Human capital, externalities and tourism: three unexplored sides of the impact of FT affiliation on primary producers 1 Leonardo Becchetti, University of Rome Tor Vergata Marco Costantino, Crogiuolo-Mestizaje-Melting Pot Association, Trento Elisa Portale, Econometica and University of Milano Bicocca Abstract We evaluate the impact of fair trade (FT) affiliation on a sample of around 250 producers from two different fair trade projects which widely differ in terms of average FT affiliation and local standard of living. On the descriptive side we find evidence of two types of externalities (FT affiliates have higher bargaining power also with local intermediaries and, in one project but not in the other, FT improves conditions also of local non FT affiliates). The FT price premium (difference between FT and traditional importers price) is substantial even though “ethical travelers” pay a price even higher than FT importers. On the econometric side we observe that, in both projects, producers’ income, weekly food consumption expenditure, the non food consumption share on total income, self evaluated relative standard of living and professional self esteem are significantly and positively correlated with affiliation years. Through its impact on consumption share and relative standard of living fair trade is also shown to have indirect significant effects on producers’ life satisfaction. We also find weaker but significant effects of fair trade affiliation on last year savings, while we do not observe significant differences between the treatment and control sample in terms of wealth proxies. Finally, with backast panel data we reconstruct farmers yearly decisions to send their children to school and find that FT affiliation has a significant and positive effect on them when children are between 15 and 18. The effect is stronger in the project in which producers have higher standard of living. Keywords: fair trade, human capital investment, life satisfaction JEL Numbers: O19, O22, D64. 1. Introduction A well established empirical and anedoctical evidence shows that unlimited supply of labour (Deaton, 1999) and excess market power of local intermediaries and moneylenders often lead marginalised primary agricultural and textile workers to low (below the marginal product value) earnings which prevent rescue from poverty (Ray, 2000; Becchetti and Trovato, 2000). Fair trade is an initiative promoted by European and North American trade organisations aimed to tackle this problem via the creation of alternative value chains which provide higher economic value and social benefits to these workers. The fair “trade package” includes capacity building, a price premium which compensates primary producers’ for their low market power and never falls below a defined “subsistence threshold”, 2 a prefinancing scheme which is aimed to break the 1 We acknowledge financial contribution of Provincia Autonoma di Trento under the "NUPROMIR" cooperation project managed by Cooperativa Mandacarù (Trento) and by Consorzio Ctm altromercato, and coordinated by Lorenzo Boccagni. We also thank the Minka and Allpa teams in Peru and Raffaella Sasso for the valuable contribution to the interviews. 2 Evidence for such premium on prices of coffee beans and cocoa in the last 20 years is well known, available from the authors upon request and omitted here for reasons of space.