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Kids need liquidity, too
Sep 14th 2000
From The Economist print edition

To abolish child labour, create more efficient capital markets

THAT child labour is still so pervasive upsets many people in rich countries. The issue sends them clambering towards the moral high ground. In his speech accepting the Democratic nomination for the presidency, Al Gore made a pledge to squelch child labour by setting standards for American imports. McDonald’s recently came under fire for buying the toys it hands out to children from a Chinese firm that employed 14-year-olds. Vicente Fox, Mexico’s president-elect, received similar treatment when under-age workers were found on his family farm.

Yet the conventional outrage about child labour is at odds with the orthodoxy followed not just by economists but by non-governmental organisations (NGOs) that work with poor children. Both groups have pointed out that children’s work can be in their own interests: a family’s survival may depend on it. Of course, nobody wants to seem “pro-child-labour”, let alone to condone the conscription of children as soldiers, or their exploitation in prostitution. In rich countries, governments can spend tax revenues to ensure these fates are avoidable. They can guarantee parents a minimum income based on family size, for example. But many poor countries do not have that option.

One theoretical solution is to ban child labour. This would make labour scarcer, so parents’ wages might rise. And, in the long run, it might help countries’ growth rates, since better-educated children would become more productive workers. Nevertheless, a ban is hardly likely to lift families out of poverty in the short term. For that reason, organisations such as the World Bank (in its World Development Report, released this week, which focuses on poverty) and the United Nation’s Children’s Fund, UNICEF, advocate total bans only for work that can harm children’s development. Moreover, bans—and the policies that go with them, such as compulsory education—are often high-principled but heavy-handed ways of tackling what is at heart an economic problem.

That problem can be seen, in essence, as a lack of liquidity. Children themselves are not necessarily poor in terms of their whole life-cycles; their futures hold decades of paid work. But they cannot borrow today against the earnings that education will bring tomorrow. The key is to unlock those future earnings so that children can be free to study (or maybe even play) in the present. Forcing them out of factories and into schools may actually hurt them; unless their families are compensated for the lost income, such a policy can worsen their destitution.

This little kid went to market

Child labour’s effects on social welfare are the subject of a recent paper* by Jean-Marie Baland of the University of Namur and James A. Robinson of the University of California at Berkeley. In a theoretical model, the authors show that there can be two reasons for a child to work: the imperfection of the capital markets, as outlined above, in translating future earning-potential into present spending-power; and the inability of parents to make “negative” bequests to their children. If parents were able to bequeath debts to their children, they could, in effect, borrow against their offspring’s future earnings in order to pay present expenses.

Messrs Baland and Robinson acknowledge that negative bequests might be hard to implement, for both social and legal reasons. But the day when children themselves can borrow against future, education-enhanced, earnings may not be too far away. A capital market for such transactions could be established by governments or multinational organisations and could attract funds from individuals, institutions or governments. Children, or more likely parents acting on their behalf, could sign contracts promising to repay educational stipends during their working lives. Poor countries might also require assurances that signatories would use their state-funded skills at home rather than moving abroad. Such contracts already bind many state-funded scholars who study abroad.

If the investor is a government, it could recoup its investment by making adults surrender a percentage of their wages in return for earlier subsidies. But this would merely add to marginal tax rates. It would be better to demand lump-sum payments over flexible time-periods. In the United States, where loans for university students are packaged and sold as securities guaranteed by the government, much post-secondary education is already financed in this way. The system might also link subsidies to students’ performance. In this scenario, children might ease their families’ economic burdens while happily skipping off to school; and parents might encourage learning to the exclusion of all other activities.

The World Development Report discusses the problems of child labour and poor families’ limited access to financial markets on the same page, yet it fails to make a connection between the two. Instead, it highlights the successes of governments and NGOs that have tackled children’s lack of liquidity in the traditional way—by giving their families money. Government schemes in Mexico and Bangladesh, both cited in the report, have indeed enhanced school enrolment among children of “working age” by supplying money and monitoring attendance. However, an earlier study by the World Bank, which examined an NGO’s subsidy programme in Bangladesh, demonstrated that more studying does not always mean less working. Though school-attendance rates in the target group rose, fewer than one-quarter of the newly enrolled children left their jobs.

Neither unofficial nor government schemes, as they exist today, appear capable of moving all needy children from work to school. Their scope is limited by the amount of tax revenues and donations from rich countries. The wages that children earn are therefore likely to remain crucial to ensuring their families’ survival unless and until a lasting solution to the liquidity problem emerges.

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*“Is Child Labor Inefficient?”, Journal of Political Economy, August 2000.For background, see the International Labour Organization’s report on “Economic Incentives for Children and Families to Eliminate or Reduce Child Labour”. Complete the UNICEF quiz to learn more about child labour.

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