FOREIGN CAPITAL INFLOW, FISCAL POLICIES AND INCIDENCE OF CHILD LABOUR IN A DEVELOPING ECONOMY*

Abstract

Empirical evidence suggests that the incidence of child labour taken as a whole has declined in the developing countries with economic growth due to foreign capital. But, in some high‐growth‐prone areas, the problem has been on the rise. A pertinent question is why liberalized investment policies have produced dissimilar results in different cases. The present paper is intended to provide an answer to the above question using a three‐sector general equilibrium framework with two informal sectors and a non‐traded final commodity. The paper is also designed to investigate the efficacy of an education subsidy policy and a lump‐sum tax on the richer people in controlling the problem of child labour. We find that the effects of different policies on child labour crucially hinge on the relative intensities in which child labour and adult labour are used in the two informal sectors. However, we find that on the whole a policy of subsidy on education is more effective in comparison with the policy of economic growth with foreign capital in eradicating the prevalence of the evil in the system.

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