Trade Liberalization

Eric EDMONDS and Nina PAVCNIKJournal of International Economics 65(2) March 2005

Presented by: Mir Salim

on Child Labor

The effect of

Structure of Presentation: Theory Motivation and Brief Literature

Review The model, and its estimation strategy The data Estimation results Robustness checks Conclusion and quick criticisms

The Point of the Paper:

Drastic trade liberalization programs in many poor, predominantly agricultural countries in the 1980s and 1990s.

Trade liberalization child labor or ? Should trade liberalization be promoted or discouraged on

child labor grounds? Seek to answer this with empirical evidence from Vietnam in

the 1990s.

The context of the study 97% of child labor in Vietnam (and this is true of many

other developing countries) takes place inside the childs own household (eg. agricultural work, collecting water and wood, work in household business).

44% of food expenditure in Vietnam is on rice. 98% of all Vietnam communities produce rice. Stringent export controls on rice imposed in Vietnam in

1989. Stringent internal flow restrictions on rice also. Gradual liberalization of rice markets to a non-binding

level quotas by 1998. Between 1993 and 1998, the real rice price increased

almost 30% wrt the CPI in Vietnam.

Theoretical links between Trade Liberalization and Child Labor

1) Pure Substitution effect in Production:Liberalization rice price labor demand more child labor

2) Pure substitution effect in Consumption:Liberalization rice price child leisure relatively cheaper less child labor

3) Pure income effect:Liberalization rice price if net rice producer: HH income less child labor if net rice consumer: HH income more child labor GE effects (not in paper) day labor wage income

HH income less child labor

Trade liberalization relative price of rice in Vietnam . 3 effects:

Brief Literature Review: While impact of trade liberalization on labor markets has

been studied empirically (Leamer and Levinsohn 1995), the impact on child labor has not been empirically studied.

Theoretically modeled with child labor as a bad in parental preferences (Basu and Van 1998, Bommier and Dubois 2004), or if households face credit constraints (Baland and Robinson 2000, Ranjan 2004).

Much of the increase in relative rice prices in Vietnam in the 1990s can be attributed to international and national rice market integration (Brandt and Benjamin 2004).

The model: Consider household in small open economy that produces a and n. CRTS technology in child labor L and land K. Sector a is more child-labor intensive. Household welfare depends on consumption of a, n and

consumption of child leisure. Child labor is a bad (child leisure is a good). Child labor supply is outcome of household welfare maximization

problem. Country is small exporter of agricultural goods. Transport costs drive wedge between domestic and world prices:

pd = pw / Because net exporter, > 1. Trade liberalization 1 pd . With pd change, three-prong income and substitution effects as

detailed previously, empirical answer to net impact.

The Data: Two rounds of the Vietnam Living Standards Survey (VLSS), 1992-93 and 1997-98. Two panel dimensions to dataset:

115 rural communities visited each round, random sample of children then aged 6-15 years in each round. 4,850 children in Round 1 and 4,703 in Round 2.

3,397 households with children re-visited, restricting survey to children then aged 6-15 years in these households. 4,586 in Round 1 and 4,441 in Round 2.

Child work: Child labor if more than 7 hours of work during week before (aggregated) in:

Child works outside for pay (whether cash or in kind)? Child works in agriculture for household. Child works in household business. Child works in household production activities, such as collecting water,

wood, building and maintaining house, household chores. Both participation data, and total hours of work for each category recorded.

Household annual cropland assignments. Household net production in 1992-93. Detailed community price survey conducted in community market concurrently with

VLSS. Price of 1 kg ordinary rice in 1993 and 1998. Prices deflated with monthly CPI so prices are in 1998 currency units (Dong).

Fig 1: Community Level Rice Price Increases and Declines in Child Labor

Empirical Framework:

y : indicator, 1 if child engages in child labor, 0 otherwiseRP: log (real price of ordinary rice, in 1998 Dong)X : controls. 3rd order polynomial in age and gender.

Season dummies, harvest dummy, plating dummyT : economy-wide year dummy : community fixed effect

Linear probability model for participation in child labor market as a response to rice price differences:

Notes: i, j, t denote community I, child j, time t. Rice prices only vary at the community-year dimension i. Uses first dimension of panel not limited to the same households in both periods. Huber-White robust standard errors, clustered at the community-year level. Why not use Tobit with Honores Trimmed LAD fixed effects?

Empirical Analysis: Income effects

y : indicator, 1 if child engages in child labor, 0 otherwiseRP: log (real price of ordinary rice, in 1998 Dong)M : household net production in 1998X : controls. 3rd order polynomial in age and gender.

Season dummies, harvest dummy, plating dummyT : economy-wide year dummy : household fixed effect

Again, linear probability model for participation in child labor market:

Notes: i, h, j, t denote community I, child j, household h, time t. Rice prices only vary at the community-year dimension i. Uses second dimension of panel limited to the same households in both periods. Huber-White robust standard errors, clustered at the community-year level.

Conclusions:1) Provides empirical evidence on the

relationship between trade liberalization and the incidence of child labor in poor, relatively unskilled-labor abundant economies.

2) 30% increase in rice prices are found to decrease child labor participation by about 10%.

3) The pure income effect is large enough to swamp even an unfavorable net substitution effect in all but the largest net consumers of rice.

4) Trade sanctions to eradicate child labor seem to be fallacious.

Quick Criticisms: External validity: considers only export-oriented

sector. What about import-competing sectors that may see lowered prices with liberalization?

Estimation strategy: uses linear probability model throughout in spite of its limitations.

Estimation strategy: looks only at participation. Participation may fall, but hours may still rise for the children who remain in the labor force.

Just two years of data. Time dummies are highly significant in each case. Controlling with fixed effects may be questionable.