The development of ”Fair Trade” labels – a market solution to a societal concern Workshop on the economic and trade implications of poliy responses to societal concerns, 2-3 November 2009, OECD Dr. Helena Johansson

Societal concerns and international trade Dimensions of sustainability: Environmental protection Economic growth Social progress Many societal concerns are related to the production process How to achieve sustainable development? Government policy Consumer choice Production issues are often most effectively taken care of at the production level

Societal concerns and international trade (cont) No trade – easy – Government policy gives a base, consumer choice can add extras Trade – complicated – Competitiveness issue (higher standards, higher costs, willingness to pay) tariffs or NTBs not an option because of WTO rules – Cannot make governments in other countries act as we would like Transboundary issues makes societal concerns a wicked problem

Fair trade in a societal concern and trade perspective Dimensions of sustainability: Environmental protection Economic growth Social progress in poor countries How to achieve sustainable development? Government policy Consumer choice By the use of private standards we can influence behaviour in other countries

Outline What is Fairtrade? Consumer perspective Producer perspective - does it work? Conclusions What can we learn from Fairtrade when trying to take societal concerns into account?

History of Fair Trade Idea: Payment of a higher price to poor producers in developing countries + social and environmental standards to improve working and living conditions Channels – churches, Worldshops, charity organisations, traditional stores and cafés Goods – handicrafts, coffee, bananas, cotton etc.

Labelling – a way to handle lack of information Consumers have a possibility to support certain production conditions Choice for consumers who cannot afford/do no want to pay Choice for producers who do no want to/cannot follow the standards Fair trade – a movement Fairtrade – a label

Fair Trade's strategic intent (FLO) to deliberately work with marginalized producers and workers in order to help them move from a position of vulnerability to security and economic self-sufficiency, to empower producers and workers as stakeholders in their own organizations, to actively to play a wider role in the global arena to achieve greater equity in international trade.

Fair Trade in figures, 2008 (FLO) Consumers spent 2,3 billion euro on Fairtrade goods in producer organizations in 58 countries 1,5 million farmers in developing countries High growth rates (average growth rate of 40 percent per year in worldwide sales over the past five years) Small volumes (e.g. three percent of all coffee sold in Sweden is Fairtrade certified)

Components of Fairtrade (FLO) Price – Minimum price – Social premium Organization – Democratic organization of farmers and workers (e.g. cooperatives) Standards – Long term relationships – Direct purchasing from producers – Provision of credits when requested – Environmentally sustainable production – No labor abuse

Important questions A.Producer perspective Beneficial for those who are certified? – Directly by rising income and improving conditions – Indirectly by supporting long term development Prospects of helping many poor small scale farmers? Efficient way to transfer money from consumers to producers? B. Consumer perspective?

Consumer perspective Warm glow effect – contributing to a better world Trade instead of aid; fairness instead of charity Positive action; buy good alternatives instead of boycotting bad ones Can be seen as easier than making a monetary donation A “story” connected to the food item

Why are world market prices low? (The example of coffee) Supply: Technical change + new actors (Vietnam) gave increased supply Demand: Inelastic demand, i.e. small increases in demand when prices fall Impact: Drastic fall in price Is a minimum price a solution?

Minimum price Positive impact on income when world market prices are low – But only 30 percent of the certified production is sold as Fairtrade Consumer demand restricts the market – Very few farmers can be covered (25 million coffee farmers, 880 million poor in rural areas) Structural effects – A sub-optimal mix between efficient and inefficient producers – Could be negative for structural adjustment Niche market – beneficial for a few, but no potential to help many

Important questions A. Producer perspective Beneficial for those who are certified? – Directly by rising income and improving conditions – Indirectly by supporting long term development Prospects of helping many poor small scale farmers? Efficient way to transfer money from consumers to producers? B. Consumer perspective?

Transfer efficiency Share of consumer payment: A small share of consumer payment reaches the farmers – Costs related to the certification process – Potentially higher production cost – Risk of capitalization in scarce resources – Risk of corruption – Market segmentation / price differentiation – Low transfer efficiency Share of final price: The cost of green coffee beans is a small share in a coffee latte. Value added is created outside of the country

Socioeconomic effects Too few collective goods – The price premium can be used to build schools etc. – BUT an inefficient way to canalize resources, direct aid more efficient Lack of credits – Increased income can be used to develop or diversify production – BUT better with credits without a production link and restrictions on organizational form Weak barging power (etc.) – Organization in cooperatives can strengthen farmers – BUT other organizational forms can also be beneficial, as vertical integration with multinational corporations Weak legislation – Standards can result in improved conditions – Efficient control and monitoring is needed

Faritrade in a wider perspective Relation to long term development: Higher farmer income is fundamentally the result of having fewer, larger and more efficient farms Focus on small scale + link to production, static & short run approach Do not address many important fundamentals hindering trade and development, e.g. – lack of unconditioned credits, – movement upwards on the value chain ladder, – property rights.

Conclusion: Positive effects … A form of “price insurance” when world market prices are low for certified farmers One way to handle local market failures and a weak state (lack of credits, too few schools) Psychological effect - trade instead of aid Brings attention important questions regarding conditions in developing countries Warm-glow effect for consumers

Conclusions (cont): BUT … No potential to help many farmers Low transfer efficiency More efficient to handle market failure directly, if possible Can be replace by new trends like local food Negative impact on poverty reduction if consumers avoid non-Fairtrade labour intensive goods from developing countries

Conclusions (cont): Trade policy implications A main problem is lack of good policies in developing countries Fairtrade can help, but only a little bit – Private standards can be insufficient to handle societal concerns – Design of private standards important for effectiveness Aid for trade important Trade between developing countries important, but high tariffs a problem