Bachelorthesis Will the development of Fairtrade production increase sustainable economic growth in a developing country? Sustainable GDP ? Development Fairtrade Bachelor Economics - FEB Eefje de Gelder s402285 June 2010 Supervisor: dr. G.C.L. Vannoorenberghe - Department of Economics 1 Outline Preface 3 Chapter 1: Introduction to Fairtrade 4 1.1. Visions and objectives 4 1.2. Short history 5 1.3. Visual representation of trade process 6 1.4. Fairtrade and economic growth 7 Chapter 2: Fairtrade principles and research on economic growth 8 2.1. Fairtrade price 8 2.2. Fairtrade premium 14 a. Education 14 b. Health care 16 c. Farm improvements and other process facilitation investment 17 2.3. Empowerment producers and workers 18 a. Transparency and democracy 18 b. Contracts and partnerships 19 c. Hired labor and working conditions 19 2.4. Provision finance 21 2.5. Sustainable development 22 2.6. General comments 24 2.7. Conclusions on Fairtrade principles and research on economic growth 24 Chapter 3: Empirical research – coffee market 25 3.1. Coffee market 25 3.2. Fairtrade price 26 3.3. Fairtrade premium 30 3.4. Empowerment producers and workers 30 3.5. Provision finance 31 3.6. Sustainable development 31 3.7 Conclusions on Fairtrade coffee and impact on economic growth 32 Chapter 4: Conclusions and final remarks 33 Appendix 35 References 40 2 Preface „Aid to developing countries is nonsense and doesn‟t work at all‟, so is the general opinion often heard in my family. At home we often buy Fairtrade products, since we perceived them to be more effective in helping the poorest. Once living on my own, I continued buying the products if my budget allowed me to do so. Moreover, the question “will it really make sense me paying 50 cents more for my coffee and tea” has always been triggering me. In addition, during my study at Tilburg University and Universidad de Navarra the question „what causes economic growth in developing countries to go up, and hence foster well-being for the poor?” (Ulrich, 2010) got increasingly my interest. When the moment came I had to choose a subject for this thesis, the choice was easily made. Fairtrade production and economic growth are two subjects that really interest me, and I wanted to see whether there would be a link between them. In order to investigate this relationship between those, the following division is made: The first chapter will elaborate on what the Fairtrade movement is and where it stands for. The second chapter investigates whether the Fairtrade principles will have an impact on economic growth. Here, economic growth models will be applied. In combination with literature on economic growth the principles will be assessed. Third, the Fairtrade product with the largest history – coffee- will be studied to see whether the predictions made in the second chapter become true. In addition, it will be investigated what possible menaces there can be for the effect of Fairtrade production. Finally, the fourth chapter will be lead to conclusions stating that the overall impact on economic growth will highly depend on the (initial) market conditions the Fairtrade product faces. Curiosity led me to write this thesis. It was a great pleasure to do the research. Every time I read something, I got more questions than could be answered. Lots more can be said about the Fairtrade movements and its effects on economic developemtn. One thing, however, that became clear, is perfectly expressed by J.S. Mill: ―No great improvements in the lot of mankind are possible, until a great change takes place in the fundamental constitution of their modes of thought.‖—J. S. Mill Tilburg, June 2010 Eefje de Gelder 3 Chapter 1: The Fairtrade movement This part will give a short insight in the history of the Fairtrade movement. In addition, their working methods and objectives will be discussed in order to get more insight in their goals and work process. Furthermore, the link between Fairtrade and economic growth will be given. 1.1. Vision and Objectives Fairtrade1 can be described as follows: ―Fair Trade is a trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade. It contributes to sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers – especially in the South. Fair Trade Organizations, backed by consumers, are engaged actively in supporting producers, awareness raising and in campaigning for changes in the rules and practice of conventional international trade.‖ Fair Trade products are produced and traded in accordance with these principles – wherever possible verified by credible, independent assurance systems.‖ (World Fair Trade Organization (WFTO) & Fairtrade Labelling Organization (FLO), 2009, p. 4). The movement is driven “more by the desire to make a practical difference to the lives of people where we can, than by a need to conceptualize generic solutions to the problems of trade and development. It‟s an approach that served us well in the past”. The approach is aimed at identifying the needs and opportunities that small-scale producers face when trading in the conventional world market. In addition, their “work is driven by informed consumer choices, and the desire of business to meet the expectations o their customers, both of which provide crucial support for wider campaigning to reform international trade rules and create a fairer economic system” (FLO, 2009, pp. 3,4). This vision is translated in giving certificates to producers producing according to norms and standards set by the FLO. They state their arguments as follows: Ensure that producers receive prices that cover their average costs of sustainable production; Provide an additional Fairtrade Premium which can be invested in projects that enhance social, economic and environmental development; Enable pre-financing for producers who require it; 1 Keep in mind that Fairtrade is not the same as Fair Trade. “Fairtrade” will refer to certified Fairtrade programs, while “Fair Trade” will refer to the principle of fair trade relationship in the market that Fairtrade programs seek to create (Bassett (2010), p. 1). 4 Facilitate long-term trading partnerships and enable greater producer control over the trading process; Set clear minimum and progressive criteria to ensure that the conditions of production and trade of all Fairtrade certified products are socially, economically fair and environmentally responsible. (FLO, 2010) In order to get the higher price, the FLO sets price standards for each product. Next, for each Fairtrade product the buyer buys, he will have to pay a premium, which will be put in a common fund that the farmers can use for investment in production material, education, and health care. Pre-finance is needed in order to avoid high debts, while the long-term partnerships will guarantee the producer a certain quantity of products sold. Finally, a producer gets certificated if it accomplishes the standards set for hired labor and environment issues. By implementing and aiming at those goals and trade requirements, the Fairtrade movement aims at making the way in which trade is performed fairer and increase the well- being of the individual small-scale farmer. 1.2. History In 1988, the first Fairtrade Labelling initiative, called Max Havelaar, started selling Mexican coffee with a Fairtrade label into Dutch supermarkets. This organization set up the production of coffee fulfilling various requirements set by Max Havelaar, because of coffee farmers arguing that “aid is nice to receive, but a fair price for our coffee is better. Thus we do not have to hold up our hands for aid anymore”. With a fairer price for their coffee beans, small farmers could become independent. (www.maxhavelaar.nl) Due to the great success in the Netherlands several replicating initiatives were started in the late 1980s and 1990s throughout Europe and North America. These initiatives were unified under the name „Fairtrade Labelling Organization‟ in 1997 which nowadays acts as an umbrella for various Fairtrade marks. The goal of this unification was to harmonize worldwide standards and certification for the official Fairtrade mark, which can e seen on the cover of this thesis. 5 Currently, the organization has set up a separate organization for monitoring the accomplishment of the standards; certification of producer organizations and audit traders, called FLO-CERT. FLO now concentrates on setting Fairtrade standards and provides producer support. 2 The Fairtrade movement is concentrated in four organizations: FLO, World Fair Trade Organization (WTFO), Network of European World Shops (NEWS), and European Fair Trade Association (EFTA) 3. Next, nineteen labeling organizations hold license companies to use the Fairtrade mark in their country (2010, www.fairtrade.net). Part 1.3 makes clear how these companies function in the market. 1.3. Visual representation of trade process Source: FLO Explanatory Document (2010), p. 11 2 The FLO is nowadays also member of the International Social and Environmental Accreditations and Labelling Alliance (ISEAL), an organization aiming at “creating a world where ecological sustainability and social justice are the normal conditions of business”. This organization is an umbrella for different labeling organizations, that is to say: not only for Fairtrade production, but also for example organic products. (ISEAL, 2010). Discussing this organization would go beyond the goal of this research, and therefore not be taken into account in the further discussion. 3 In the Appendix a more detailed description of these organizations is given. 6 1.4. Fairtrade and economic growth Economic growth is associated with higher GDP, which basically consists of the consumption, savings, expenditures of government, and the net import results (Mankiw, 2003). Economic growth implies that incomes earned are increasing since one of the factors mentioned is increasing. Generally, economic performance in terms of economic growth is related with well-being of the inhabitants of the country.