsibility, if families, farms, businesses and coffee-producing nations are going to achieve long-term sustainability. References Capella University. (Eds. ). (2011). MBA6008: Global Economic Environment.

New York, NY: McGraw-Hill. Lines, T. , & Tickell, S. (2003, May 1). Walk the Talk, Oxfam International Briefing Paper, May, 2003. Oxfam International | Working together to find lasting solutions to poverty and injustice.

Retrieved May 5, 2012, from www. oxfam. org/sites/www. oxfam. org/files/walk. pdf Osorio, N. (2002). ICO. org Documents/Global Crisis. International Coffee Organization. Retrieved May 4, 2012, from dev. ico. org/documents/globalcrisise. pdf Osorio, N. (2003). ICO. org Documents/G-8.

International Coffee Organization. Retrieved May 4, 2012, from dev. ico. org/documents/g8e. pdf Osorio, N. (2004). ICO. org Documents/UNCTAD. International Coffee Organization.

Retrieved May 4, 2012, from dev. ico. org/documents/UNCTAD. pdf Prince, M. (2003, December 3). CoffeeGeek – Coffee Crisis:TechnoServe Releases Fact-Based Industry Analysis. CoffeeGeek – News, Reviews, Opinion and Community for Coffee and Espresso. Retrieved May 5, 2012, from http://coffeegeek. com/resources/pressreleases/technoservedec42003.

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