On the effects of fair trade on the welfare of the poor

Abstract

Despite the rising importance of fair trade (FT), a relatively small amount of academic research has been done in this area so far. Advocates of FT claim that it will ultimately improve the living conditions of the poor. Opponents hold that it will worsen their situation. More often than not, public discussion is affected by dogmatic views, prejudices and emotional charges. This paper aims to contribute to an objective discussion of the topic. We present a matching model to analyse the welfare effects of FT in an agricultural market. Our results show that producers obtaining FT certification are better off. All others will lose if incentives for importers to enter the market decline.

Socio-Environmental Certifications: Risks and Opportunities for Small-Scale Coffee Farmers in Central America

“…Baumann et al (2008) reports about the discussion, that free trade may not necessarily be 'fair trade' as it appears that quite a number of people are excluded from the benefits of globalization. Focusing on the coffee market, many authors find that fair trade might have a positive impact on a small group of farmers, but these need not necessarily be the poorest (Baumann et al 2008). However, producers connected with a fair trade organizations are better off than before.…”

“…In principle, the fair trade system works as follows: The farmer joins a democratically organized cooperative which obtains a fair trade certification provided it fulfils certain minimum standards (e.g. the pursuit of ecological and social goals) (Baumann et al 2008). The importers of the commodity then have to buy their goods directly from the cooperative.…”

“…The guarantee of the minimum price and long-term agreements, then, are supposed to protect the farmer from price volatilities and exploitative importers. Therefore, fair trade aims at improving the living conditions of the poor (Baumann et al 2008;Ruben, 2008).…”

“…For instance in year 1999, in the UK flew 65 million US dollars only into promotion for instant coffee, mainly for the brands Nescafé, Kenco and Douwe Egberts (Oxfam, 2002). Baumann et al (2008) report that critics claim that in their search for the cheapest location of production, MNC's (multinational companies) coerce governments of poor countries to grant them tax breaks and to turn a blind eye to both, working hours and working conditions of their labourers.…”

“…Empirical evidence indicates that higher incomes expected from certified production motivate farmers to get certifications (Baumann et al 2008;Ruben, 2008;Davidron & Ponte, 2005). How much profit retailers in North America and Europe make from certified products such as organic and fair trade coffee make is hard to estimate, but it is assumed that they also have a larger profit margin.…”