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Decision and Policy Analysis Research Area – DAPA

FairTrade: beyond good intentions

FairTrade (FT) coffee certification involves two incentive mechanisms that aim to improve the income and welfare of smallholder farmers organized in cooperatives: a guaranteed floor price and a yearly premium.

When the market price for coffee is particularly low, FT certifications ensure a floor price that provides cooperatives with an incentive to keep selling coffee, minimizing income losses among member-farmers. In the presence of low market price for coffee, certified cooperatives tend however to witness rapid growth in membership, due of high pressure for inclusion from non-member farmers, who also want to receive a better price. As membership expands the economic incentive introduced by the FT floor price gets diluted, reducing per-capita income gains. This “crowding-in” effect emerges because the demand for FT coffee is limited and FT agricultural standards tend to be easily met by conventional farmers. Rapid growth in membership can also increase organizational inefficiency (or coordination costs) in a cooperative, so as to offset or even reverse the intended benefits of FT certification. In other words, the FT floor price is expected to be beneficial only when directed at cooperatives that coordinate farmers’ entry and exit in order to contain membership growth. This conclusion implies that FT need to target cooperatives that are able to enforce adequate membership rules. One could argue that this recommendation would lead FT to become an instrument for promoting social exclusion and the consolidation of rural elites. However, certified cooperatives that do not control membership growth may be more likely to degenerate and collapse than conventional cooperatives. It follows that in the name of social inclusion, FT certification may end up depriving farmers of a key market outlet and undermine their capacity to cooperate, which is exactly the opposite of what FT intends to do.

Similar concerns and recommendations are associated with the other and arguably most important incentive mechanism of FT: a yearly premium to be invested in collective assets (warehouses, washing stations, offices and so forth), to the benefit of cooperative organizations and rural communities at large. However, the FT premium can also contribute to shift decision-power from member-farmers to their leaders, managers and technicians. The FT premium is in fact handed out to and managed by cooperatives’ administrators, and farmers do not seem to be always aware of that. In addition to this, the FT premium can induce a cooperative to take unnecessary risk and engage in excessively long-term and diversified investment strategies, which add costs and generate limited benefits for member-farmers over the short-run. Both these premium-induced problems have in some cases induced ordinary members to raise embezzlement and mismanagement allegations against their administrators, and to side-sell their coffee outside the cooperative system. The FT premium can thus be expected to benefit farmers only when certified cooperatives recognize and enforce members’ decisions and claim rights over equity capital and collective investments. For example, this can be done by defining and enforcing clear bylaws and shareholding mechanisms through a system of checks and balances, in such a way to ensure that the total endowment of a cooperative remains owned and controlled by member-farmers.

In conclusion, FT certification is expected to benefit farmers only when it targets well-designed cooperative organizations, both in terms of membership rules and members’ rights. FT is recommended to not only set technical standards, but to enforce also organizational standards of the kind that ensures farmers’ cooperation.


Francesconi, G.N. and R. Ruben, 2014. “FairTrade’s theory of change: an evaluation based on the cooperative life cycle framework and mixed methods”. Journal of Development Effectiveness, DOI: 10.1080/19439342.2014.918164.


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