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4/21/2014
Assessing the club theory approach to sustainability certification initiatives: a case study of UTZ Certified.
Author: Merel van Rooy | Supervisor: drs. A.R.M. Gigengack
M
ASTERT
HESISIRIO
C ERTIFICATION CLUBS
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DECLARATION BY CANDIDATE
I hereby declare that this thesis, “Certification clubs: assessing the club theory approach to sustainability certification initiatives. A case study of UTZ Certified.”, is my own work and my own effort and that it has not been accepted anywhere else for the award of any other degree or diploma.
Where sources of information have been used, they have been acknowledged.
Name: Merel van Rooy Student number: 1854461
E-mail address: m.c.van.rooy@student.rug.nl
Signature:
Date
April 21, 2014
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Table of Contents
List of abbreviations ... 4
1. Introduction ... 5
2. Concepts ... 8
3. Theoretical framework ... 9
3.1 Classification of goods ... 9
3.2 Externalities... 11
3.3 Club theory and SCIs ... 12
3.4 Club Theory and International Political Economy Research ... 17
4. UTZ Certified ... 20
4.1 UTZ’s pursuit of efficacy ... 20
4.1.1 Position and functioning of SCIs ... 20
4.1.2 The pursuit of efficacy by UTZ ... 24
4.1.3 The Code of Conduct ... 27
4.1.4 Monitoring and enforcement procedures ... 28
4.1.5 Evaluation of UTZ’s pursuit of efficacy ... 30
4.2 Emergence and organizational development of UTZ ... 31
4.3 Conclusion ... 36
5. Club theoretical approach to UTZ ... 38
5.1 Conceptualizing UTZ as a club ... 38
5.1.1 Club members ... 38
5.1.2 Club benefits ... 40
5.1.3 Externalities ... 41
5.1.4 Club Sponsor ... 42
5.1.5 Conclusion... 43
5.2 Efficacy of UTZ ... 44
5.2.1 Prakash and Potoski ... 44
5.2.2 Evaluation of the standard of UTZ ... 45
5.2.3 Evaluation of the monitoring and enforcement procedures ... 48
5.2.4 Application of the model ... 50
5.2.5 External relations and partnerships ... 51
5.2.6 Conclusion... 52
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5.3 Emergence and development of UTZ ... 54
5.3.1 Emergence of SCIs ... 54
5.3.2 Club size and expansion to other commodities ... 56
5.3.3 Conclusion... 58
6. Conclusion ... 60
References ... 62
Appendix A: Interview Ward de Groote ... 67
Appendix B: Communication with Henk Gilhuis ... 79
Interview ... 79
E-mail ... 82
Appendix C: Consumer to farmer model... 83
Appendix D: Timeline of UTZ developments ... 84 Appendix E: Theory of Change
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List of abbreviations
ACC Ahold Coffee Company BCI Better Cotton Initiative CB Certification Body
CIP Cocoa Improvement Program
CoC Code of Conduct
CSN Coffee Support Network CSO Civil Society Organization CSR Corporate Social Responsibility DRC Democratic Republic of the Congo FLO Fairtrade Labelling Organization FSC Forest Stewardship Council GAP Good Agricultural Practices GVC Global Value Chain
ICO International Coffee Organization
IIED International Institute on Environment and Development IPE International Political Economy
IR International Relations
LEI Agricultural Economic Institute NGO Non-Governmental Organization RA Rainforest Alliance
RSPO Roundtable on Sustainable Palm Oil SAI Sustainable Agriculture Initiative SCI Sustainability Certification Initiative UN United Nations
UNCTAD United Nations Commission on Trade and Development
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1. Introduction
“We cannot wait for governments to do it all. Globalization operates on Internet time. Governments tend to be slow moving by nature, because they have to build
political support for every step.”
Kofi Annan
The former Secretary-General of the United Nations (UN), Kofi Annan, made this statement in July 2000 at a high-level meeting of the UN Global Compact, a UN initiative started by Annan seeking to align the interests of business with the principles of the UN (Annan, 2000). He was not alone in his conviction that non-governmental actors, especially business and civil society, have an important role to play in global governance. Following many corporate scandals in the nineties, ranging from the revelation of sweatshops to the bankruptcy of Enron, business refocused on corporate social responsibility (CSR) (Rowe, 2005, p. 126). Many codes of conduct (CoCs) and later on self-regulation and certification initiatives emerged. Activists from civil society organizations (CSOs) co-operated with business to make these efforts credible and meaningful. In the past two decades, these initiatives have gained ground and certification seals have become a common sight on all kinds of products.
The scholarly attention to the increasing number and importance of these sustainability certification initiatives (SCIs) came from traditional International Political Economy (IPE) schools discussing their government-like rule-making authority, the political power struggles between private and non-private actors and the democratic legitimacy of these new ‘private regimes’ (Haufler, Cutler, & Porter, 1999; Bartley, 2009; Fuchs & Kalfagianni, 2011)1. The approach studied in this thesis is the ‘theory of clubs’, stemming from a nontraditional school of IPE: public finance. This approach is different, as it focuses on how public goods can still be provided by market actors when the conditions to organize output and input efficiently via markets are not present.2 The theory’s central question is exciting: are these private SCIs capable of balancing out current imbalances in the market system? Aseem Prakash and Matthew Potoski (2009) were the first to apply the theory of clubs to the phenomenon of SCIs. They proposed that this relatively new approach should serve as an all- encompassing framework for analyzing SCIs. This thesis will investigate whether the club approach is a meaningful way to analyze SCIs, by focusing on UTZ Certified (UTZ). As will be explained shortly, UTZ is an example of a most-likely case. Researching this case contributes to the discussion of whether the club approach is indeed suitable to serve as an all-encompassing framework for analyzing SCIs in general.
The research question will be answered in three parts. The club approach will be considered a meaningful way to analyze UTZ if three conditions are met:
1. The central concepts of the approach should be applicable to UTZ;
1 See Vogel (2008) for an overview of literature about the regulatory dimensions of SCIs.
2 Or: when externalities are present. Externalities are a central concept of club theory, introduced and explained in chapter 3.
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2. The club approach framework to analyze the efficacy3 of SCIs should be applicable to UTZ, as the club approach emphasizes this aspect of SCIs;
3. The approach should account for the development of UTZ.
This paper is structured in the following way: the concepts used in this study and the theoretical framework of club theory is introduced in chapters 2 and 3 respectively. Chapter 4 introduces the case of UTZ Certified elaborately, paying specific attention to the efficacy and development of the organization in two separate sections. Chapter 5 approaches UTZ from the club perspective, separately discussing the three parts of the analysis. The sixth and final chapter answers the main research question.
UTZ is an interesting SCI, as it is an early certification initiative initiated by business actors:
Ahold Coffee Company (ACC) and the Guatemalan coffee roaster Nick Blocklandt started the program in 1997 under the name of Utz Kapeh, meaning “good coffee” in the Malaysian language Quiché. ‘UTZ Kapeh’ experienced a rapid growth leading to expansion towards other commodities. In 2007, the name was changed to UTZ Certified Good inside (UTZ , 2008, p. 4) to reflect this diversity.4 Apart from its business-roots, UTZ is interesting because it was specifically designed as a mainstream coffee initiative with standards that are also suited for larger estates. That was not the case for the standards of the other main SCI at the time, Max Havelaar5 (Solidaridad, 2012). In about ten years, this strategy has proved successful: companies like Sara Lee with their brand D.E. Master Blenders 1753, IKEA, Mars, Nestlé and Lidl now sell UTZ certified products. By the end of 2012, 13% of all cocoa produced worldwide, 8% of the global coffee harvest and 2% of all tea produced worldwide originated from UTZ certified farmers. UTZ aims to certify 50% of the total coffee, cocoa and tea production by 2020 (UTZ, 2013a, p. 4). Because of its business origins, its mainstream positioning and its rapid growth, UTZ is a fitting case study for the club approach. The theory of clubs is not apt to explain political processes and many other SCIs have political or activist roots. UTZ has been explicit in its conviction to stay close to business whilst serving public interest.
The approach of the theory of clubs is relatively new and few authors have been engaged in the theoretical pursuit of adapting the theory to SCIs. The approach was pioneered by Aseem Prakash and Matthew Potoski and experienced theoretical advancements by David P. Baron, Matthew Kotchen and Klaas van ‘t Veld. The work of these authors will be used when attempting to apply the club theory perspective on UTZ.
An application of the club theory perspective to UTZ is meaningful, because the perspective is still developing and this research can point out what has already been achieved and what difficulties still need to be overcome in order to make it an accepted perspective. The tropical commodity chains that UTZ is concerned with, are of particular importance to sustainability: they contribute to global inequality with the production in the South and consumption in the North and unequal distribution of income along the chain (Talbot, 2004, p. 20). The club approach offers a way to organize the “input-outcome allocation” more efficiently. Besides for those interested in the study
3 Efficacy: ‘the ability to produce a desired or intended result’ (Oxford Dictionaries , 2013).
4 In this thesis, ‘UTZ’ will refer to either name of the organization.
5 Max Havelaar later became Fairtrade Labelling Organization (FLO).
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of SCIs in general, this research is of value for those interested in aspects of one of the most important SCIs: UTZ, about which surprisingly little research texts exist yet.
This study is primarily based on examination and analysis of the existing literature.
Additionally, information about UTZ has been derived from annual reports, documents provided by UTZ and interviews with two prominent people involved with UTZ: Ward de Groote, co-founder of UTZ and former managing director of ACC, and Henk Gilhuis, director of the department of Monitoring and Evaluation of UTZ.6
6 The transcripts of the interviews with De Groote and Gilhuis are attached in appendix A and B respectively.
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2. Concepts
This chapter will introduce the definition of concepts used in this research that are not introduced separately when used in this study for the first time. It does not include most of the theoretical concepts, because they will be introduced in the next chapter.
Activists
Activists are actors rationally pursuing goals in the public interests. Activists in this thesis are actors from civil society organizations (or non-governmental organizations, NGOs) striving to make industries more sustainable.
Certification
Certification is a declaration by a third party that states the certified party/product/actor fulfills the criteria set by the third party. There are many examples, including but not limited to swimming certificates for children, certified initiatives for medical personnel and sustainable production certification for products.
Rationality
Rationality is making decisions by the power of reason; logical and structural assessment of one’s options using the information given in order to decide the strategy that fits one’s interests best.
Stakeholders
A stakeholder of an organization or business is a person, group, organization or system that is or can be affected by the organization’s actions (Van Dale, 2014).
Sustainability
Sustainability refers to a situation which is durable and long-term. Environmental sustainability refers to e.g. using resources responsibly. Sustainability includes social sustainability as well: an economic system that creates chronic poverty on the one side and the buildup of wealth on the other cannot be considered socially sustainable.
Sustainability Certification Initiatives (SCIs)
This thesis refers to SCIs instead of ‘green clubs’ (Van 't Veld & Kotchen, 2011), ‘voluntary programs’
(Potoski & Prakash, 2009) or ‘voluntary environmental programs’ (Kotchen, 2013; Prakash &
Potoski, 2007). ‘Voluntary programs’ is broader than certification initiative and this thesis limits itself to clubs that use ‘certification’ as an exclusion mechanism for the club. ‘Environmental’ or ‘green’
only refers to environmental sustainability, whereas this study includes ‘social’ sustainability certification initiatives as well.
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3. Theoretical framework
This chapter introduces the theoretical framework of this research: club theory. Sections one and two will introduce the basics of the theory of clubs and the link with externalities. Sections three and four outline how the traditional theory of clubs is adapted to the study of SCIs and how this perspective relates to other IPE theories.
3.1 Classification of goods
Even Adam Smith recognized that the ‘invisible hand’ did not always work optimally and that when the market failed, government should take action. One potential source of such a market failure is the provision of public goods (Cornes & Sandler, 1996, pp. 3-5). Samuelson (1955) researched the characteristics of public goods and their relationships with other goods. His classification resulted in a bi-polar spectrum of goods: on the one hand pure public goods and on the other pure private goods.
Samuelson differentiated between public and private goods on the basis of rivalry of consumption7: private goods are rivalrous of consumption and pure public goods are nonrivalrous of consumption.
An example of a private good is a sandwich: if someone consumes it, no one can consume that same sandwich again. An example of a public good is national defense: if someone consumes it, it has not reduced any of the consumption opportunities for others. Everything in between Samuelson termed an ‘impure public good’.
James Buchanan added to nonrivalry of consumption the characteristic of excludability8 in his 1965 paper “An economic theory of clubs”. Excludability means that a low-cost exclusion mechanism can be provided. Buchanan introduced clubs9 as institutions that provide club goods, i.e. goods that are both nonrival and excludable. An example of a club good is a swimming pool: if one person
‘consumes’ (or swims) in the swimming pool, another person can still ‘consume’ the swimming pool.
The low-cost exclusion mechanism can be a ticket booth (Buchanan, 1965, p. 2). Another insight is that club goods always have a point where crowding sets in, so-called ‘congestion’, meaning there is a finite number of club members. The number of people that can enjoy the swimming pool simultaneously is not infinite; at one point the pool gets too crowded. Buchanan’s insights suggested that the great spectrum of impure public goods did not necessarily have to be provided by the government, but could be provided by “clubs” (Cornes & Sandler, 1996, pp. 3-5). The theory of clubs provides the framework for determining how the large class of impure public goods can be provided efficiently.
Another class of goods is common pool goods: goods that are nonexcludable, but rivalrous. A classic example of a common pool good is the global fish stock: it is very difficult to withhold the benefits of the global fish stock from others as everybody with a fishing rod has access. Consuming
7 Nonrivalry of consumption is used interchangeably with the indivisibility of benefits: “a good is nonrival or indivisible when a unit of the good can be consumed by one individual without detracting, in the slightest, from the consumption opportunities still available to others from that same unit” (Cornes & Sandler, 1996, p. 8).
8 Nonexcludability: “goods whose benefits can be withheld costlessly by the owner or provider generate excludable benefits. Benefits that are available to all once the good is provided are termed nonexcludable.”
(Cornes & Sandler, 1996, pp. 8-9).
9 Club: “a voluntary group deriving mutual benefit from sharing one or more of the following: production costs, the members’ characteristics, or a good characterized by excludable benefits.” (Cornes & Sandler, 1996, p. 347)
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the global fish stock means detracting from consumption opportunities of others, so the global fish stock is rivalrous.
The two characteristics of rivalry and nonexcludability cause market failure: normally (assuming some sort of property rights), scarcity leads to higher prices and less consumption but because of the nonexcludability, this market mechanism fails to accumulate, which leads to non- efficient markets (hence, market failure) (Prakash, 2000, p. 186).
On the basis of rivalry and excludability the following distinction in types of goods can be made:
This categorization of goods should be seen as a spectrum: the extent to which they are ‘rivalrous’ or
‘excludable’ varies. Clubs are institutions that provide or allocate club goods. The optimal sharing arrangement, or club membership, is more than one (purely private goods) and less than universal10(purely public goods). The purpose of ‘traditional Buchanan clubs’ such as a swimming pool or movie theatre is the production of the club good and the central problem is consequently determining the optimal membership or sharing arrangement, or determining the point where congestion sets in (Buchanan, 1965, pp. 1-3).
SCI-clubs
This research conceptualizes the institutions of SCIs as ‘clubs’. The definition of a club used in this study is: “a voluntary group deriving mutual benefit from sharing one or more of the following:
production costs, the members’ characteristics, or a good characterized by excludable benefits.” UTZ can be regarded as a club, if one interprets the group as a group of firms11 who derive the mutual benefit of ‘good reputation’ from participating in the initiative (Kotchen, 2013, p. 280). ‘Reputation’
in an industry is a ‘good held in common’ (Potoski & Prakash, 2009, p. 34). Within the scope of the industry, it has the public good characteristics of nonrivalry and nonexcludability. Reputation of the industry is nonrival, because if one firm ‘consumes’ reputation, another firm can enjoy the same quantity of reputation at the same time. Reputation in the industry is also nonexcludable; no firm can exempt itself from the industry reputation, unless an exclusion mechanism is provided like a certification seal. Hence, ‘good reputation’ is produced, when an exclusion mechanism separates the firms adhering to sustainable practices from the ones that do not. This way, the sustainable firms can reap the benefits of the investments in more sustainable production.
10 Universal in this context means all actors in the population considered.
11 The firms can have different identities; farmers, traders and buyers (see section 5.1.1).
Rivalrous Nonrivalrous Excludable Private
(food, clothing, cars…)
Club
(movie theatres, private parks)
Nonexcludable Common pool
(global fish stock) Public
(sunsets, air, national defense)
Table 1: Categorization of goods
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Although there are strong resemblances with ‘traditional’ clubs like movie theatres and swimming pools, there are some differences as well. One is the ‘viewpoint’ of the club: traditional clubs aim for the production of the club good and take the benefits of the club members into account, whereas SCI-clubs in some cases focus on the production of positive sustainability externalities. These externalities are the main justifying reason for the existence of the SCI (Prakash & Potoski, 2007, p.
776). Before discussing other differences between ‘traditional’ clubs and SCI clubs, the concept of externality deserves more attention.
3.2 Externalities
An externality is ‘a positive or negative side-effect of (economic) actions on non-related parties whose interests have not been taken into account and who receive no compensation or penalty’. An example of a negative externality is pollution: others are harmed by the production without receiving compensation. An example of a positive externality is fireworks: others benefit from the pretty sight without paying for admission to the fireworks (Parkin, Powell, & Matthews, 2008, p. 347). Negative and positive externalities cause an inefficient equilibrium when it is left to the market, as not all costs of benefits are internalized by the private decision maker. Therefore, too much of the polluting good (and too little fireworks) is produced. Hence, externalities are a form of market failure. To achieve the socially optimal equilibrium, action should be taken to internalize costs of the negative externality.
For example, consider a coffee farm that uses water inefficiently causing water pollution and scarcity of clean water, in other words, causing environmental and social costs. Suppose the costs of producing coffee in this water-polluting way are as follows:
Coffee produced (bags 60
kg) Private costs Environmental
damage Total Costs
1 $ 10 $ 0 $ 10
2 $ 25 $ 3 $ 28
3 $ 40 $ 6 $ 46
4 $ 60 $ 9 $ 69
Table 2: Example of the production costs of a coffee farm
In table 2 ‘private costs’ are the costs the coffee farm makes to produce coffee. The environmental damage is the damage to the environment, not considered by the coffee farm. The total costs represents the cumulative environmental and private costs. Suppose the revenue for one bag of coffee is $14. If no compensation for environmental damage is required, the coffee farm will produce 3 bags of coffee.12 To achieve socially optimal production, the costs of the environmental damage should be internalized, compensating the harm done. If the environmental damage is included in the costs, only 2 bags of coffee will be produced.13
12When the farm produces three bags of coffee, the revenue (3 x $14= $42) is more than the costs ($40), whereas when the farm would produce 4 bags, the costs ($60) would be more than the revenue (4 x $14 = $56).
Assuming the coffee farm pursues profit maximization, it produces 3 bags of coffee.
13 Private costs ($25) plus environmental costs ($3) equals the revenue (2 x $14 = $ 28).
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There are several strategies that can be pursued to achieve the socially optimal production.
The traditional ones involve government action: government could, for example, tax the coffee farm and clean the polluted water with the tax money. If the coffee farm was taxed $3 for each bag of coffee, the private costs would go up by $3 and the farm would produce only two bags of coffee. Other actions governments undertake are emission charges or marketable permits (and fireworks could be subsidized) (Parkin, Powell, & Matthews, 2008, pp. 346-350).
Actions of private actors can lead to the socially optimal production as well. Following the Coase theorem, if government does not intervene, it is likely that the involved actors will bargain to an agreeable outcome (Cornes & Sandler, 1996, p. 86). The socially optimal production can be achieved only if three conditions are present: the existence of property rights, a small number of involved parties and low transaction costs. Consider the example of the coffee farm and suppose the environmental damage caused by the water pollution only negatively affects three families living near the farm (a small number of parties is involved). Suppose these families own the land and groundwater around the coffee farm (property rights exist) and experience $ 2 damage each from the production of the three bags of coffee, then rational actors reach an agreement: each family could pay the coffee farm $ 2 to produce only two instead of three bags of coffee. As this offer is profitable for the farm, it is accepted. Interestingly, it does not matter which party has the property rights:
suppose the coffee farm owns the land and groundwater and the families rent it, the families could pay less rent. Apart from the small number of parties and the property rights, another precondition for the Coase theorem to work is that transaction costs should be sufficiently low: as the transaction costs get higher, the advantages of the deal will decrease to a point where no agreement can be reached.
International externalities
Production has become increasingly globalized and with that the production of externalities.
Governments do not always have the power, capacity or willingness to take action to produce public goods and can instead urge the actors involved to internalize the costs of the negative externalities.
Moreover, the conditions for the Coase theorem are not always present. The tropical commodity chains and other production chains that are extremely globalized encounter these restrictions of government action. In that case, according to the theory of clubs, clubs can function as an institution for efficiently dealing with externalities.
3.3 Club theory and SCIs
The concept of a ‘traditional Buchanan club’ has been adapted to fit the phenomenon of SCIs.
Moreover, insights from collective action research have been added to make the club approach more meaningful to SCIs.
Distinction between traditional Buchanan clubs and SCI-clubs
The club approach to SCIs differs from ‘Buchanan’ clubs in a number of aspects, represented in table 3.
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As mentioned, the central purpose of a SCI club is not the production of club benefits for their members, but the production of positive sustainability externalities (Potoski & Prakash, 2009, p. 20).
Kotchen and Van ‘t Veld (2009; 2011) add to this view by distinguishing between different club
‘sponsors’ that fall into three groups: industry, activist groups14 and governments15. A club sponsor is the actor who is governing and organizing the club. A difference between an industry club sponsor and activist club sponsor is that an industry club sponsor has a within-club viewpoint and an activist club sponsor has a total economy viewpoint. A club with a within-club viewpoint only takes the utility for the average club member into account and is not focused on the maximization of sustainability externalities, but on the maximization of benefits of their members. A total economy viewpoint also takes into account the utility of nonmembers. An activist sponsored club aims for the maximization of sustainability externalities (Kotchen & Van 't Veld, 2009, p. 310). As externalities in this thesis are side-effects on nonrelated parties, the total-economy viewpoint is more accurately described as an
‘outside-club’ viewpoint.
Traditional Buchanan clubs, such as a movie theatre have a within-club viewpoint: movie theatres generally only take into account the preferences of those people who buy tickets or have a subscription. Because of the within-club viewpoint, industry sponsored clubs are closer to traditional Buchanan clubs. Both industry and activist sponsored clubs differ from traditional Buchanan clubs with regard to the membership costs: whereas for traditional clubs, members pay a fee directly to the club which offsets part of the production costs, the bulk of the membership costs of SCI-clubs is not a direct payment to the club, but adhering to the club’s membership requirements of production.
At the end of this section, the three types of clubs (traditional clubs, industry sponsored and activist sponsored SCI-clubs) are graphically displayed. Firstly, what different types of benefits SCIs produce in what way, will be discussed.
14 Kotchen and Van ‘t Veld use ‘environmentalist groups’ instead of ‘activist’. As an environmentalist group is only concerned with the environment and this study uses a broader definition of sustainability, including social sustainability, this type of sponsor actor is referred to as ‘activist’.
15 Clubs sponsored by governments are not considered here, as this study is concerned with private certification initiatives.
Buchanan Club (movie theater) SCIs Central purpose Production of benefits for
members Depends on the sponsoring actor
Viewpoint Within-club Depends on the sponsoring actor Member Benefits Club product: possibility to
watch movies on a big screen with excellent acoustics
Social externalities, private benefits and club benefits like branding Membership costs Directly to club Costs to fulfill requirements, some
paid to the club, some not
Table 3: distinction between SCIs and traditional 'Buchanan' clubs
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SCIs: clubs addressing market failures
SCIs address two (potential) causes of market failures: imperfect information and the public good nature of many sustainability externalities. Firstly, the market only works perfectly when consumers can make rational choices based on perfect information. Imperfect information leads to non-optimal choices and hence market failures. SCIs address this cause of market failure, because they provide information to consumers about production circumstances of products of which they were previously unaware. If consumers know a product has been produced with child labor (or guaranteed without), they may choose the product not produced by children. Subsequently, information about production circumstances provided by SCIs improves functioning of the market.
Secondly, public goods are under-provided due to the free-rider problem. Rational actors do not have the incentive to contribute, but through certification certain aspects of the public good are privatized – creating an incentive for private actors to produce public goods compatible with firm or individual decision-making (Kotchen, 2013, p. 278). The mechanism works in a way like the Coase theorem: normally, ‘reputation’ in an industry has the characteristics of a public good.Implementing costly sustainable production practices when others do not, does not yield any private benefit for a company. When a firm joins an SCI, the production practices are communicated, reducing information asymmetries between firms and stakeholders. The SCI allows stakeholders to receive positive sustainability externalities and in return, the firm receives branding benefits. Moreover, the reputation becomes a club good, as it is now excludable because of the certification seal and ‘property rights’ are established. Hence, SCIs effectively ‘subsidize’ the voluntary provision of public goods.
The sustainability externalities produced by SCIs do always have the characteristics of public goods.
They can have the attributes of private benefits (clubs requiring firms to pay higher wages), public benefits (clubs requiring firms to reduce emissions) or club benefits (clubs requiring firms to hire more women) (Prakash & Potoski, 2009, pp. 19-24).
Apart from sustainability externalities and branding benefits, SCIs can also produce private benefits. These benefits accrue to only one firm, for example when a club creates a win-win situation when adhering to the requirements of responsible water usage of a club results in cost reduction and higher profit for a club member. Prakash and Potoski (2009, p. 33) argue that, from a collective action research point of view, these benefits are less interesting as individual rational actors are presumed to take these actions unilaterally, without joining the club. However, as will be shown in the case of UTZ Certified, these private benefits and ‘win-win’ situations can provide a powerful motivation for a member to join.
Summary
The next three figures show a traditional ‘Buchanan’ club (figure 1) and two SCI-clubs: an activist sponsored SCI (figure 2) and an industry sponsored SCI (figure 3).
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Figure 1: traditional ‘Buchanan’ club (own compilation)
Figure 2: Activist sponsored club (own compilation)
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Figure 3: Industry sponsored club (own compilation)
The figures of the SCIs are more complex than the Buchanan club, because the rest of the world is affected as well. For activists clubs, this is the goal of the club and the other benefits are only a means, for an industry club it is the other way around. The difference between an industry and activist sponsored club is relevant, as it has implications for what can be considered an efficacious club (effective in achieving its goal).
As will be explained shortly, Prakash and Potoski have developed a model to account for the efficacy of clubs. In their view, certification initiatives aim for the maximization of sustainability externalities, like activist sponsored clubs do. Hence, whether their model is applicable to UTZ, depends on whether UTZ can be considered an ‘activist’ sponsored club aiming for the maximization of sustainability externalities. If UTZ has the characteristics of an ‘industry’ sponsored club, the efficacy will be measured on different terms, namely the maximization of the production of club benefits.
Curbing collective action challenges through club design
The club theory approach to SCIs builds on collective action research within political science. Why do individuals work together, what common objectives do they have and what makes their action effective or not? The sub-questions of this thesis about the development of the organization and efficacy stem from these traditional collective action problems. The theory of clubs complements collective action research in the voluntary domain: when do private actors voluntarily commit themselves to do more than social regulation requires and under what conditions do these actions produce positive sustainability externalities? The club approach emphasizes rational economic
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reasons for firms to voluntarily commit themselves to exceed government regulation: the value is worth more than the investment.16
An efficacious club curbs two collective action problems. Firstly, the free-rider challenge: a rational actor has an incentive to free-ride on the efforts of others (Olson, 1965). Because the reputation in the industry is held in common, firms may want to free-ride on the efforts of others to be environmentally responsible, without having to bear the costs of being environmentally responsible themselves. The free-rider challenge also comes to the fore in the formation of (SCI-) clubs: firms have various incentives to not take action on social responsibility, like a spill-over from the good reputation of socially responsible firms to non-socially responsible firms or the (potential) failure of stakeholders to reward the efforts. The free-rider challenge is curbed by the exclusion mechanism of the certification seal, which represents and communicates the production standards.
The second collective action problem is shirking: once a member, the club members have an incentive not to live up to their obligations, a firm can save costs while still enjoying the better reputation (Prakash & Potoski, 2007, p. 778). This challenge is curbed by monitoring and enforcement procedures. If the risk times costs of getting caught is higher than the benefits derived from not living up to the standards, firms will adhere to the production standard. The stringency of the standards and the monitoring and enforcement procedures are two key elements of club design that determine the efficacy of club (Prakash & Potoski, 2011, p. 46).
When designing these club features, social planners should consider that while more stringent standards produce more environmental benefits per member, they also bring with them costs which will reduce the number of members. In order to maximize the amount of sustainability externalities produced (efficacy for an activist sponsored club), the club should choose the right strictness of the standards and monitoring and enforcement procedures.
3.4 Club Theory and International Political Economy Research
This section will point out where the theory of clubs approach stands in the IPE domain and how it relates and contributes to other theories.
Political-institutionalist research
Although traditional scholarship in International Relations is state-centric and downplays the role of private actors, various theories within IPE have concerned themselves with the study of SCIs, especially research focusing on global governance, civil regulation, regimes and authority. From the global governance domain, codes of conduct and rules that SCIs make, have been conceptualized as global civil regulation. The standards SCIs develop, implement and monitor, are similar to state and legal structures (Meidinger, 2006, pp. 48-49). Civil regulation can compensate for the shortcomings of public regulation and governance and could be the answer to a regulation gap. The legitimacy of civil regulation, governance and implementation is not rooted in public authority (Vogel, 2010, pp.
68-69). This results in concerns about the democratic legitimacy of such regulation: often, the input and output sides of legitimacy often do not meet the democratic demands of inclusive participation, transparency and accountability (Fuchs & Kalfagianni, 2011). In the absence of government-like
16 At this point, the theory differs from some other theories in IPE, see next section (3.4).
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organizations to effectively push companies to behave in a socially and environmentally responsible manner, the actions of SCIs can result in powerful ‘private regimes’17 (Haufler, Cutler, & Porter, 1999, pp. 16-19). SCIs may even be a strategy of business to forestall public regulation (Rowe, 2005, p. 4;
Potoski & Prakash, 2013, p. 405).
Other theorists are less concerned about the (potential) illegitimate power of SCIs. In their view, SCIs emerge from long-term political bargaining processes between governments, CSOs and firms on the question on how to regulate capitalism. Hence, SCIs have the consent of CSOs and governments and are legitimized by these actors (Bartley, 2009, p. 110). Governments are sometimes paralyzed because of WTO regulations, while SCIs do not face these restrictions (Bernstein &
Cashore, 2007, p. 350; WTO, 2013). SCIs exist because of their popularity with governments and CSOs, because they can make it through the political process (Bartley, 2010, p. 2; Kotchen, 2013, p.
278). Certification is according to this political-institutionalist view not a solution to market problems, but a political settlement and institution building project.
Position of the theory of clubs
The aforementioned regulatory, democratic legitimacy, sociological and political bargaining perspectives can be complemented by the collective action research and the club approach. The club approach does not deny that SCIs take many forms, including government supported clubs or private bottom-up industry sponsored initiatives. Certainly, some may do more harm, green-washing activities of unsustainable firms, than produce sustainability externalities. The image of a political struggle for power and regulation does not inherently conflict with the theory of clubs perspective.
The political bargaining process to regulate capitalism can be seen as a search for a response to market failures by rational actors pursuing their own interests. The emergence of clubs has been modeled in the club perspective as a game, where different actors – firms and activist – interact strategically (Baron, 2009; 2011). Activists, governments and firms have different interests but need each other. Exactly because of the legitimizing power, firms will take into account the interests of activists and governments when determining the standards and enforcement procedures.18 Political interests are not necessarily downplayed by the theory of clubs perspective, but their power is expressed in market forces. Firms are presumed to obey regulations for monetary reasons. Penalties for not living up to regulations are market penalties, directly or indirectly (Bartley, 2010, p. 7). This contrasts with the sociological view that actors may be intrinsically motivated to self-regulate and comply with the regulation. In this view, monitoring and enforcement of rules should not be emphasized, but rather roles and norms and socialization, which will discourage shirking (Rowe, 2005, p. 130). Hence, firms have ethical and social learning capabilities and may have an intrinsic motivation to do what is right. It relates to regime theory and constructivism: private regimes initiated by SCIs can create and change the scope of possible strategies perceived by actors to exist.
Where this sociological approach emphasizes the global governance trend and shaping factors in the gradual development of actors’ interests, the theory of clubs approach takes one snapshot of this
17 Following the definition of Krasner, regimes are ‘implicit or explicit principles, norms, rules and decision- making procedures around which actors’ expectations converge in a given area of international relations’
(Hasenclever, Mayer, & Rittberger, 1997, p. 9).
18 Barons contribution will be further elaborated upon in section 5.3.
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development: interests of actors are given and the analysis focuses on how SCIs should be designed to fit their members’ characteristics to be as efficacious as possible.
The theory of clubs approach offers unique insights, conceptualizing politicized problems like global poverty and environmental degradation as market failures and inability to solve these as collective action problems. Clubs, correctly designed, are a mechanism to curb the collective action problems and address the market failures. The maximization of positive sustainability externalities is unique to activist sponsored SCIs; the goal of the club is production of sustainable public goods that can be enjoyed the whole population, also non-members.
The club approach is not an all-encompassing International Relations (IR) or political theory, but analyzes SCIs on an ad hoc basis in terms of efficacy. Kotchen (2013, pp. 291-292) proposes that future research should incorporate many clubs by measuring the impact of different clubs, modelling competition and the evaluation of standards over time. Such a less ad hoc - investigation with consideration of wider global governance developments should be informed by political- institutionalist insights, emphasizing democratic legitimacy, the formation of interests and the struggle for power in global governance.
How the previous material will be applied in subsequent chapters
In the subsequent chapters, the club approach will be applied critically to the case of UTZ. On the basis of what has been discussed in this chapter, a more detailed strategy to answer the sub-questions of this thesis can now be outlined. For the first sub-question - which important theoretical concepts are applicable to UTZ – the concepts can be specified: club membership, club benefits, club sponsors and the club’s goal (or viewpoint). Whether the concepts make sense in the case of UTZ certified, and how they are interrelated will be the focus of section 5.1, based on information given in chapter 4.
With regard to the second sub-question which deals with club efficacy, it is now possible to conclude what efficacy is according to the club theory approach. Efficacy is measured in terms of sustainability externalities produced (activist club) or club benefits produced (industry club). In order achieve this production, two collective action problems should be curbed: free-riding and shirking. Hence, in section 4.1 attention will be paid to these two features of club design. In section 5.2, these design features are analyzed according to a framework proposed by Prakash and Potoski.
In addition, in order to evaluate whether this perception of efficacy of the club approach is shared by the organization of UTZ in chapter 5, the pursuit of efficacy by UTZ is discussed in section 4.1. The results of the evaluation of this latter question will also be discussed in relation to sub-question 1, as it deals with the applicability of the concept of ‘efficacy’ in the perspective of the theory of clubs to UTZ.
Finally, the strategy to answer the third sub-question - dealing with the development of the organization - can be specified. According to the club approach SCIs emerge as a result of rational assessments of private actors who are motivated by self-interest to found or join a club. A way to determine the strictness of the standards has been modeled by Baron (2009; 2011) and his work will be used to analyze this process in UTZ. As for the development of the organization after its creation, the ideas of maximization of sustainability externalities, congestion and optimal membership are crucial for the club approach. Section 4.2 elaborates on two developments that stand out in the development of UTZ and section 5.3.2. analyzes them from a club perspective.
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4. UTZ Certified
This chapter will discuss the efficacy, emergence and organizational development of UTZ. It is divided into two sections: the pursuit of efficacy by UTZ and the emergence and development of the organization. This sequence is not chronological, but it serves the structure of the analysis in the next chapter better. Chapter 5 mirrors the structure of this chapter almost perfectly, with the only exception that chapter 5 starts with one section discussing the applicability of the theoretical concepts to UTZ. Information retrieved from the interviews with Ward de Groote, co-founder of UTZ and Managing Director of ACC at the time, and Henk Gilhuis, Director of the Department of Monitoring and Evaluation, will be used in this chapter.
4.1 UTZ’s pursuit of efficacy
Efficacy is ‘the ability to produce a desired or intended result’ (Oxford Dictionaries, 2013). This section will discuss how UTZ produces which intended results. As was discussed in the previous chapter, the theory says the intended results (or goals) of a club depend on the identity of the sponsoring actor. In this section, the pursuit of efficacy of UTZ will be outlined. In the next section about the development of the organization, information about the governance of UTZ (and identity of the key sponsoring actor) will be given.
Before we can go into detail about how UTZ specifically intends to produce the intended results, the position and functioning in the supply chain of SCIs in general will be discussed. The coffee chain will serve as an example. Afterwards, UTZ’s activities and perspective of efficacy will be discussed. This will shed light on who can be considered the ‘members’ of the club, what can be considered the ‘product’ of the club and what is the ‘goal’ of the club.
Then, the standards and monitoring and enforcement procedures, central to the framework of efficacy constructed by Prakash and Potoski, will be described. Finally, impact studies researching the efficacy of UTZ will be discussed.
4.1.1 Position and functioning of SCIs
Figure 4: Coffee supply chain(TCC, 2009, p. 9)
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Figure 4 depicts the coffee supply chain (representative of other tropical commodity supply chains UTZ is active in, most importantly cocoa and tea). Coffee is grown at smallholder farms or at larger estates.19 Twenty-five million smallholders produce eighty percent of the world’s coffee (Fair Trade, 2013, 2). The smallholders sometimes organize themselves in cooperatives, but this does not have to be the case.
After the coffee is produced (ninety percent of the world’s coffee is produced in developing countries), the coffee is exported to industrialized countries, often via traders such as Neumann Gruppe, Volcafé and ECOm. who together trade more than fifty per cent of the world’s green coffee (Wegner, 2012) Then, the coffee is roasted, which adds the most value and the biggest profit margins.
Four large transnational corporations (TNCs) -Kraft, Nestlé and Sara Lee and Tchibo- occupy fifty percent of the world’s coffee market (Oxfam, 2010, p. 12; Arnouts, 2012). The roasters sell their coffee via retail or catering to the consumer. Because of the powerful position of the large roasters, the coffee chain is regarded as an example of a ‘buyer-driven’ chain (Ponte, 2004, p. 3; Arnouts, 2012).20 The term ‘buyer’ refers to the large roasters21 and should not be confused with consumers.
Also, a ‘farmer’ can be a wealthy owner of a large estate, or a smallholder farmer. 22 Emergence of SCIs in the coffee chain
The buyers have not always had this powerful position in the chain. The chain went through a big transformation in the 1990s. Before 1989, the producing countries’ governments were powerful actors in the chain due to an export quota system of the International Coffee Organization (ICO) that had existed since 1962. Producing countries and consuming countries negotiated agreements, to make sure coffee would not be excessively supplied and the price would be maintained between the agreed range of 120-140 US dollarcents/lb (ICO, 2014). Producing countries’ governments often intervened in the national coffee sector; the coffee was sold through state-controlled monopolies and public enterprises (Akiyama, 2001, p. 83). In 1989 the quota system of the ICO collapsed, because of the inability of member countries to agree on the distribution of new quotas, difficulties the ICO experienced with monitoring the quotas and the implementation of neo-liberal policies advocating deregulation, privatization and open markets in important countries such as Brazil (Muradian &
Pelupessy, 2005, p. 234). The ICO is still involved with the coffee industry, now functioning as an intergovernmental discussion forum and a collecting data agency.
After the collapse of the quota system, the coffee market became very volatile leading to a coffee crisis. For years, governments had accumulated stocks of coffee due to the export quota. When the system collapsed, all these stocks flowed onto the global coffee market, causing a sharp decline in price (UNCTAD, 2003, p. 14). Many farmers were left in poverty, decreasing health and education possibilities for their families and forcing them to migrate to the cities. Because many national economies of the producing countries were dependent on coffee for their foreign exchange, they were
19 Smallholders own less than 5 hectares of land, large private estates more than 50 (Hortons, 2012, p. 5).
20 A buyer driven chain “refers to those industries in which large retailers, marketers, and branded manufacturers play the pivotal roles in setting up decentralized production networks in a variety of exporting countries, typically located in the third world.” (Gereffi, 2001, p. 30).
21 Sometimes, roasters and retailers are one company, like Starbucks or ACC.
22 A commodity producer refers to the farmer.
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destabilized (Akiyama, 2001, p. 86). Buyers became more powerful at the expense of the producing countries’ governments. Where earnings for producer countries were 10-20 billion with a value in retail sales of 30 billion USD in 1990, ten years later producers received 5.5 billion with a value in retail sales of 70 billion dollar (Kolk, 2005a, p. 230).
As from the mid-1990s activists started exerting pressure on business. For example, in 2002, Oxfam launched a campaign against the big roasters in the coffee industry called ‘Mugged: poverty in your coffee cup’. This campaign was a reaction to the coffee crisis that impoverished coffee farmers and Oxfam held the big roasters Kraft, Nestlé, Procter & Gamble and Sara Lee responsible (Oxfam, 2002). These campaigns coincided with changes in consumer preferences and food safety crises in the 90s. Consumers were increasingly concerned about the way the product was produced, whether it was healthy, safe and sustainably produced by a farmer that could make a living (Ponte, 2004, pp.
10-13). Also, the coffee market saw a quick development of specialties coffees one of which was sustainable coffee. Coffee was drunk in new environments like the luxury Starbucks chain and the sustainability claim contributed to the feeling of luxury (Arnouts, 2012). Often, the roasters responded to these pressures with a code of conduct (CoC) and in order to make these CoCs credible, certification initiatives arose (Kolk, 2005a; Linton, 2005; Ingenbleek, 2009).
Certification initiatives
Certification initiatives bridge the information gap between the consumer drinking the coffee and the farmer producing the coffee cherries. This information is also called the ‘credence attributes’23 of a product. The production standards and monitoring and evaluation procedures of certification organizations differ. Certification initiatives in the coffee sector that determine the competition landscape for UTZ are Max Havelaar/Fair Trade and Rainforest Alliance (RA). Table 4 introduces the characteristics of the different certification organizations. The SCIs focus on different aspects of the coffee supply chain: Fair Trade Labeling Organization (FLO) focuses on smallholder cooperatives, on social standards and is consumer oriented: consumers pay a price premium for the FLO credence attributes. Rainforest Alliance and UTZ partner (mainly) with large estates. An important difference that distinguishes FLO from UTZ and RA in its application of a fixed price premium.
The market share of certified coffees is increasing rapidly and the leading companies have ambitious goals: Nestlé, Kraft, Tchibo and DE Master Blenders have set the goal to increase the sale of sustainable coffee24 to 25 percent of total sale in 2015 and the Dutch coffee sector aims for three quarters of the sale in the Netherlands to be sustainable in 2015 (IDH, 2012).
23 Credence attributes are the attributes of products that are different from physical or performance characteristics, because they cannot be observed by consumers. They can include the conditions under which the product is produced, how workers are treated and how well they are paid (Baron, 2009, p. 41).
24 Sustainable coffee is coffee that is certified by any of the certification initiatives (except for the 4C Association, which focuses more on a change in mindset within the industry than actual production practices and certification).
