The International Coffee Agreement: an analysis of a successful cartelization effort

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Virginia Polytechnic Institute and State University

The first International Coffee Agreement (ICA) came into force on September 1, 1963 and established a system for regulating coffee exports and imports primarily by employing quotas to limit coffee supply. The ICA has been in existence since that time and is now in its fourth edition. The continued operation of the Agreement for nearly twenty five years is an apparent contradiction of economic cartel theory.

Two major areas related to the success of the ICA cartelization effort are the focus of this paper. First, the structure of the Agreement, especially the provisions for regulating exports and imports, is analyzed from the perspective of standard economic cartel theory. This analysis highlights several cartel mechanisms incorporated in the ICA. It concludes that the Agreement is soundly structured and allows for the successful cartelization of the coffee market by those countries which voluntarily participate in the ICA. However, this sound structure alone does not explain the success of the coffee cartel because it cannot prevent countries from withdrawing their support of the Agreement.

The analysis then turns to the questions surrounding the continued endorsement of the ICA by both coffee producing and consuming countries. Political and economic motivations of the governments which support the Agreement and of the producers and consumers in these countries are discussed. Although some incomplete explanations for their support of the ICA are presented, several questions surrounding the economic reasoning of many parties to the Agreement, especially coffee consuming countries, remain unresolved.