Badri Narayanan G.
The debate on whether or not to impose labor standards in the international trading systems has a long history in the literature of social sciences. Some researchers argue for their need in order to ensure fair competition all over the world and better human rights in the developing world (Andrews, 1919; Wilson, 1933; Richardson, 1934; and Jenks, 1960), while others opined that they are unnecessary as domestic mechanisms are good enough to help evolve such standards (Windmuller, 1956). More recently, economists have been arguing for excluding this debate from the trade negotiations (Srinivasan, 1996), owing to lack of global consensus on such potentially trade-restrictive standards (Bhagwati, 1995), constraints in efficient co-ordination of trade and domestic policies (Ederington, 2001) and possible losses for the developing countries in terms of cost-competitiveness and consequently (Brown, 2001a). Although there has been extensive literature on the impact of labor standards on international trade in partial equilibrium and econometric frameworks (Busse, 2002), there is hardly any study that examines in detail the impact of any of them in an economy-wide framework, which could provide useful insights on welfare implications of trade policies. Child labor is one of the major concerns among the labor standards and is quite prevalent in the developing countries. The practice of exploiting children to support their families has been condemned by the developed countries (OECD, 1996) and banned in most of the countries by setting minimum age for work (Brown, 2001a). However, it has hardly been implemented in many of them, resulting in the global employment of about 211 million children aged 5-14 in 2000 (ILO, 2002). Few economists study the causes of child labor (Basu and Van, 1998) and the implications for the poor households of banning child labor (Brown, Deardorff and Stern, 2001). A ban of child labor may not affect the poor households if it accompanies re-distributing income from capital to labor so as to raise the wages (Basu and Van, 1998), reforming the capital markets to facilitate availability of education loan (Baland and Robinson, 2000) and raising the returns of education (Brown, 2001b). However, there has been no attempt to address the child labor issue from the viewpoint of production and cost structure, except for a survey by ILO on child labor wages and productivity (ILO, 2007). Particularly, there are no international economy-wide studies that analyze the trade and economic welfare implications of a global or local child labor ban. In this paper, we attempt to address this gap in the literature, by extending a widely used Computable General Equilibrium (CGE) model of the Global Trade Analysis Project (GTAP) (Hertel, 1997) and its accompanying database (Narayanan and Walmsley, 2008), in conjunction with numerous country-specific surveys including ILO (2007), to model the issue of child labor and its impact on developing economies. From the ILO’s International Programme on the Elimination of Child Labour (IPEC) reports for different countries in Asia, Latin America, Africa and Europe, we use the shares of child labor in total employment, its distribution across sectors and the productivity-adjusted-wage-differences (ILO, 2007) between child-labor and adult-labor to split ‘child labor’ from unskilled labor in the GTAP 7 Data Base with base year 2004. The aggregation that we use comprises 54 regions and 4 sectors, namely, agriculture, industry, services and margin. In the standard GTAP model, we define two sets of all commodities – one that uses child labor (say, category CL) and another that does not (say, category NCL). We construct these sectors starting from the corresponding GTAP sectors by allocating all of the child labor to the CL sectors, while preserving the unskilled labor shares in total labor. This treatment helps retain the empirically established facts of child labor because the actual splits between child labor and adult-labor use the reliable shares estimated from the ILO’s primary surveys. We use CES functions to nest each pair of such commodities within the aggregated set of commodities, in a way similar to Narayanan, Hertel and Horridge (2010). All the variables corresponding to domestic consumption, production, imports and exports are defined both at aggregated and disaggregated commodity levels. This nesting is done for all these modules in the GTAP model, with a common elasticity for substitution/transformation between commodities that use child labor and those that do not use it. Consumption of intermediate inputs and value added are also defined at the disaggregate level. Therefore, we effectively assume that the commodities are produced, consumed and traded with a differentiation between CL and NCL categories, with a possibility of substitution between CL and NCL, via the elasticity. This is plausible since there are already many labeling systems available to certify the conditions of production of some goods (Freeman, 1994). In this framework, we conduct different simulations while assuming unemployment of unskilled adult and child labor and managed float exchange rate regimes in the developing countries and perfect competition in all markets and full employment in the developed countries. Firstly, we model the complete removal of child labor from all countries in both domestic consumption and exports. This is an extreme possibility because in most of the countries, implementation of a complete ban on child-labor in the domestic production is very unlikely to happen, though policies have already been in place to do this. Secondly, we examine the elimination of child labor for imports and domestic production by developed countries, still retaining the use of child labor for domestic consumption in developing countries. Given the intense debate on including labor standards in WTO, one cannot deny this possibility as the importers can easily impose such a market access restriction without impacting the plight of child labor in the domestic production of the developing countries. Thirdly, with no market access restrictions, we attempt to examine the effects of willingness to pay higher prices by the ethically conscious customers in the developed countries, using some reliable survey estimates from the literature (Commission of the European Communities, 1997 and Marymount University, 1999). As they have little impact on child labor, we finally examine the price premium required to remove child labor completely. This paper is organized as follows: Section 2 explains the methodologies to develop the data used in the study and its sources. Section 3 describes the modeling framework employed for the study as well as the scenarios postulated herein. Section 4 shows the results of the different scenarios. Section 5 lays out the conclusions and policy recommendations. 2.Data Sources and Methodology The main data source for this study is GTAP 7.1 Data Base (Narayanan and Walmsley, 2008), which has 112 regions and 57 sectors, with a base year for this version is 2004. This dataset contains international information on trade, protection, input-output data, production, consumption and domestic assistance.