Economic Models of Fair Trade

Here’s some economic models of Fair Trade from my thesis.  I would be happy to continue to make models based on different Fair Trade arguments and understanding.  If someone would like to suggest a few or talk about this more, I would be happy to work on it.  I work so much in Fair Trade, sometimes it is hard for me to imagine how much someone might know (or not) – and where to start with a model... Send me suggestions and we'll see what happens.

Supply (S) Opportunities Deprivation             (F1)                                 Freedom (F)                                     Capabilities

Figure 1. A Model of the Capabilities Approach

Explanation:  This is a model I made based on the work of Amartya Sen (image did not come across clearly). It should show how Opportunities and Capabilities relate to Freedom.  Sen equates freedom with justice.  In Fair Trade, producers are able to realize more Capabilities through skills and management training.  They are able to grow their Opportunities through Fair Trade’s market access and sales.  This leads to an expansion of Freedom, and ultimately justice.  Thus Fair Trade grows justice.  Ideally this is how the Fair Trade model is set up to work.  But it does not always happen this way.

If something happens and skills are developed but not the Fair Trade markets (i.e. there is a glut of Fair Trade coffee, or US/European customers are experiencing negative economic growth and not buying as much as they usually do, or a country is at war), then a producer has grown their Capabilities without realizing Opportunity.  They now enter into a place I labeled “Deprivation.”  Deprivation is a place where people realize that they are being denied their basic freedoms due to circumstances often beyond their control.   It is important to note that people know when they are in Deprivation.  They are aware that things are not working out for them in a fair and just way.

The same scenario holds true for a producer who may have market access (Opportunity) but not the skills or capacity needed for that market (i.e. they can not produce enough garments quickly enough for a western client who is buying in bulk for a large chain of stores, or the rains came early and they can not dry the coffee quickly enough to make the container ship date).  They have the Opportunity but their Capabilities have not grown accordingly.  The producer in this scenario would experience increased Opportunity but not increased Capabilities.  They too would enter into Deprivation. 

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Figure 2. Costs for knitting an adult KUSIKUY sweater.

From KUSIKUY Clothing Co., LLC, 2011.  Adapted with permission.

Fair Trade enables prices to be determined by the producers and supported by Fair Trade buyers.  The KUSIKUY Fair Trade knitters (my company, www.kusikuy.com) price their production in accordance to the model seen above.  This is the pricing structure they created.  It translates to double minimum wage for producers, and an important opportunity for farm women to enter into the wage market.  Fair Trade tends to serve the most underpriviledged of the developign world, in my case (KUSIKUY) it is the indigenous farm woman (Fig. 2).

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Figure 3. Costs of a Fair Trade sweater sold retail in the US.

From T. Stenn, 2011.  Adapted with permission.

However (as we discussed at the conference), the retail side of Fair Trade is not at as evenly structured or transparent (Fig. 3).   Most goods in the US are sold at “keystone” which means a 100% mark-up from the wholesale price.  Some retailers mark up their product even higher than keystone, while others also mark them up less.  Sometimes there are multiple levels of distribution until the client gets the Fair Trade product (i.e. the raw, green, Fair Trade coffee is purchased and roasted by a wholesale buyer and then sold to a distributor who private labels it for sale at a small coffee house) These distribution steps can result in coffee that is sold for 8 to 10 times its original Fair Trade market price of $1.26 a pound.  Some of these product costs are legitimate costs for services, packaging and marketing, though others are added on because the “ethical consumer” market will tolerate the higher costs. 

Consumers assume that a higher Fair Trade retail price means that more money is going to producers.  It is rational for an ethical consumer to purchase a more expensive product against their own economic self interests because of the satisfaction (personal gain) they receive in being able to “give back” and help others through their Fair Trade purchasing.

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Two Last Things…

Fair Trade is made up Four Pillars:  Producers, Consumers, Institutions, and Governments.  All four have to work together in full transparency, reciprocity and trust for Fair trade to truly be fair.  I don’t have a model for this yet – but I can make one…

I also have a Game Theory scenario for producer support in their home country – this would fit into a feminist argument in Fair Trade - look for this coming soon!