The Hidden Costs of Fair Trade Certification

Fair Trade Flaws:

The Inefficiency of Fair Trade Coffee for Economic Development

Proponents of Fair Trade often overlook the costs of becoming and maintaining a Fair Trade certification. Thus, the analysis they give on its utility does not portray the entire picture accurately. Fair Trade includes several explicit and implicit costs to the producers (Haight 15). The most obvious costs come in the form of certification fees and costs of inspections. To attain membership in FLO, cooperatives must pay a fee. Furthermore, they must pay for inspections to verify that they meet the standards required by FLO. However, these are not the only costs. Many hidden costs exist for Fair Trade producers. The standards that FLO holds its producers to require

Most of the coffee produced by Fair Trade farmers does not sell to Fair Trade buyers. Fair Trade producers sell most of their coffee on the regular market. While this indicates that the global coffee market prices are high, which is good for coffee producers, it also demonstrates a disadvantage for Fair Trade coffee producers. Due to the explicit and implicit costs added to production through Fair Trade compliance, the coffee Fair Trade producers sell in the regular market makes less profit than coffee produced with lower operating costs. When market prices are above the price floor, profit-maximizing firms would benefit to avoid the costs of Fair Trade certification and compliance. Why then do producers voluntarily opt into Fair Trade? A more likely explanation is that producers use the Fair Trade certification to reduce the risks associated with the boom-and-bust nature of coffee production, rather than to benefit from a market that will increase their productive capacity and lift them from poverty. Dragusanu et al (2014) support Fair Trade use, but Claar and Haight (2015) criticize their paper for glossing over the costs of Fair Trade, arguing that it misrepresents the significance of the costs in the production of

Bottom-up approaches are the attempt to slowly evolve the institutions in a nation over time, learning and growing through a process of experimentation. While many developmental economists have attempted to discover ways to lift nations out of poverty, most schemes do not succeed. Easterly (2008) argues that bottom-up approaches are the only way to successfully grow economies. He rejects the idea that change can happen through external manipulation or aid. His perspective follows in the line of Douglass North (1991) who shifted all of the focus of development from the 1950s up until his article on top-down solutions and refocused on the neoclassical perspective that institutions are responsible for the success of an economy. His paper illustrated how institutions create the incentive structures for economies and either lead them to increasing efficiency and specialization or get stuck from developing further by creating perverse incentives. While the old-school economic theory sounds nice, empirical evidence is necessary to back it