Black Gold and the Law of Large Numbers

This afternoon I watched the 2006 coffee trade documentary "Black Gold" for the first time and learned some things, like, for instance, in terms of trade volume among commodities, coffee is exceeded by only oil, and that the eco-friendly fair-trade image cast by Starbucks and other chain coffee shops is only a veneer.  The film follows a group of Ethiopian coffee growers and is harshly critical of the World Trade Organization, which it claims keeps the world price of coffee artificially low to benefit the four major middlemen (Sara Lee, Proctor and Gamble, Kraft, and Nestle) as well as consumers in rich countries.  "Black Gold" criticizes foreign aid for Africa as a poor substitute for extending an appropriate share of the profits generated by coffee sales and those of other commodities to the poor Africans that produce them. 

While watching and hypocritically drinking dollar-a-liter iced coffee en masse, I couldn't help thinking about famous commodities trader and adventurer Jim Rogers, who, among other acheivements, co-founded the Quantum Fund with George Soros, which gained 4200% in ten years (that's not a misprint); has traveled around the world twice-once by motorcycle, and once by custom-made Mercedes; is a Professor at Columbia Business School; and regularly appears on television to offer alternative views on world trade and other topics.

Rogers is of the somewhat radical Austrian School of Economics, and, as such, predicted both the collapse of the real estate market and the recent financial crisis in his 2001 book Adventure Capitalist.  In that same book, there is a notable passage on Ethiopia in which Rogers is harshly critical of the WTO, farm subdsidies in wealthy nations, and the foreign aid mechanism as responsible for what essentially amounts to wage slavery for Africans.

Rogers is perhaps unique among investors for basing a lot of his foreign investment decisions on local conditions.  During his long road trips, he regularly purchased goods at black markets around the world.  In Ethiopia in particular, he chronicled a shift from localized coffee production to foreign aid piracy, whereby young Ethopians, instead of wasting their time producing artificially low-priced coffee for the four major sellers, acted as middlemen for distributing foreign aid to an impoverished people, and thereby profitting. 

Currently, Rogers has moved to Singapore, claiming the great growth era of the United States is finished.  He is extremely bullish on China, the Japanese Yen as the interim global reserve currency, and against conventional investment wisdom, is extremely bullish on global commodities.  Rogers can perhaps be accurately described as a Progressive Libertarian, that is, someone who, as a trained economist, has faith in laissez faire capitalism, but who recognizes that the corporate cartelism propagated by first-world bully clubs such as the WTO is inherently unfair and bound to end as labor organizes and citizens of the developed world become more enlightened. 

Citizens of developed nations have become used to the term "capitalism" being associated with the trade policies adopted by multinationals, but generally fail to see the principle difference between the capitalist structures of their own countries and those of the developing world.  American capitalism evolved alongside the labor movement.  Management was organized and labor became organized as well.  The crucial difference between this style of capitalism and global commodities trade is that, while management is well organized via multinational conglomerates and mechanisms such as the WTO, growers are not.  If there is a coffee growers strike in Ethiopia, Proctor and Gamble will simply choose to purchase coffee from Bolivia or Sumatra instead. 

Perhaps the reason Rogers is so bullish on commodities is that he sees an inevitable organized international labor movement on the horizon.  This would level the playing field.  After all, OPEC shocked the world in the 1970s when it suddenly announced that it would increase the global oil price.  Rogers and other commodities investors profitted heavily off this shift.  Now, countries such as Saudi Arabia and Bahrain are among the wealthiest in the world.  If the small tenant farmers of countries such as Ethiopia and Bolivia could develop more efficient organizational structures, an OPEC-type cartel would have a similar counterbalancing effect on the coffee trade.  Of course, it's easier to form a cartel among the relatively few oil explorers.  Doing the same with millions of independent farmers is a much more formidable task, but one made easier by both the internet and the microfinancing phenomenon. 

"Black Gold" certainly touches on this.  The film follows the elected representative of a southwest Ethiopian coffee growers union as he spurns the four major distributers and searches for buyers within the UK's relatively new organic, fair trade, gourmet coffee distributers market.  The film finishes with the simple fact that, despite millions in foreign aid, Africa has been the only continent to grow poorer over the last twenty years.  If Africa were to receive an additional 1% increase in profit-share from world trade, this would more than compensate for all the hypocritical and insulting foreign aid it receives.