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Trade Policies for Combating Inequality
to consumers who care about how products are made. Setting of sustainability
standards, labelling and third-party certication schemes through VSS are the private
sector response to this market failure.
9
For example, the theory of labelling shows that
the introduction of this type of schemes improves welfare in both low-income producing
and high-income consuming countries as they help provide information in a market that
needs it (Podhorsky, 2013).
However, there is not enough evidence that VSS have genuinely contributed to
the improvement of living conditions of developing-country producers, for the following
reasons. First, the impact of VSS adoption on local producers is highly context specic.
Labelling and certication costs faced by low-income country producers can be quite
high, which means that labelling may not necessarily increase welfare for certied farmers
even if they receive higher prices. In a study of a Fair Trade scheme in Guatemala de
Janvry et al. (2014) report certication costs as high as $1500, with expected prots
from participation in the Fairtrade coffee cooperative close to zero. More generally, non-
certied growers are often too poor to afford certication. If the introduction of private
standards ends up hurting the poorest of the poor, this will lead to undesirable increases
in income inequality at the very bottom of the income distribution. Dragusanu and Nunn
(2018) nd that certied coffee producers in Costa Rica do receive higher prices, but that
skilled growers benet the most from certication, suggesting that attention should be
paid to how gains are distributed to achieve SDG 10.
Second, imposing certain standards on certied rms, but not others, can also
have unintended consequences. Bad practices may simply be displaced from certied
to non-certied rms, without changing the aggregate environmental or social problem.
In some cases, certication can even make things worse. Basu and Zarghamee (2009)
show how consumer boycotts in high-income countries of products produced in low-
income countries with techniques that are not aligned with SDGs, such as the use of child
labour, can lead to more unsustainable production, not less.
Lastly, the proliferation of multiple VSS within a same sector (e.g. coffee) focusing
on similar issues without interoperability creates confusion for producers, buyers, and
consumers. The current multiplicity of VSS makes it difcult to keep track of them, which
ends up increasing costs related to information and certication. It can also lead to a
“race to the bottom” in terms of certication requirements, as different schemes compete
to attract producers into their standards. The outcome of this race-to-the-bottom among
multiple VSS agencies can lead to less, not more, sustainable production as shown by
Fischer and Lyon (2014). There is an emerging need to increase transparency and seek
mutual recognition and harmonization across sustainable standards and labels.
9
VSS can act as mechanisms that consider impacts on sustainability associated with the production of goods and
services and help consumers that care about dimensions of production that cause environmental harm or violate
norms and social preferences to allocate their expenditures to products that do not do so (Auriol & Schilizzi, 2015;
Baron, 2011; Jahn, Schramm & Spiller, 2005; Podhorsky, 2013).