Trade adjustment and human capital investments: evidence from Indian tariff reform

This paper addresses the question about the influence of trade policy on schooling and child labor decisions in low income countries in the context of India's 1991 tariff reforms. In the 1990s, rural India experienced a dramatic increase in schooling and decline in child labour. However, these trends were attenuated in communities where employment was concentrated in industries losing tariff protection. The study investigates the impacts of trade reform's costs on schooling and work decisions of children in order to learn about the determinants of human capital investment. The study relies on India's considerable geographic diversity.

The paper suggests that this failure to follow the national trend of increasing schooling and diminishing work is associated with a failure to follow the national trend in poverty reduction. Schooling costs appear to play a large role in this relationship between poverty, schooling, and child labour. Similarly, a considerable share of India's rise in schooling and India's fall in child labour can be explained by falling poverty and therefore improving capacity to afford schooling.

The paper presents several possible channels through which the liberalised labour market could affect households’ investment in the human capital of their children:

• there is a correlation between living standards and the loss of workers’ protection due to trade liberalisation

• the child’s economic contribution to the household may be affected by the loss of protection, or the structural shifts associated with it

• the structural change in the economy may affect returns to education, which in turn will influence educational attainment

The paper notes that a better understanding of the channels influencing schooling in the context of trade adjustment may shed light on what policies might best expedite this process.

Some of the paper's main findings are:

• higher exposure to trade liberalisation is associated with slower poverty reduction

• the impact of tariffs on schooling is larger in areas with high baseline schooling costs and relative increases in poverty are associated with a rise in the share of children who neither work nor attend school

• tariff decline would lead latterly to declining literacy and thus to declining per capita expenditures

Finally, the paper concludes that trade liberalisation has likely contributed to the aggregate increases in schooling and literacy in India during the period of study. However, asymmetric incidence of the costs of these tariff declines are potentially considerable for affected individuals.