14 Sweatshops and Child Labor: Globalization

and Human Rights

International Trade

ECON 1269
Globalization and child labor

• Did a Child Slave Pick the Cocoa for My Chocolate Bar?

• Malick Doumbia is a representative case:

o at age 14, working on his family farm, decided to try and escape poverty

o went to Ivory Coast, following rumors of money

o went with a recruiter for cocoa pickers who promised a good job

o instead, was sold to a cocoa farmer who kept him in bondage for several
years
Globalization and child labor 2

• Child labor is a declining trend worldwide (Basu, 1999).

• Even most benign forms raise concerns about lost educational opportunities.

• Child labor and international trade

o cocoa Malick tended and picked was for export

o in Ecuador, bananas export to the U.S. are often tended by child laborers

o in India, large numbers of carpets for export are produced by child labor in
distressing conditions

o in China, there are slave children in factories for export goods

Globalization and child labor 3

• All these examples lead to the natural question: Does globalization cause child
labor?

o Are consumers in the first world causing misery and destroying the lives of
children in poor countries?

o If that is the case, what should be done?

Globalization and child labor – Some theory

• We follow Edmonds and Pavcnik (2005).

o We will use a simplified version of their model to understand causal

relations.

o The model is essentially a version of the specific-factors model (Lecture 5)

o Economy can produce two goods: rice and manufactures.

o Some households in the countryside can produce rice but not manufactures.
Globalization and child labor – Some theory 2

• Some urban households can produce manufactures but not rice.

• A rural household can produce one unit of rice with one unit of labor; an urban
household can produce one unit of manufactures with one unit of labor (we can
always normalize units).

• We ignore roles of land and capital, for simplicity—they are irrelevant for our
analysis.

• We assume this is a rice-exporting country: globalization raises the domestic

.
price of rice relative to manufactures
Globalization and child labor – Some theory 3

• Each household consists of adults and children, all of whom consume rice and
manufactures, and all of whom have time available for work and leisure
(includes school attendance for children).

• There is a benevolent household head who

o makes economic choices for whole family

o has a well-defined utility function defined over consumption of all household

members
Globalization and child labor – Some theory 4

• For simplicity, assume rice and manufactures are always consumed in equal
proportions.

o Thus, we summarize consumption as G = min{R, M}, where G: goods

consumption, R: rice consumption, and M: manufactures consumption

• Then, if PR: price of rice and PM: price of manufactures, the price of a unit of
goods consumption is PG = PR + PM.

• Suppose each household has L hours of time each week to spend on work or
leisure and that the superscript C denotes children and the superscript A
denotes adults.
C A
o Thus L L L
Globalization and child labor – Some theory 5

• We assume that the household prefers to use up all adult hours for work before
using any children’s hours for work. Thus,
o if household enjoys total of L leisure hours, then only adults are working if
C
and only if LL .
C A
• If L  L , adults are working for L hours per week while children are working
A C
for L  L  L  L  L hoursperweek.

• Fig. 14.1 shows budget line for representative rural household.

Graph
Globalization and child labor – Some theory 6
For example, a household that take s no leisure can consume at
• point A, working L hours per week, producing L units of rice
per week, selling that rice to earn income of P R L per week, and
PR L C
purchasing units of goods. In this case, the children do L
PR  PM
hours of work per week.

• Given this budget line, whether there will be any child labor, and if so, how
much, will depend on preferences.
• Fig. 14.2 shows one possibility. Note how globalization shifts the budget line up
from the black line to the blue line. This moves the household from point A (no
child labor) to point B (positive child labor).
Graph
Globalization and child labor – Some theory 7
• So in this example, globalization does indeed cause child labor in the rural
household.
o The interpretation is that globalization raises the marginal value product of
time spent on the farm working, and the household takes advantage of that
by making everyone work more (including children).
• But globalization could also have the opposite effect.
o Basu and Van (1998) suggest that the majority of households direct their
children to work only when necessary to attain a minimum subsistence level
of consumption.
e.g., if minimum level of consumption is G,the household
C
head's utility function could look like U  min{G  G, L  L }.
Globalization and child labor – Some theory 8
• Indifference curves for this utility function are depicted in Fig. 14.3.
• Note that with these indifference curves, a household would never resort to
child labor if it was possible to attain the basic-needs consumption level without
it.
• Now we consider (again) the effect of globalization that raises the domestic
relative price of rice (pivoting the budget line from the black line to the blue
line).
Graph
Globalization and child labor – Some theory 9
• Now we consider (again) the effect of globalization that raises the domestic
relative price of rice (pivoting the budget line from the black line to the blue
line).
• The outcome could move from a point like A (positive child labor) to a point like
B (no child labor)
o In this case, globalization has ended child labor.
o The interpretation is that globalization makes it possible for the household to
attain the minimum consumption level without resorting to child labor, which
coincides with its preferences.
• Clearly, both possibilities are consistent with economic theory.
Globalization and child labor – Some theory 10
• What matters is the relative strength of income and substitution effects.
o The substitution effect makes the budget line pivot up, providing an incentive
to substitute away from leisure (including children’s leisure) and toward
goods production and consumption.
o The income effect provides an increased demand for leisure (including
children’s leisure), since leisure is a normal good.
o The substitution effect is dominant in Fig. 14.2.
o The income effect is dominant in Fig. 14.3.
Globalization and child labor – Some theory 11
• An additional point needs to be made here as a matter of theory: for urban
households, the mechanisms previously explained for rural households work in
the opposite direction.
o The rise in the relative price of rice pivots the budget line down.
o In consequence:
• if the substitution effect is dominant, globalization will reduce child labor;
• if the income effect is dominant, globalization will increase child labor.
• More generally, the model predicts that globalization will have different effects
on child labor in different sectors of the economy.
o If the substitution effect is dominant, child labor will be increased in export
sectors and reduced in import-competing sectors.
o If the income effect is dominant, exactly the opposite conclusion follows.
Evidence and Implications for Policy

• The Edmonds and Pavcnik (2005) study focuses on the case of Vietnam.

o Vietnamese economy has a strong competitive advantage in rice and in

labor-intensive manufactures.

o During the 1990s, it went through a rapid period of globalization and a rapid
reduction of child labor—the question is whether or not there is a causal
relation.

o The Edmonds and Pavcnik study focuses on rice exports.

Evidence and Implications for Policy 2

• In the early 1990s, the government restricted exports of rice through a system
of quotas to keep prices low for consumer.

• In the mid-to-late 1990s, the government eliminated these quotas, allowing the
domestic price to rise.

• However, rice prices did not rise uniformly in every part of the country—regions
more integrated with the world market saw a faster rise in prices than more
remote regions.

• As a result, the effects of this globalization episode can be measured cleanly.

Evidence and Implications for Policy 3

• Fig. 14.4 shows the percentage change in rice price observed in each
commune over this period plotted against the fall in child labor.
Evidence and Implications for Policy 4

• Note that in some communes, rice prices more than doubled, while in many
others the price increase was much more modest, and the price even fell in a
few communes, even by as much as half.

• This data allows the researchers to isolate the price rise itself, and therefore the
effect of globalization.

• Over the whole sample in the period 1992−98, there was a significant decline in
child labor overall, from 60 to 48%.

• Fig. 14.4 shows a positive correlation between the change in price and the
improvement in child labor.
Evidence and Implications for Policy 5

• On average, a rural commune with a 10-percentage-point higher increase in

rice price experienced a 3-percentage-point larger decline in child labor.

• Given that the average rise in rice prices was approximately 30% after
correcting for inflation, Edmonds and Pavcnik estimate that eliminating the
export quotas was responsible for approximately a 9-percentage-point
reduction in rural child labor. This is about two-thirds of the overall improvement
in child labor.

• An earlier study by the same authors found globalization was responsible for
45% of the reduction in child labor overall.
Evidence and Implications for Policy 6

• In the earlier (2005) version, the authors found that an increase in the rice price
had the effect of reducing rural child labor, but it also had the effect of
increasing urban child labor.

o In households that were net sellers of rice (i.e., they produce more rice than
they sell), child labor decreased.

o In households that were net purchasers of rice, child labor increased.

o Both of these findings are consistent with a great body of empirical work
elsewhere, suggesting that the main determinant of child labor is simply
poverty.
Evidence and Implications for Policy 7

• The same basic story emerges from Indian data in a paper by Edmonds,
Pavcnik, and Topalova (2010).

o They examine household data before and after the trade liberalization of
1991, in which Indian tariffs fell from 83 to 30%.

o Over the period, child labor rates fell sharply and school enrollment rates
rose sharply across India.

o Districts that saw a large drop in the local average tariff tended to have
significantly more modest drops in child labor and more modest increases in
school enrollment, compared with districts with smaller drops in local
average tariff.

o This finding is consistent with a model in which income effects dominate.

Bottom Line on the Child Labor Question

• Globalization seems to affect the prevalence of child labor through its effect on
household income.

• Households whose income rises tend to reduce their use of child labor, even if
globalization increases their opportunities to use child labor for profit.

• Households whose income falls tend to increase their use of child labor.

• There is a strong negative correlation between trade openness and child labor
across countries.

o However, it appears to be driven entirely by the strong positive correlation

between trade openness and incomes.

o After controlling for income per capita, the correlation between trade
openness and child labor across countries disappears.
Bottom Line on the Child Labor Question 2

• Thus the question “What effect does globalization have on child labor?” is not
separate from the question “What effect does globalization have on income?”

• This point is borne out not only in microeconomic data but also in aggregates.

• There is a strong negative correlation between trade openness and child labor
across countries.

o However, it appears to be driven entirely by the strong positive correlation

between trade openness and incomes.

o After controlling for income per capita, the correlation between trade
openness and child labor across countries disappears.
14.2 Sweatshops and Multinationals

• A sweatshop is a factory in which very poorly paid workers labor for long hours
under very poor conditions.

o Sometimes the term is reserved for factories that coerce workers or that
violate local labor laws.

o Example: Meitai Plastics & Electronics Factory in Dongguan City,

Guangdong, China.

• 2009 report by National Labor Committee (which is a labor-rights

watchdog group based in Pittsburgh).
14.2 Sweatshops and Multinationals (Example)

• 12-hour shifts seven days a week with a single day off every other week,
despite laws requiring a 40-hour work week with a worker’s right to refuse
overtime.

• One 18-hour shift required from workers once a month.

• Workers required to live in company dormitories, for which they are charged;
10−12 workers sleep in each small room; strict curfew; no real privacy; four
days out of the week workers are required to get company permission if they
wish to leave the grounds for any reason.

• Workspace unbearably hot because of the equipment and lack of ventilation;

many workers develop rashes from excessive sweating.
14.2 Sweatshops and Multinationals (Example) 2

• Any medical treatment must be paid by worker.

• Company supplies food, including a thin, watery rice gruel for breakfast.

• Payment is 76 cents per hour, or $57.19 per week.

• This factory makes keyboards for Dell, Hewlett-Packard, Lenovo, IBM, and
Microsoft.

• The relevant questions are:

o Are sweatshops a pernicious consequence of globalization?

o Should consumers refuse to buy items made in them?

o Can consumer activism make life better for the workers in them?
14.2.1 Sweatshops Arise from Poverty

• Multinational firms seeking cheap labor raise the demand for labor in low-wage
countries, thus raising wages.

• For example, consider a low-wage economy represented in Figure 14.5.

Graph
14.2.1 Sweatshops Arise from Poverty 2

• Assume this equilibrium wage is well below the poverty line for U.S.
households.

• U.S. corporations entering the economy will introduce a new source of

demand for labor, as indicated by the upward-sloping curve in Fig. 14.5.
(Employment in sweatshops is measured from the right-hand axis leftward.)

• As a result, the equilibrium moves from point A to point B, raising the wage for
all workers in this economy from wNSS to wSS.

• As a conclusion, the poverty of the workers hired in the sweatshops is not

caused by the sweatshops; rather, the sweatshops are caused by the poverty.
14.2.1 Sweatshops Arise from Poverty 3

• Think of this economy as a (mixed) specific-factors economy, with labor

perfectly mobile across sectors as in the model of Section 5.5.

o The length of the box is the total supply of labor in the economy.

o The downward-sloping curve shows the horizontal sum of the labor-demand

curves for all domestic industries.

o If foreign multinationals have not set any production facilities in this

economy, the total domestic demand for labor must equal the domestic
supply, yielding an equilibrium at point A, with a wage of wNSS.

• Also, the sweatshops reduce domestic poverty somewhat by raising wages.

14.2.1 Sweatshops Arise from Poverty 4

• Note that this analysis is not fundamentally changed by extending it to include

working conditions, worker privacy, etc.

• If the demand for workers increases, we should expect to see employers

offering a more attractive bundle.

• Wages and working conditions are poor in export-oriented factories in low-

income countries because the workers have low opportunity costs.
14.2.2 Multinationals May Be Part of the Solution

• If we agree that the deprivation associated with sweatshops is caused by the

lack of economic opportunity, it follows that the presence of sweatshops may
actually make the situation better.

• There are two ways in which this improvement can occur.

o An increase in the local demand for labor will tend to drive the market wage
up.

o Multinational firms tend to pay more than market wages.

14.2.2 Multinationals May Be Part of the Solution
2

• The first effect is difficult to confirm in the data—extensive survey by Lipsey

(2004) concludes that the evidence is inconclusive.

• The second effect is robust and well-documented (again, see Lipsey, 2004).

o The reasons for this multinational wage premium are a subject of a lively
debate.

• Maybe multinationals are able to screen for the most able workers.

• Maybe multinationals have stronger incentives to deter pilfering or quitting

and pay above-market wages to make sure employees don’t do those
things (“efficiency wage”).
14.2.2 Multinationals May Be Part of the Solution
3

• The bottom line is that the data make it clear that the introduction of

multinational firms to a labor market tends to increase average wages .

14.2.3 But There May Still Be Good Reason to
Keep the Pressure On

• Our previous conclusions don’t mean that the best solution is to let the market
work without any tending or tinkering.

• Rich-country consumers who are willing to pay a bit more in product prices
can pressure the companies to improve pay and other conditions.

o Multinational firms have proven themselves highly susceptible to pressure in

this vein.

• Seidman (2007) provides a detailed history of activist campaign.

14.2.3 But There May Still Be Good Reason to
Keep the Pressure On 2

• An interesting case is the anti-sweatshop movement in the 1990s whose

purpose was to monitor manufacturers of college-licensed merchandise and
certify them as sweatshop- and child-labor free.

o A coalition of economists called the Academic Consortium on International

Trade (ACIT) circulated a letter on July 29, 2000, arguing that the anti-
sweatshop movement may be backfiring.

o Their argument is represented in Fig. 14.6

Graph
14.2.3 But There May Still Be Good Reason to
Keep the Pressure On 3

• The equilibrium wage with sweatshops but without anti-sweatshop activism is,
as before marked as wss, with the equilibrium allocation of labor at point B.

• In this model, if the multinational sector is forced to pay a higher wage such as
w under threat of boycott by activists, then it will reduce its hiring from point B to
point C.

• The workers shed will be absorbed by the domestic employers, and so the
market wage must fall in order to induce them to hire the extra workers.

• The domestic employers will move along their labor-demand curve from B to D,
with their wage falling from wSS to wACIT. This lower wage is now received by all
workers not employed by multinationals.
14.2.3 But There May Still Be Good Reason to
Keep the Pressure On 4

• Thus, in this interpretation, sweatshop activism has helped the lucky few who
still have jobs in the multinationals but has harmed everyone else.

• Clearly, if w is high enough, workers in this economy as a whole will be hurt by

the anti-sweatshop activism.
14.2.3 But There May Still Be Good Reason to
Keep the Pressure On 5

• In practice, we don’t have much evidence on the wage effects of anti-

sweatshop activism, but the one formal case study by Harrison and Scorse
(2010) suggests that, at least in Indonesian footwear manufacturing, foreign-
owned and exporting plants in the affected areas may have actually increased
their hiring modestly in response to the activism.

o The reason behind this is not very clear, but it could be activists convinced
consumers that they could purchase in good conscience now that
monitoring was in place, increasing demand.
14.2.3 But There May Still Be Good Reason to
Keep the Pressure On 6

• In Fig. 14.6, if this allows the multinationals to sell their sneakers at a higher
price than before, that shifts the marginal-value-product of labor curve in Fig.
14.6 upward, as shown by the blue curve.

o In this case, the sweatshops increase their hiring as they increase their
wage, jumping from point B to point E.

o For this outcome to be possible, domestic employers now need to be

induced to give up some of their workers, so the domestic wage must
increase, and the domestic employers move along their labor-demand curve
from B to F.

o The new domestic wage is marked wHS (for Harrison and Scorse).
14.2.3 But There May Still Be Good Reason to
Keep the Pressure On 7

o If this indeed occurred, it implies that the Indonesian workers across the
board likely benefitted from the activism.

o At this point, our conclusions are tentative; we need a great deal of more
evidence on these questions before we can be confident that these results
are typical.
14.2.3 But There May Still Be Good Reason to
Keep the Pressure On 8

• In conclusion

o sweatshops are a symptom of poverty rather than a cause of it;

o sweatshops may actually be a part of the solution, in that any increase in

demand for workers in a low-wage labor market will tend to push wages
up somewhat;

o however, pressure on multinationals from concerned consumers can

improve matters even more.
14.3 Globalization and Human Rights More
Generally

• Effect on Democracy: The Political Influence of Multinational Firms

o There are examples of both negative and positive effects.

o A well-known case is that of mineral-extraction multinationals allegedly

colluding with host governments to silence dissent in order to smooth
mining or oil extraction operations.

• Oil companies and military dictatorship in Nigeria in the 1990s.

• Chevron allegedly lent a helicopter to the regime to attack protesters in

1998 (see, e.g., Renner, 2002, pp. 46−47).
14.3 Globalization and Human Rights More
Generally 2

• Shell recently settled a lawsuit accusing it of helping the government repress

ethnic Ogoni protests, supplying weapons, and encouraging police to kill
protesters (Usborne, 2009).

• ExxonMobil is being sued by the International Labor Rights Fund for allegedly
collaborating with the Indonesian army to murder and torture people living in
the Aceh province who protested the company’s natural gas operations there.

• Technology companies are increasingly accused of helping political repression

in countries in which they operate; e.g., Yahoo has been accused of helping the
People’s Republic of China track down at least four dissidents, who are now in
prison for online dissent.
14.3 Globalization and Human Rights More
Generally 3

• However, the influence can at times go in the other direction.

o For example, John Kamm is a former regional vice president of Occidental

Chemical Corporation, stationed in Hong Kong, and a former president of
Hong Kong’s American Chamber of Commerce. He became a full-time
human rights activist to campaign for the release of many political prisoners.

o Another example is the possibility that multinationals in South Africa under

apartheid helped foster more progressive attitudes that helped nudge the
country toward political liberalization, at least after many U.S. multinationals
adopted the voluntary code of conduct known as the Sullivan Principles
(although this is the subject of lively debate; see Seideman, 2007, for a
review).
14.3 Globalization and Human Rights More
Generally 4

• The general point is that foreign direct investment doesn’t affect a host country
by simply hiring workers and conducting activities there, but also, more subtly,
by the effect that foreign firms have on the conduct of government in the host
country.

o There is some evidence that foreign firms are on average better able to
persuade host governments to shape policy in ways beneficial to them than
domestic firms (Desbordes and Vauday, 2007).

o This can have positive or negative effects depending on intentions and

political agenda of the foreign firms in question.

o This is another area in which pressure from shareholders and consumers of

multinational firms can be decisive.
14.3.2 The Effect on Democracy: The Effect of
Trade

• Even in the absence of multinational firms, simply opening up international

trade can have substantial effects on the development of democracy.

o Acemoglou and Robinson (2005, Chapter 10) survey many ways in which
opening trade can affect the likelihood that a country will move to
democracy.

o Rosendorff (2000) provides a formal mechanism, in which income

inequality slows toward democracy, and any reduction in income inequality

will speed it up.

14.3 Globalization and Human Rights
More Generally

• In a Heckscher-Ohlin world, such as depicted in Chapter 6, countries that are

abundant in unskilled labor will see a reduction in income inequality due to the
opening of trade, while countries where unskilled labor is scarce will see an
increase.

o Under this theory, in poor economies trade is a force for democracy, while
in rich economies it works against democracy.

o Acemoglu and Robinson (2005) point out that since most rich countries are
already democratic, this theory establishes a presumption that trade is on
balance a force for democracy.
14.3 Globalization and Human Rights
More Generally 2

o There is some empirical support for this idea; e.g., Lopez-Cordova and
Meissner (2008) show that in a broad cross section of countries over a long
historical time span, higher openness to trade is correlated to a greater
propensity toward democracy.
14.3 Globalization and Human Rights
More Generally 3

• However, in individual cases the interaction between trade and democratization

can be very complex.

o Rosendorff (2000) argues that trade embargoes likely helped speed the path
toward democratization in South Africa also because they depressed the
profits of the large mining companies and other multinationals more than
unskilled wages, thus reducing income inequality.
14.3 Globalization and Human Rights
More Generally 4

o Another example is given by a recent free-trade agreement between Peru

and the U.S. that required the Peruvian government to enact decrees to
open large swathes of jungle to development by logging and energy
multinationals. To streamline the process, the decrees allowed development
to proceed in areas inhabited by indigenous people without the consent of
local indigenous authorities. After a series of violent confrontations, the
government suspended the decrees.
14.3.3 Globalization and Civil War

• Collier and Hoeffler (1998) showed a strong statistical relationship between a

country’s dependence on primary commodity exports and the probability that
the country will become embroiled in a civil war.

o Authors interpretation is that civil war in the modern age is driven by a

desire for plunder. Violence is intimately tied to globalization because the
resource in question is always an export commodity, which raises the
question of whether war might not have occurred had the world price of the
commodity been lower.
14.3.3 Globalization and Civil War 2

• Examples of civil wars driven or worsened by exportable primary commodities

are unfortunately common. See reviews by Renner (2002) and Ross (2004).

• One of the best-known cases is the war in Sierra Leone.

o 1991−2002

o Rival armies competing partly over control of diamond fields.

o Exceptionally intense violence against civilians and much recruitment of child

soldiers.

• Other known cases are the Biafran War in Nigeria in the 1970s, where control
of oil-rich territory was a central problem, and current violence in the
Democratic Republic of Congo, largely centered on control of fields rich in
coltan, a mineral used in manufacture of electronic items.
14.3.3 Globalization and Civil War 3

• Implications for trade policy

o Situation is not clear.

o In case of diamond-driven wars, one constructive response has been

banning conflict diamonds from the world market.

o Author Eve Ensler has suggested that there is a need for a labeling system
to allow consumers to be sure that they are buying “rape-free” electronic
products (Paczkowski, 2009).

o At the same time, it has been argued that the right kind of globalization can
reduce the propensity toward civil war.

o There is evidence that good overall performance in an economy reduces the

probability that it will be embroiled in a civil war.
14.3.4 A Note on Women’s Rights

• Few examples of the subtle effects that globalization can have on the status
and rights of women.

o In a number of low-income countries, labor-intensive manufacturing for

export to rich countries is predominantly an employer of women, as well as
a major force for generating economic opportunities and even a first entry
into the labor force for women. See Milner and Wright (1998), Timmerman
(2009), and Chang (2009).

o Evidence shows that as women’s place in the workforce expands, gender

gaps in social indicators such as life expectancy tend to diminish (Mammen
and Paxson, 2000)
14.3.4 A Note on Women’s Rights 2

• There is also evidence that economic openness can reduce the scope for
gender discrimination in wages.

• In general, globalization can have positive or negative effects on women’s

rights. It seems to have enhanced women’s empowerment in a number of low-
income countries by giving women employment, and to have reduced
discrimination in the U.S.—but no one would argue that the export demand for
coltan has had a positive effect on women’s rights in the Democratic Republic
of Congo.
14.4 Conclusion: Getting the Globalization You
Want

• Globalization has a myriad indirect effects on human rights, in addition to its

direct effects on economic variables such as prices and incomes.

• These indirect effects can either strengthen or weaken human rights.

• Consumers and investors can identify the ways in which trade appears to be
injurious to human rights, and use his or her power to change it.