Nestlé has just announced that KitKat – Britain's biggest-selling chocolate bar – will carry the Fairtrade logo from next month. But how much do consumers really know about the Fairtrade movement? Is it, as some say, an essential safety net that helps poor farmers earn a better living or, as others say, an example of western feel-good tokenism that holds back modernisation and entrenches agrarian poverty?

There are now more than 4,500 Fairtrade items on our shelves. UK sales boomed by 43% in 2008 and the British government has announced a four-year £15m funding package for the organisation.

Fairtrade provides a minimum baseline price for commodities, allowing farmers to hedge against market volatility. The co-operative system allows small farmers better access to global markets and encourages democratic representation. Each commodity price also includes a "social premium" which can be reinvested in social or development projects.

However, economist Paul Collier argues that Fairtrade effectively ensures that people "get charity as long as they stay producing the crops that have locked them into poverty". Fairtrade reduces the incentive to diversify crop production and encourages the utilisation of resources on marginal land that could be better employed for other produce. The organisation also appears wedded to an image of a notional anti-modernist rural idyll. Farm units must remain small and family run, while modern farming techniques (mechanisation, economies of scale, pesticides, genetic modification etc) are sidelined or even actively discouraged.

Fairtrade director of communications Barbara Cowther admitted in the documentary A Bitter Aftertaste that the organisation had no real policy on mechanisation – this despite the fact that it is central to agricultural development.

By guaranteeing a minimum price, Fairtrade also encourages market oversupply, which depresses global commodity prices. This locks Fairtrade farmers into greater Fairtrade dependency and further impoverishes farmers outside the Fairtrade umbrella. Economist Tyler Cowen describes this as the "parallel exploitation coffee sector".

Coffee farms must not be more than 12 acres in size and they are not allowed to employ any full-time workers. This means that during harvest season migrant workers must be employed on short-term contracts. These rural poor are therefore expressly excluded from the stability of long-term employment by Fairtrade rules. Indeed, The International Development Committee declared in 2007 that "Fairtrade could have a deeper impact if it were to target more consciously the poorest of the poor".

We might think of sub-Saharan subsistence economies when we think of Fairtrade, but the biggest recipient of Fairtrade subsidy is actually Mexico. Mexico is the biggest producer of Fairtrade coffee with about 23% market share. Indeed, as of 2002, 181 of the 300 Fairtrade coffee producers were located in South America and the Caribbean. As Marc Sidwell points out, while Mexico has 51 Fairtrade producers, Burundi has none, Ethiopia four and Rwanda just 10 – meaning that "Fairtrade pays to support relatively wealthy Mexican coffee farmers at the expense of poorer nations".

Another criticism is over institutional inefficiencies. The vast majority of the money from Fairtrade sales remains in the west – with only about 5% of the Fairtrade sale price actually making it back to the farmers. As Philip Oppenheim says, "any intelligent person will ask why I should pay 80p more for my bananas when only 5p will end up with the producer". Fundamental to the failure of wealth transfer are issues such as the fact that while 90% of the world's cocoa is produced in the developing world, only 4% of the chocolate is produced there. Developing countries remain locked in the primary sector commodities market, while the west cashes in on their value-added conversion.

Colleen Berndt of George Mason University details how Fairtrade membership can also be high. The costs take in not just certification and annual inspections, but also the wider compliance with Fairtrade organisational structures. In Guatemala, an executive at Fedecocagua, the country's biggest Fairtrade co-operative, admitted that "after paying for the co-operative's employees and programmes, nothing remained of the Fairtrade premiums to be passed on to the individual farmers".

A further inefficiency is highlighted by examining the accounts of the independent charity Fairtrade Foundation, which licenses the use of the Fairtrade mark in the UK. In 2008, of a total income of £7.2m, the largest expenditure was on "public education and awareness" at more than £2.1m. Fairtrade is an expensive brand to maintain because it relies solely on consumer awareness campaigns, and these costs eat into the Fairtrade premiums that farmers can receive.

Ultimately, Daniel Jaffee concludes [see footnote – Ed] that "Fairtrade ... does not bring the majority of participants out of poverty". He suggests the small increase in farmers' wages is at the expense of further entrenching the agrarian status quo, disadvantaging migrant workers and those outside the Fairtrade organisation. Steve Daily, of WorldWrite charity, condemns the movement for having horizons that are far too low, and for not focusing enough on actual agricultural reform. Berndt concludes that Fairtrade coffee can provide a useful short-term hedge against commodity volatility, but that in the long run it "represents at best a Band-Aid to the problems that coffee producing nations face".

The Fairtrade concept itself still has merit – and as long as protectionist trade barriers limit commodities entering western markets there will be a place for developing world trade subsidies. However, a greater focus on producing and exporting western consumables would ensure that much more of the Fairtrade price went back to the developing world. Larger land units and greater mechanisation could help drive agricultural development. An increase in the commodity social tariff would help social progress. Fairtrade could also allow western consumers to donate directly to this social fund – providing a more efficient mechanism for charitable transfer than currently exists. It is not time to ditch Fairtrade, but it is time that there was an intelligent debate about how the organisation can employ its massive consumer goodwill to best help lift agrarian workers out of poverty.

• This footnote was added on 21 December 2009. Daniel Jaffee believes that a reference in the article above distorts the findings of his book, Brewing Justice: Fair Trade Coffee, Sustainability, and Survival. We would like to draw readers' attention to his comments which are posted here.