Tuesday, June 21, 2011

From Principles to Practices - Part III

In my last blog post about breaking down principles to practices in contracts (From Principles to Practices Part II) with Fair Trade producer groups, I discussed and provided examples of the purpose behind such a contract:
  1. To provide clear definitions for common understanding
  2. Assign clear and practical areas of responsibility to both the producer and the buyer for each principle. A Fair Trade contract cannot be one sided!
  3. Reference the relevant United Nations and ILO Conventions, thereby integrate a Rights-Based Approach into the contract
  4. Create a platform for in-depth discourse to develop common understandings that overcome social and cultural barriers between the buyer and the producer
To that blog post, Dr. Sabam Malau, Chairman of the North Sumatera Coffee Forum (NSCF) made a few additional points from his own experience that are particularly important if Fair Trade is to be considered fair to producers. First, he explains the need for an independent third party to verify adherence to the principles. Secondly, he defines a fair price for coffee growers as one that provides the farmers with a viable livelihood. Lastly, he points out the importance of establishing a forum inclusive of the local government while integrating a Rights-Based Approach to programs and policies. With his permission I have posted it here:

Thank you Mr. Mitch Teberg for the explanation above for it is a very good idea of understanding and implementation of the fairness principles. That's very inspirational.

Indeed, yes, both sides (buyers and producers) has its own duties. However, I do believe that a third party must play a key role i.e to match buyers' and producers' interest. The third party can be NGO, person, or government. As long as no conflict of interest they face, they can then contribute significantly to fair trade implementation.

We NSCF-North Sumatera Coffee Forum has been trying to spread the idea of fair trade, such as coffee price at growers level must be high enough that coffee growers can then have enough income for better livelihoods and for maintaining their coffee field sustainably by using GAP/SOP. The coffee growers have right to live good, have right to be treated fairly, have right to live in friendly ecology/environment, have right to prepare good education for their children etc.

NSCF will stimulate coffee stakeholders to form coffee forum in each regencies or subregencies. To do that, NSCF needs external supports (technical and financial) to establish the forums and then train the forum members. For short and simple explanation: such coffee forums will disscuss then with the local government so that the local government will decide policies/program based on people rights. The forums will also make good relationship with buyers. It's a kind of win-win solution for all sides. The producers will produce coffee with highest quality continuously, and buyer will buy coffee with highest price.

I do understand that the tasks of NSCF is not easy. However, NSCF have done something through spreading the idea to decision makers and people near to them as well as to the coffee exporters. Although the results are not yet seen significantly, but at least they already rethink their policies/program. Otherwise, the future of coffee will be questioned and unclear.

Thank you. Kind regards.

Dr. Sabam Malau
Chairman of NSCF-North Sumatera Coffee Forum


I wholeheartedly agree with Dr. Sabam Malau. His first point is quite important - the need for independent verification. An independent third party is essential to ensure both parties adhere to the agreement. A third party such as an NGO, person, or government has several tools at its disposal. Participatory Rural Appraisal (PRA) is a commonly used methodology in the field of Development for conducting assessments and as a basis for project evaluations. The same tools can be modified for a third party evaluation of Fair Trade practices. For example, interviews with key people involved such as management, review of the transactions between the buyer and the producer, a review of the current practices throughout the supply chain, conducting an inquiry directly with producers, and group discussions with various stakeholders. These are just a few of the many tools used in project evaluations that would be applicable here.

In the Helvetas contract, it states: “Verification of compliance to the contract will be conducted by external auditors with an understanding of the local political, social and cultural contexts and extensive knowledgeable of Fair Trade Principles and Practices. To ensure a fair disposition in the audit, both the Producer and the Buyer will be assessed according to the terms of the contract.”  In short, it is not only the producer who is held accountable, but the buyer as well.

His second point on defining a fair price is the cornerstone of Fair Trade. He utilizes a set of criteria to determine fairness. 
  • Improving livelihoods
  • Maintaining sustainable farming practices
  • Live well
  • Fair Treatment
  • Live in a safe, unpolluted environment
  • Children receive good education
  • Etc

In establishing Ten Principles of Fair Trade, the World Fair Trade Organization also defines the payment of a Fair Price:

Principle Four: Payment of a Fair Price 

A fair price is one that has been mutually agreed by all through dialogue and participation, which provides fair pay to the producers and can also be sustained by the market. Where Fair Trade pricing structures exist, these are used as a minimum. Fair pay means provision of socially acceptable remuneration (in the local context) considered by producers themselves to be fair and which takes into account the principle of equal pay for equal work by women and men. Fair Trade marketing and importing organizations support capacity building as required to producers, to enable them to set a fair price.

Both approaches center on the participation of producers which integrates the cost of living and production. 

Another approach is termed as a "Living Wage" and is often upheld as a standard for Fair Trade. Notably, a "Living Wage" does not contrast with the WFTO or NSCF definitions. 

© Bennett cartoon from the Christian Science Monitor

What is a "Living Wage"? 

Firstly, it is not a minimum wage. Frequently a minimum wage is lower than a "Living Wage" and keeps families trapped in poverty. Another important distinction is that a minimum wage is set by legislative bodies whereas a "Living Wage" is set by the producers themselves. 

By definition a "Living Wage" is designed to provide a minimum estimate of the cost of living for low wage families. The estimate does not reflect a middle class standard of living. The living wage is calculated as a wage sufficient to provide food for an adequate diet and the remaining basic needs for the worker household with an additional 10% added on for discretionary income. For this reason the average number of wage earning adults per household in the target community is included in the calculation.

The "Living Wage" is a calculation reflecting the basic needs of a family and integrates a means for a family to get out of poverty in a particular context. By this, I mean it is flexible enough to be applied in rural or urban settings, as well as in various cultural or political settings. For example, in rural communities the cost of day-to-day living is generally less expensive. This calculation allows for variations by involving the poor in calculating their own day-to-day costs. 

Secondly, in some countries there is a limit to the number of children a family can have, most notably is China's One-Child Policy. In other communities where no such legal restrictions exist, socio-cultural and religions norms and pressures may influence the number of children in a family. For example, in some cultures it may be a common practice to have six or seven children while in other cultures there may be fewer children per family, which may be due to external influences such as effective family planning and awareness campaigns. 

A third influencing factor is also influenced by socio-cultural norms. In some Asian countries it is common to have three generations residing in the same household. However, that is quite a broad generalization. For a calculation to be accurate, the producers need to be involved in answering particular questions. For example, "Amongst the producers is it common to have three generations residing in the household?" "Has a recent event such as a natural disaster or economic recession forced families to move in together?" For these reasons the producers themselves are essential for the calculation to be accurate. 

Discussing the Value Chain and a Living Wage at the
Helvetas Workshop in Hanoi, Vietnam, May, 2011.
I have reviewed a few variations of this calculation and integrated my findings into the Helvetas contract as follows:

 Living Wage Calculation:

[(Average cost of basic needs per HH for 1 month)
+ 10% Savings]
Average no. of adult wage earners per HH

Note: Individual “basic needs” include food, water, clothing, daily use items, communication and transportation costs, cost of schooling, average medical costs, etc. Household monthly expenses include rent and household utilities, maintenance costs, etc.

We had participants in the Helvetas Workshop practice with this and strongly suggested they repeat this exercise with the craftswomen and men as a means to ensure they are providing a fair and living wage.

During our travels in SE Asia from December, 2010 to May, 2011, Chou and I followed up on producers and the wages they earned. Often times, the wages were above the minimum wage, but not yet to a "Living Wage" standard. In most cases their pay covered all their costs, but there was little or no room for much beyond that. This does not suggest that Fair Trade has failed producers. When I inquired as to the reasons for not achieving a "Living Wage" standard with management of the local Fair Trade Organizations, I would frequently hear the same problems: Sales were not high enough for the FTO to be able to pay a higher wage at this time. Keep in mind that most Fair Trade producer groups are heavily dependent on export. It is important to note here that although recovery from the 2007-08 Global Recession is occurring in many Western nations, that does not mean that Fair Trade sales have returned to pre-recession levels. 

Many times I had discussions with the management of local FTOs on ways to expand markets, diversify products and value-add to their product line. If you are reading this blog and would like more ideas in this area, read about development of local and national markets in the February, 2011 blog posts: Franchising Fair Trade and Defining Competitive in Local Markets. For an inspirational approach to localizing Fair Trade for coffee farmers, check out the January, 2011 blog post: To Make Coffee Sustainable and April, 2011 post: Coffee Part III: Empowering Communities through Action.


For the Helvetas contract, the Annex it stipulates the payment of a  Fair Price and mainstreams gender: 
  • Producer sets minimum wages according to a “Living Wage” calculation in the local context. 
  • Producer guarantees equal pay for equal work by women and men. 
  • Producer ensures women and men have equal access to skills training and capacity building to increase income generating opportunities.

However, Helvetas didn't want the "Living Wage" standard to be an impeding factor, but an established goal that could realistically be attained. For those cases where providing a Living Wage is not attainable upon contracting, the contract specifies:  

"Where a Producer is not in compliance with the practices detailed in the Annex, Helvetas will work with the Producer to jointly create a progressive Action Plan which will include identifying areas for improvement, further research, and training in order to enable the Producer to modify current practices in a reasonable time-frame. An Action Plan will be created within 60 days of contracting and agreed upon adjustments will be integrated into Producer Development Strategies to ensure compliance within 1 to 3 years from the date of contract." 

Buyers working with producers to create an Action Plan provides a platform for in-depth discourse to develop common understandings that overcome social and cultural barriers. Defining a "Living Wage" is just one of many common understandings that need to be developed between buyers and producers in Fair Trade.

Again, I would like to add a special thanks to Helvetas Vietnam (www.helvetas.org.vn) for permitting me to write of our work together to make the world a better place. Recognition also goes to my partner and greatest supporter, Chou. We are currently residing in Ho Chi Minh City, Vietnam, where I will continue to keep up this blog delving into relevant issues as I write about our Journey for Fair Trade.
Feel free to add your comments, thoughts or ideas below or catch me on facebook.

Mitch Teberg, MA


  1. Thanks Mitch, another good insight into the nuts & bolts of Fair Trade from the perspective of Producers.

    In the current economic climate (which is tight) the balance between producing products at competitive prices and providing living wages is a challenging balancing act in our experience. Something that we think needs to be given more emphasis is finding improved efficiencies in production, something that many NGOs and producers in our experience are not particularly strong in. In one case where we were moving in this direction there were suggestions that perhaps producers were being exploited.....so a VERY challenging and complex area!!!

    We cannot see any strong recoveries in the world economy at the moment, so things will remain tough for exports. But having said that, we take your point on developing local markets.

  2. Keep up your wonderful work, Mitch and Chou! But the model you propose presents a puzzle which many of us have struggled with for years. If size of family, costs of food and education, etc. differ by country, as of course they do, how do we set prices for coffee around the world? Farmers in Asia don't appreciate that we pay higher prices for a similar quality coffee from Ethiopia, for example. At present, we all use the mysterious specialty premium by country, but that is not really a recognition of the different levels of living wage, but a commercial component. Any thoughts on the equity of this?

  3. Gurging between "working efficiency" and "working hours" is not an easy job here. Linh Indochine

  4. Thanks Mitch...it has always been the problem in the Phils...majority of the workers doesn't get the minimum wage as mandated by law.. still got a long way for us to be able to implement it.

    Keep up the good work!!

  5. The situation in Malaysia is quite unique.....no Fair Trade to-date, there is no legislated minimum wage, and the country has 2 million overseas workers plus another 2 million that are illegal. Of course none of these overseas workers are on any sort of standard employment conditions.....PLUS, if you are a poorly educated and under-skilled Malaysian who do you think will be getting employment.....yes, employers will go for the "disposable" overseas worker.

    Very recently (this month) the Government is now allowing the illegal overseas workers to become registered. May be a step in the right direction.