Child Labor: Theory of Foreign Trade and Investment Intervention

Michalak, Katja and Naqvi, Nadeem (2019): Child Labor: Theory of Foreign Trade and Investment Intervention.

Abstract

The principal result of this paper is that under endogenous international capital mobility inward FDI reduces the incidence of child labor if stimulated by a country’s trade policy of granting protection to the sector that employs child labor. Child labor persists, however, if there is exogenous inward FDI and it is small in magnitude; it is eradicated in equilibrium if this FDI is sufficiently large. If the supply of capital in the country is fixed, granting greater tariff protection or higher export subsidy to a sector that employs child labor reduces its incidence, and may eventually eliminate it. Since a country’s aggregate real income decreases as the import tariff increases, it may sometimes face the dilemma of having to choose between higher real GDP or fewer child workers as an entailment of its foreign trade policy. These results are obtained under standard assumptions about technology, and maximizing behavior on the part of both producers and families, with the latter maximizing a Kanger-Sen non-binary preference ranking relation subject to their budget constraints. (171 words)

• Item Type: MPRA Paper
• Language: English
• Keywords: child labor, FDI, trade policy, International Labor Organization, World Trade Organization, India, United Sates of America
• Subjects: F - International Economics > F1 - Trade > F16 - Trade and Labor Market Interactions; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O12 - Microeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O15 - Human Resources ; Human Development ; Income Distribution ; Migration

References

Arrow, Kenneth J. (1963), Social Choice and Individual Values, 2nd Ed. New York: Wiley.

Baland, J.-M. and J. A. Robinson (2000), “Is Child Labor Inefficient?” Journal of Political Economy, 108, 663–679.

Bar, Talia and Kaushik Basu (2008), “Children, Education, Labor and Land: In the Long Run and Short,” Journal of the European Economic Association, vol. 7 (2-3), 487-497.

Basu, Kaushik (1999), “Child labour: cause, consequence, and cure, with remarks on international labour standards,” Journal of Economic Literature, 37 (September), 1083-1119.

__________ (2002), “A Note on Multiple General Equilibria with Child Labor,” Economics Letters, 74, 301-8.

__________ and Pham Hoang Van (1998), “The Economics of Child Labor,” American Economic Review, vol. 88, 412-27.

__________ (1999) “The Economics of Child Labor: Reply,” American Economic Review, vol. 89, 1386-1388.

Basu, Kaushik, Sanghamitra Das and Bhaskar Dutta (2010), “Child Labor and Household Wealth: Theory and Empirical Evidence of an Inverted-U,” Journal of Development Economics, Elsevier, vol. 91(1), 8-14.

Basu, K. and H. Zarghamee (2009), “Is product boycott a good idea for controlling child labor? A theoretical investigation,” Journal of Development Economics, 88 (2), 217-220.

Beegle, K., R. H. Dehejia, and R. Gatti (2006), “Child Labor and Agricultural Shocks,” Journal of Development Economics, 81, 80–96.

Bell, C. and H. Gersbach (2009), “Child Labor and the Education of a Society,” Macroeconomic Dynamics, 13, 220–249.

Bommier, A. and P. Dubois (2004), “Rotten Parents and Child Labor,” Journal of Political Economy, 112, 240–248.

Chandra, Vandana and Nadeem Naqvi (1997), “Protection and the Shadow Price of Foreign Exchange with Increasing Returns and International Capital Mobility,” Canadian Journal of Economics, 30, 569-67.

Cigno, A., Rosati, F.C., and Guarcello, L. (2002), ‘Does globalization increase child labor?’’ World Development, 30, 1579-1589.

Dumas, C. (2013): “Market Imperfections and Child Labor,” World Development, 42, 127–142.

Edmonds, E. V. (2008), Child Labor, Amsterdam: Elsevier, vol. 4 of Handbook of Development Economics, chap. 57, 3607–3709.

__________ and Pavcnik, N. (2005), “The effect of trade liberalization on child labour,” Journal of International Economics, 65(2), 401-419.

__________ (2006), “International Trade and Child Labor: Cross-country Evidence,” Journal of International Economics, 68(1), 115-140.

ILO (2017), Global Estimates of Child Labour: Results and trends, 2012-2016.

Jones, Ronald W, (1971), “A Three-Factor Model in Theory, Trade and History,” in Jagdish Bhagwati, Ronald Jones, Robert Mundell and Jaroslav Vanek, (eds.), Trade, Balance of Payments and Growth, North-Holland: Amsterdam.

Kuklys, Wiebke (2005), Amartya Sen’s Capability Approach: Theoretical Insights and Empirical Applications, Springer: Berlin.

Menon, N. (2010): “Investment Credit and Child Labour,” Applied Economics, 42, 1461–1479.

Neary, J. Peter (1978), “Dynamic Stability and the Theory of Factor-market Distortions,” American Economic Review, 68, 671-82.

__________ (1985), “International Factor Mobility, Minimum Wage Rates and Factor Price Equalization: A Synthesis,” Quarterly Journal of Economics, 100, 551-70.

__________ (1988), “Tariffs, Quotas, and Voluntary Export Restraints with and without Internationally Mobile Capital,” Canadian Journal of Economics, 21, 714-35.

Neumayer, E. and Soysa, I. (2005), “Trade Openness, Foreign Direct Investment and Child Labour,” World Development, 33(1), 43-63.

Ranjan, P. (1999), “An Economic Analysis of Child Labor,” Economics Letters, 64, 99–105.

__________ (2001), “Credit Constraints and the Phenomenon of Child Labor,” Journal of Development Economics, 64, 81–102.

Sen, Amartya (1995), “Non-binary choice and preference: A tribute to Stig Kanger,” in Dag Prawitz, Brian Skyrms, Dag Westerståhl (eds.), Studies in Logic and the Foundations of Mathematics IX, Amsterdam: Elsevier, 913-24.

__________ (1997), “Maximization as an Act of Choice,” Econometrica, 65, 745-79.

__________ (1999), Development as Freedom, Oxford University Press.

__________ (2002), “Why Health Equity,” Health Economics, John Wiley & Sons, 659-666.

__________ (2009), The Idea of Justice, Cambridge: Harvard University Press.

Swinnerton, Kenneth A. and Rogers, Carol Ann (1999), (1999) “The Economics of Child Labor: Comment,” American Economic Review, vol. 89, 1382-1385.

WTO (2019), India – Measures Concerning the Importation of Certain Agricultural Products, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds430_e.htm .