International trade, foreign direct investment and the phenomenon of child labor

Abstract

PurposeThe purpose of this paper is to investigate the causal links between, foreign direct investment (FDI), openness through trade, poverty, value added of agriculture sector as share of GDP, urban population and child labor by using annual data for Pakistan over the period 1970‐2003.Design/methodology/approachThe methodological framework for causality testing is a multivariate vector autoregression (VAR) model. This permits investigation of the importance of factors on the incidence of child labor in Pakistan. More generally, this study seek to establish the causal link between these factors and child labor, which might suggest important implications for eradicating child labor's strategies for Pakistan.FindingsThis study presents strong and robust evidence that in the long‐run trade openness raises the output of the exportable sector and increases the demand for child labor as well as the child‐wage. However, FDI is found to lower the incidence of child labor, indicating that because of low labor standards and a high incidence of child labor, Pakistan is not attracting a greater inflow of FDI.Practical implicationsThis study provides several implications for the policy debate on globalization and child labor and end by suggesting that rich countries should restrict the sale of goods from developing countries that lack or do not enforce child labor laws. Yet many doubt the ability of trade sanctions to eliminate child labor.Originality/valueThis could be the first ever effort in describing child labor incidence with the help of VAR technique for Pakistan.