What does Fairtrade mean for producers in developing countries? How does the Fairtrade Model work? This paper is my final thesis of business administration and explains the above questions. The research paper also examines the fairtrade approach with the New Institutional Economics, relating to transactional costs and Williamsons Failure Framework. It further points out the relevant complications for the actors along the supply chain of agricultural products and explains the information differences between producer and consumer in our global trade and how an established & costly monitoring system tries to resolve the issue. In conclusion the consumer has to be aware of his power of choice and how the governmental institutions can help in balancing the information levels through labelling obligations.
For all those, who´d like to get the short version in english rather than all the research work published in 2008, here I give a small explanation of how the ideal fairtrade system works.
The farmers get a certificate from the Fairtrade Labelling institution, which is agreed upon certain standards that are individually set by each organisation on their own terms. The farmer have to pay a certain amount of money for this process of as well being assessed and sequentially monitored. So they can sell their product to the merchants, which are allowed to label it “fairtrade” again according to the individual standards of their certifier. The certifier receives payment mostly increasing with increasing value of products traded with his label. The merchant can sell their labelled products to the customers, who can also review the information provided by the certifier or labelling initiative. (see graphic)
Certain friction points in this scheme are obvious as labelling initiatives, merchants and farmers are also operating under market rules and profit maximisation goals. The consumer in the end has no means to really know what is going on in the fields, therefore he needs the extra amount of trust into a fairtrade label – transparency becomes a key value in building this trust and is mostly achieved through proactive storytelling and rich media enhancements of the products themselves.