Rocco Macchiavello (LSE)

The Sustainable Quality Program in the Colombia Coffee Chain

Abstract. Approximately 75% of the world’s poor live in rural areas and earn their livelihood in agriculture. Linking these farmers to foreign markets through global value chains has the potential to lift millions out of poverty but requires quality upgrading – which has proven challenging. This paper studies the Sustainable Quality Program in the Colombia coffee chain. The Program is the flagship, buyer-driven, sustainable sourcing program in coffee. We present a simple model that characterizes the Program as a relational vertical restraint that overcomes both monopsony power and limited contract enforcement in the domestic coffee chain. The model delivers testable predictions and is then calibrated to quantify the impact of the Program along the chain. After confirming the structure of price premia along the chain associated with the Program, we take advantage of its staggered rolled-out to evaluate the impact on quality upgrading. The reduced form analysis confirms that Program induced substantial quality upgrading and investment in farms. We then build on the reduced form analysis and estimate a dynamic discrete choice model of farmers’ upgrading decisions to quantify the impact of the Program. Our estimates reveal that the Program increased total surplus along the coffee chain by about 30% — with farmers retaining nearly half of the gains. Counterfactual exercises confirm the importance of the vertical restraint and show that contractual arrangements at the export gate significantly contributed to higher farmers welfare in rural areas. Policy implications are discussed.

Joint with Josepa Miquel-Florensa