Foreign Direct Investment and Domestic Child Labor

• Author: Sarbajit Chaudhuri,Jayanta Kumar Dwibedi
• Date: 01 May 2017
• Published date: 01 May 2017
• DOI: http://doi.org/10.1111/rode.12263

Foreign Direct Investment and Domestic Child

Labor

Sarbajit Chaudhuri and Jayanta Kumar Dwibedi*

Abstract

Empirical evidence suggests that use of child labor as domestic help has increased significantly in

recent years although the overall incidence of child labor across the globe has declined satisfactorily.

This should draw the attention of economists and policymakers because domestic child labor is

considered as exploitative and in many cases hazardous. This paper purports to explain this apparently

perplexing finding theoretically in terms of a three-sector general equilibrium model with a nontraded

sector where only child labor is used to render services to the richer section of the society. The

analysis shows how FDI-led economic growth increases the size of the services sector although it

lowers the overall incidence of child labor in the economy and improves the welfare of the poor

families that supply child labor. Finally, a composite policy has been recommended that can deal with

all three aspects favorably.

1. Introduction and Motivation

The incidence of child labor worldwide has decreased significantly over the last few

years both in absolute and percentage terms. As per International Labour

Organization (ILO, 2013) estimates, 168 million children aged 5–17 years were

involved in child labor in 2012 (10.6%) compared with 215 million in 2008 (13.6%).

This represents 47 million fewer than in 2008. The ILO (2013) reports highlighted

some important as well as interesting dimensions of the problem. There has been

an increase in the relative importance of child labor in services in recent years. The

share of child labor in services rose from 26% in 2008 to 32% in 2012. More

specifically, among different services rendered by children, the incidence of child

labor in domestic work has increased significantly from 10.57 million (4.9%) in 2008

to 11.53 million (6.9%) in 2012.

1

A pertinent question is, therefore, why has child labor in services like domestic

work increased significantly both in absolute number as well as in terms of activity

rate especially when the child labor incidence in both counts has appreciably fallen

in the world as a whole? This calls for earnest attention and theoretical explanation

because this kind of child labor falls under the category of worst form of child labor

and is quite exploitative in nature.

The reduction in child labor at a satisfactory rate can possibly be attributed

largely to the liberalized economic policies that the developing countries have been

following for the last two decades or so.

2

The pace of economic reforms has

*Chaudhuri (Corresponding author): Department of Economics, University of Calcutta, 23 Dr. P.N. Guha

Road, Belgharia, Kolkata, 700083, India. Tel: +91-33-2557-5082; +91-98305-30963 (mobile); Fax:

+91-33-2844-1490. E-mail: sarbajitch@yahoo.com. Dwibedi: Department of Economics, B.K.C. College,

Kolkata, India. The paper has been revised in the light of some interesting and constructive comments of an

anonymous referee of this journal to whom the authors are thankful. The authors also thankfully

acknowledge a few editorial suggestions made by Professor Andy McKay, Managing Editor of this journal.

The usual disclaimer, however, applies.

Review of Development Economics, 21(2), 383–403, 2017

DOI:10.1111/rode.12263

©2016 John Wiley & Sons Ltd

particularly gathered high momentum in the last decade. Barring a couple of years

of economic recession, these countries have achieved high rates of economic growth

relying mostly on abundant inflows of foreign capital. It is now well accepted that

‘abject poverty’ is the root cause behind the incidence of child labor.

3

Economic

growth via foreign direct investment (FDI) is believed to work on poverty primarily

through the so-called “percolation effects.” Higher economic growth means higher

economic activities, which in turn would lead to higher employment and wages and

hence less poverty and poverty-induced child labor. But, why FDI-led growth has

pushed children increasingly into various services, including domestic help, is the

prime question that needs to be answered.

There is a vast theoretical literature that is devoted to identifying the various

factors responsible for the child labor incidence and has suggested policies to

eradicate the problem. For example, Basu and Van (1998) and Basu (1999, 2000)

have held adverse adult labor market conditions responsible for low adult wage as

the driving force behind child labor and have emphasized labor market

interventions that raise adults’ wages for mitigating the problem. Gupta (2000) has

provided a theory of child labor where the selfish guardian of a child worker is only

concerned about his own well-being and considers his child as an asset that can be

leased out for rental income.

Ranjan (1999, 2001), Jafarey and Lahiri (2002, 2005), and Baland and Robinson

(2000) have emphasized the importance of capital market imperfection as a

contributing factor to inefficient child labor and have advocated measures that can

lower the degree of distortion in the credit market. Eswaran (1996) and Dessy

(2000) have advocated in favor of imposition of compulsory education as a means

to combat the incidence of child labor.

There are also works, e.g. Gupta (2002), Jafarey and Lahiri (2002), Chaudhuri

(2010), Chaudhuri and Gupta (2004), Chaudhuri and Dwibedi (2006, 2007), and

Dwibedi and Chaudhuri (2010, 2014), that have examined the consequences of

trade sanctions, education subsidy and mid-day meal programs and different

liberalized economic policies on the incidence of child labor in the developing

economies using different general equilibrium structures. However, none of these

works has made any attempt to study the effects of different trade and domestic

policies on the sectoral allocation of child labor and explain the atypical empirical

finding that the use of child labor as domestic help has been on the rise.

Under the circumstances, the present paper is devoted to explore how policies

such as investment liberalization in the form of increased FDI affect the

intersectoral composition of child labor in a developing economy in terms of a

three-sector general equilibrium model with a nontraded services sector that

produces services that are consumed by the richer sector of the population. The

paper also analyzes the consequences of the policy on the overall incidence of child

labor in the economy and on the welfare of the poor families supplying child labor.

Finally, we verbally (not rigorously) explain the efficacy of a composite public

policy that can successfully deal with child labor in the nontraded sector without

adversely affecting the overall child labor incidence and welfare of the poor

families.

2. The Model

The economy we consider is a small open developing economy, which is divided

into two informal sectors and one formal sector. There are two types of labor

384 Sarbajit Chaudhuri and Jayanta Kumar Dwibedi

©2016 John Wiley & Sons Ltd