Speaker:

Karen Ellis - Research Fellow, ODI

Discussants:

Anne MacCaig - Chief Executive, Cafédirect plc

Prof Alan Winters - Cheif Economist, DFID

Chair:

Simon Maxwell - Director, ODI

The discussion commenced with Simon Maxwell, Director of ODI introducing Karen Ellis & Jodie Keane who would present the results of the study to the participants. The presentation began with Karen Ellis explaining the scope of the presentation – a review of the impact and development of existing ethical labels and standards within the market and a proposal for a “good for development label” and whether there is a gap in the market for a new label – recognising how controversial the subject is, however hoping to stimulate debate on the subject.

Ellis reaffirms the importance of most agricultural exports as being good for development, generating income, reducing poverty and increasing jobs with millions of people around the world dependent on exports. Consumers are keen to support development through their purchases; however they are worried that producers are being exploited by big supermarkets, with negative media discussions on poor developing countries exploited by big multinationals.

There is a wealth of information and labels on environmental impacts, however not enough on development impacts of produce. Fair Trade tend to cover a small proportion of produce, there is however a wider proportion of produce which could be viewed as good for development but this is not recognised by the majority of consumers. ODI was commissioned by DfID to undertake a review of the development impact of existing ethical labels and standards.

The framework for analysis focussed on a number of labels, including Fair Trade, Forestry Stewardship Council (FSC), Marine Stewardship Council (MSC), GlobalGap, Rainforest Alliance & Ethical Trading Initiative. For each of the schemes their objectives, economic impacts and focus were considered. This included looking at their scale of coverage, their geographical coverage, what products were included in the scheme, the potential impact on the participating farmers, compliance costs and whether the producer or buyers pay for them, their overall development impact including their impact on non participating producers who cannot get the labels. The methodology involved reviewing existing impact assessments together with other data on trade volumes to see what proportion of goods was actually covered by the schemes; a review of market research reports; and a consultation of other stakeholders involved, such as the labelling schemes themselves, supermarkets, academics and NGOs. For some schemes there is a large amount of data available, for others very little and in some cases there was conflicting data. Nonetheless, given the scope of the project, the data had to be taken at face value.

The first finding is that the only scheme that has the specific objective of improving the economic benefits of farmers in developing countries is “Fair Trade” the others do not specifically focus on this objective. The second finding was that these schemes can have positive effects on participating producers. They can include better work conditions, productivity and reduced environmental costs. These schemes can include a price premium for producers; however only Fair Trade explicitly includes a price premium for producers. The other labels can sometimes implicitly deliver a premium by giving access to producers to higher value niche markets. There can be highc compliance costs to the producers however and in cases where the scheme is compulsory, such as GlobalGap, they can restrict access to markets for producers not able to meet the requirements.  For voluntary schemes, these compliance costs can reduce the scope for expansion of the scheme.

Jodie Keane then presented the results on six different schemes reviewed. Four of these schemes were attached to labels, whilst two were not. Product, Scope and Country coverage were looked at.

1)     Fair trade – Fair Trade is now covering an increased number of products, however in terms of country coverage it is mostly based in Latin America and Sub Saharan Africa, of which half were in South Africa. Fair Trade includes around one million direct beneficiaries. 18% of bananas imported into the UK were Fair Trade in 2007, but for most product categories the proportion covered by Fair Trade is much lower (e.g. Cocoa is only 1%). Fair Trade has social, environmental and economic standards, however only 20% of certified Fair Trade products are actually purchased at Fair Trade prices.

2)     Rain Forest Alliance – The main competitor to Fair Trade as it labels the same type of products. Overwhelmingly the products come from Latin America. The cost of compliance is lower for buyers, e.g. as RFA does not charge the 2% premium that FT charges, however it has higher costs of compliance for producers.

3)     Forestry Stewardship Council – The majority of the $ 20 billion worth of wood products they certify (out of the total of $204 billion wood products produced worldwide) come from North America and Europe. The cost of compliance is quite high and the system is complex. There are around 56 criteria to which producers must adhere to in order to get FSC certification.

4)     Marine Stewardship Council – MSC certifies mainly fish products, mostly in the USA and the UK, followed by Canada and Australia. In Sub Saharan Africa MSC certification is found in South Africa with Senegal now joining the MSC certification. 89% of certified products are Salmon and New Zealand Hoki. The product coverage is very limited as well as a very limited coverage of developing countries.  Combined, developing countries account for less than 15% of all certified fisheries, though developing countries account for nearly half of total global fish exports.

5)     GlobalGap – This scheme does not have a label however it does have a big affect on fresh fruit and vegetable exporters in developing countries. Previously known as EurepGap, it was started by European supermarkets. It now includes mandatory, social and environmental standards which must be met in order to import into the European markets, but no price premium. The coverage is high. Donors have tried to help developing country producers meet Global Gap standards; however compliance costs are high, and so are auditing costs, which can amount to 4% of sales, which can be expensive for developing country producers. The cost of compliance is thus high for producers, there are however benefits (such as learning how to properly use pesticides).

6)     Ethical Trade Initiative – No label is attached to this scheme. It is an initiative of UK based manufacturers and retailers who have committed themselves to improve labour standards throughout their supply chain (though no minimum standard is set). The coverage potential is high and membership of ETI is growing. The cost of compliance is low, including a membership fee.

Three summary points:

1)     GlobalGap is the only standard that is mandatory for European market access

2)     For most of the standards, compliance costs are high

3)     The scope of coverage in developing countries is low

Karen Ellis cites a study conducted by Lundi, looking at CostCo, a USA firm which purchases coffee from Guatemala, purchasing coffee beans worth $1.5 million with $780 going directly to each family which was involved in the production these coffee beans. This product is not ethically labelled, however the study shows how this money has helped these families achieve better standards of living.

There are two parts to the argument that there is a gap in the market for a “Good for Development” label. The first argument is that you need a label which captures a larger proportion of products exported from developing countries, given that most of these are also ‘good for development’ even if they don’t qualify for existing ethical trade schemes. You need lower minimum standards in order to include a larger proportion of products; the overall objective is to expand the market for producers and increase income and employment as well as include a larger number of developing countries, without creating new standards.

The second argument is that the development contribution of supermarkets should be increased. The label can be graded on Gold, Silver or Bronze based on a point system which measures the development impact of purchases by the supermarkets.  This would allow consumers to choose the product which has the best development impact; this would also incentivise supermarkets to do more to increase their positive development impacts.

Compliance costs to producers for the new label would be zero, i.e. no additional costs to producers, whilst the compliance costs for suppliers would depend on the size of the development contribution made..

There are many labels already within the market and an additional label may confuse buyers. However if the existing labels are not providing the right information then they need to change. As an alternative to a new label, existing schemes may be scaled up, such as Fair Trade, which they are already considering, or perhaps development impacts may be communicated in other ways, not just labels e.g. a league table for supermarkets can be set up to show which have the best development track record.

The next step would be to find a robust methodology on how to measure development impacts.

Prof. Alan Winters continued the discussion by stating that open trade was a good thing for consumers and the economy as research indicates that trade makes people and countries better off. Trade can be a powerful tool to lift people out of poverty; over the last decade 500 million people were taken out of poverty due to trade. China for example was one of the poorest countries in the world during its period of isolation; however its poverty levels have decreased since engaging in trade with the rest of the world. DFID is engaged in promoting a fair and efficient trading system, through an aid-for-trade system, a world trade system and various other measures. Individually as a consumer each person can play their part through purchasing decisions to ensure that the benefits we have through world integration are also gained by people in developing countries.

Nearly all conventional trade is beneficial to developing countries. Fair and ethical trade go further; however all trade is development friendly. The paper prepared by Ellis & Keane is a very useful tool to look at the ethical schemes and makes efforts on identifying who pays the costs. Costs of compliance always filter back to producers, since there are few retailers and many producers so they have weaker bargaining power;

However, DFID is not convinced that a further label is needed and more research would be needed. A label on a packet would be quite a strong promise to the consumer that the developmental impact of the product has been rigorously tested. However this requires further compliance costs, which may not be desirable. Errors may be also involved as firms may be incorrectly labelled as compliant or non-compliant. The decision to choose who undertakes compliance testing is also important and it is not clear who would be efficient at rating development impacts.

Labels are designed to exclude, a label that includes everyone is not a label at all. Exclusions must be considered. The current label schemes show that the products which are labelled are the exception, not the norm. If the label were to include a larger number of products, then how would you choose who to exclude.

If you need a new label, you need the correct rhetoric. The ability for producers to sell their beans for a slightly higher amount is the difference between education for your children and no education. As the belief is that trade is generally beneficial then this needs to be explained to consumers. The way to deal with exceptions is to point out the exceptions to this rule; trade which is not beneficial. If the idea that nearly all trade is beneficial is accepted by the public then there may be progress.

Anne MacCaig commenced her discussion by talking about how important the work by Ellis & Keane is to raise the discussion on labels. There is a large amount of labels in the market and research shows that consumers are already quite confused about what is and what isn’t good for development. Further work needs to be done on Fair Trade, which is the strongest labelling scheme within the market; this work however is already being carried out.

The business mission of Cafe Direct is to change lives abroad through inspirational business, focussing on social and economic impacts on the developing world. Cafe Direct was the first company to get the Fair Trade label, however the system goes beyond labelling, allowing over 50% of profits to be invested back into the countries supplying coffee, affecting the lives of over 1.4 million people. Looking at impacts is very important as it affects the lives of people, and questions on impacts need to be asked and other businesses need to look at this as well. Many rural communities now have clean drinking water thanks to our schemes; many of these wells were paid by the premiums on the products sold by Cafe Direct. The impacts on these kind of operations clearly needs extra work as both the measure of impact as well as communicating these impacts need more attention. Retailers should also take on greater compliance costs from organisations that are seeking to be part of the Fair Trade system.

The discussion was then opened to the floor for questions from the audience.

A representative of Divine Chocolate commented that equitable trading was not discussed. How one does the trade is the issue, which is what Fair Trade should be about. The assumption that all trade is good is questionable since there is no monitoring on where the money actually goes. On the issue of compliance, if people want standards then compliance is necessary. Retailers should also help in paying these compliance costs. The label is good as it allows a large number of companies to be audited in regards to their labour standards. Governments could also be involved in monitoring companies. If companies were forced to adhere to strict standards then no labels would be needed.

An Ethical Trading Initiative representative commented that ETI is focussed on mainstream trade. ETI does not exclude producers since it focuses on retailers and branded companies in order to allow them to improve labour standards and help them where issues are found. Most international labour standards which ETI works on are internationally ratified hence ETI actually works so that ratified labour standards are actually implemented rather than any additional standards.

The Fair Trade foundation disagreed with the conclusions of the ODI and would have preferred the ODI to look at how the existing labels could be improved. Fair Trade recognises that they need to scale up and do more work. A further comment was that normal trade does not necessarily improve the lives of producers hence the need for ethical trading. Fair Trade would like its practices to become normal standards for trade and reach the point where Fair Trade would be redundant, through the commitment of companies and public support.

IFAT – The World Fair Trade Organisation are also working on a new label, which would not be a new label for consumers but rather changing the process. IFAT are working on a sustainable fair trade system, combining the environment with fair trade. IFAT thinks that there should be recognition for the companies that invest in making sure that their products do have positive development effects.

Shared Interest Society – a cooperative that finances fair trade – agrees on the need for debate. The Fair Trade label needs to be improved along the lines on which it is going but faster. Not all trade is good for development, for example shipping fish from the UK to China to be packed may not be the best use of resources. The ODI study could also have widened their study beyond the UK noting that a UK based development label may not have international recognition.

The International Coffee Association states that it is important that whenever the shortcomings of trade are identified they are done in such a way as to vilify neither trade nor the product. The issue of quality for products is also very important.

Chris Stevens of the ODI commented that the importance of the work of the ODI is that it shows that companies with enough funds can buy labels giving the impression that their product is better socially and environmentally. Producers which do not have enough money would be excluded from this label. GlobalGap itself excludes too many producers from the European market and now something should be done to lessen its negative impact. The argument that trade is generally good for development is the correct argument, however convincing people that this is the case is an uphill struggle and more needs to be done in this regard. The idea of paying a premium for a product is a good idea, however labels by their very nature would be restrictive and this is why a Good for Development label is a good one as it would include producers who do not have enough money to be part of the labelling schemes. 

Finally Karen Ellis replied to a number of comments. The first response was to Prof. Winters that part of the problem is to convince people that trade is good and that a label would be a powerful way to convince consumers that trade was good for development as long as the product met some minimum standard.. She noted that the energy efficiency grading scheme for “white” electrical products didn’t exclude any products, and had worked very well, as it meant that retailers had strong incentives to make their product lines more energy efficient – variation has reduced and most products sold now have the best grade; this could be the case for the Good for Development label. In regards to the proliferation of labels, a large number of companies have established their own schemes and make their own claims.  By creating a way to compare and benchmark these claims, consumer confusion and label proliferation could be reduced by the new scheme being proposed.

Jodie Keane also made a final comment that there is a regulatory gap on the schemes as consumers do not know if these ethical labelling schemes are doing what they say they are doing nor what the compliance costs are. It is also important that retailers and mnaufacturers take on board some of the compliance costs themselves; value chains should be more producer driven as opposed to buyer driven.