House of Commons - International Development

Select Committee on International Development Seventh Report

3 THE UK GOVERNMENT'S APPROACH TO FAIR TRADE

International trade policy and fair trade

34. DFID's written evidence to us states that trade can play an important role in meeting the Millennium Development Goals (MDGs) and that creating a fairer international trade system which improves market access and makes markets work better for the poor is the best way for trade to contribute to poverty reduction.[58] DFID considers that fair trade has made an important contribution to raising awareness of global trade relations and of the situation of poor producers in poor countries among consumers in the developed world but believes that a wider approach is needed to lift millions of small producers out of poverty in order to meet the MDGs.[59] To this end DFID supports fair trade as part of its overall policy for making international trade work for the poor.[60]

35. The Department of Trade and Industry (DTI) website states that fair trade helps disadvantaged producers in developing countries and that it encourages companies to participate in fair trade practices. DTI also states that fair trade is not a solution to commodity price fluctuations, declining prices or limited market access for poor producers: these are complex problems for which there are no simple solutions.[61]

36. One interpretation of these statements is that fair trade is simply a way of helping a few small producers but that it does not offer a model for the organisation of international trade in general. This is probably accurate—fair trade may be limited in terms of markets and to date it has not been possible to certify many manufactured or industrial products.

37. Gareth Thomas, the Parliamentary Under-Secretary of State at DFID, described the Government's approach to fair trade as follows:

In response to our questioning about whether the Government's approach was sufficiently proactive, his response was that they did not want to single out one approach, such as fair trade, over other approaches and initiatives such as the Ethical Trading Initiative.[63] DFID does however acknowledge the achievements of its funding for the Fairtrade Foundation:

38. Nevertheless Government support to projects specifically concerned with promoting fair trade, rather than projects promoting other initiatives associated with more ethical trade and respect for international labour standards, has been modest. Of a total of approximately £8.5 million which DFID says it has put into fair and ethical trade, only £1 million has gone directly to the Fairtrade Foundation, and another £1 million has gone toward Development Awareness Funds to promote wider awareness of fair trade. In addition some funding has been allocated to a variety of projects, some of which are fair trade. The bulk of the funding has been for fair and ethical projects under the Business Linkages Challenge Fund (£3 million) and for the Ethical Trading Initiative (£3 million). The ETI is an alliance of companies, NGOs and trade unions working to improve working conditions in supply chains (see Chapter 4).

39. The Government assured us that there was considerable discussion across Whitehall about how to work together on international trade.[65] In addition the Government is engaged in a discussion about ethical sourcing in the food industry led by the Department for Environment, Food and Rural Affairs (Defra).[66] The official responsible for fair trade in DFID is a senior agriculture and trade adviser shared between the trade and growth teams in DFID's newly created Global Development Effectiveness Division. Other growth team members cover ethical trade and corporate social responsibility. This division of responsibility in DFID does not seem to engender strong leadership from DFID or coordination within the Government around fair or ethical trade initiatives.

40. The Government has acknowledged the achievements of the fair trade movement and has made public statements in support of it. It has also provided funding for specific projects and initiatives. However, the Government's approach tends to confuse projects specifically concerned with promoting the fair trade movement with other initiatives associated with more ethical trade and respect for international labour standards. There is merit in supporting a number of different initiatives that are effective in reducing poverty. The Government could, however, do more to promote the fair trade movement specifically if it was clearer in recognising the different contributions that different kinds of initiatives can make. One way of doing this would be to assign a senior DFID official to be responsible for fair trade within Government and for this responsibility to be properly publicised and supported. This may also help to encourage greater coordination in the promotion of fair trade through public procurement, as we recommend in Chapter 6.

DEVELOPMENT AWARENESS FUNDS

41. Development Awareness Funds are small grants to organisations based in the UK for raising awareness of development issues, the Millennium Development Goals and efforts to reduce poverty. According to the Divine Chocolate Company, DFID's Development Awareness Fund has supported initiatives which challenge public perceptions of poverty in the developing world, and has helped raise awareness of how fair trade offers an effective and dignified solution to poverty.[67]

42. Along with Comic Relief, Trading Visions and Kuapa Kokoo, Divine has successfully applied for two rounds of Development Awareness Funding since 1999. The company told us that in putting forward their successful applications they were heavily reliant on the assistance of Comic Relief who had previous experience with this. Evidence submitted by Tropical Wholefoods suggested that DFID funding was difficult to obtain and tended to be awarded to organisations with experience of working with DFID.[68] The clothing company People Tree told us they were considering applying for such funds but had not yet done so.[69] Subsequent to our oral evidence sessions Trading Vision had their application for Development Awareness Funding turned down. They commented that the process had been protracted and that no opportunity was provided to discuss the application.[70]

43. Development Awareness Funds have been extremely useful to the fair trade movement and have contributed to continuing growth in awareness of fair trade in the UK. This level of awareness will have knock-on effects in other sectors as consumers begin to demand a greater level of responsibility from companies and retailers. It could also act as a catalyst for greater support for the work of DFID in general. But Development Awareness Funds could be better publicised and the application process made less complicated, especially for those who are applying for the first time or who have no experience of working with DFID. We recommend that DFID address these two issues.

CHALLENGE FUNDS

44. One of the recommendations of the Commission for Africa was that DFID should work with the private sector to engage it in development, and to ensure that small scale farmers can access markets.[71] The need to build on innovative ways to develop the private sector in Africa was emphasised in our report on Private Sector Development.[72] One way in which DFID does this is through Challenge Funds. These provide finance for projects in developing countries over a limited period of time.

The Business Linkages Challenge Fund

45. The Business Linkages Challenge Fund (BLCF) was set up in 2000 for a five year period. It was designed to provide seed funding, of between £50,000 and £1,000,000, to businesses working in developing countries to help them compete in new markets, transfer technology, improve competitiveness, and address the policy and regulatory environment for business.[73]

46. The Fund is not designed specifically for fair trade organisations although some fair trade companies have made use of it. The International Institute for Environment and Development commended two projects which the Business Linkages Challenge Fund has helped to fund—a fair trade horticultural company "Gambian is Good" which supplies high value hotels and restaurants with quality local produce and a trademark programme which recognises fair and responsible tourism practices in South Africa, benefiting local communities and giving confidence to buyers.[74]

47. Café Direct also obtained funding through the BLCF to help them implement Hazard Analysis Critical Control Points (HACCP) food safety methodology. Café Direct say the programme has:

The Africa Enterprise Challenge Fund

48. DFID's view is that innovations in bringing the poor into the market are hampered by a poor business environment, a lack of competitive pressure, a lack of information about the poor as consumers and producers and failure to innovate and expand companies to a size which impacts on the market.[76] We agree. As recommended by the Commission for Africa, DFID is in the process of designing an Africa Enterprise Challenge Fund (AECF). This, like previous Challenge Funds, will be a partnership between the Government and the private sector. The objective of the AECF is to improve market access for the poor, especially in rural areas. It will do so by stimulating innovation in agricultural markets and increasing access to financial services.[77] However the AECF is still in the planning stages.[78]

49. The sort of capacity building supported by the Business Linkages Challenge Fund and envisaged by the Africa Enterprise Challenge Fund is extremely valuable for small businesses in developing countries. The AECF's focus on rural areas is also important as nearly 80% of the population in sub-Saharan Africa live in rural areas.[79] While neither is geared specifically for fair or ethical trade, such organisations have, in the past, been able to gain access to some funds. We consider that Challenge Funds are a good means of supporting innovation in the private sector and believe that the Africa Enterprise Challenge Fund is a useful initiative which has the potential to improve trade capacity and competitiveness in Africa. We expect DFID to update us on progress in establishing this Fund.

Learning from experience

50. DFID has funded a range of innovative projects in fair and ethical trade with considerable impact. For example in 2000 DFID guaranteed a loan of £400,000 for the Divine Chocolate Company as part of its programme for poverty alleviation in Ghana. The Company told us that this loan was instrumental in enabling them to expand and to ensure that cocoa farmers in Ghana could own a significant proportion of the business.[80] It has pioneered an approach which guarantees that farmers in the Kuapa Kokoo Cooperative supplying Divine receive more benefits than cocoa farmers producing for traditional companies.[81] In addition to a government guaranteed price Kuapa farmers gain a social premium which in 2006 amounted to US$171,750, producer support and dividends from their ownership of 47% of the Company. Pre-tax profits in 2006 were approximately £600,000.[82]

51. Other more established DFID funding streams, for example the Challenge Funds and Development Awareness Funds, have had positive and perhaps unexpected outcomes. However this ad hoc, project-based approach to funding risks missing valuable lessons which could be learned from sharing knowledge and experience strategically. The partnership between Divine and Kuapa is an example of a pioneering business model which DFID should promote. However the Government's approach to funding ethical and fair trade projects does not take advantage of opportunities to learn from previous experience and at present there is no formal mechanism for doing this. The lessons learned from the various individual initiatives which DFID has funded should be drawn together and best practice shared.

58 Ev 71 [DFID] Back

59 Ev 80 [DFID] Back

60 Ev 71 [DFID] Back

61 www.dti.gov.uk Back

62 Q 287 [Mr Thomas] Back

63 Q 288 [Mr Thomas] Back

64 Ev 78 [DFID] Back

65 Q 291 [Mr Thomas]; Q 292 [Ms Brooks] Back

66 Q 293 [Mr Thomas] Back

67 Ev 84 [Divine Chocolate] Back

68 Ev 183, 184 [Tropical Wholefoods] Back

69 Q 104-5 [Ms Minney] Back