Sunil Jain: Trust the market

RATIONAL EXPECTATIONS

Though Dr Manmohan Singh shot to fame when he plumped for market-solutions in 1991, the irony is that this (his?) government is doing everything to supplant the market even though there's no trace the market is not functioning well. So, there's the rural employment guarantee programme, which, if it works as per plan, will raise wages to levels higher than those prevailing in the states and will therefore ensure a lower generation of non-guarantee jobs. Congress President Sonia Gandhi has asked for a ban/restriction on commodity futures as her advisors feel this is raising agricultural prices even though it is the stagnation in production (for over 30 years in the case of pulses!) that is really responsible""indeed, even the limited spread of futures trading, after a 55-year ban, has resulted in farmers earning more with trader margins falling and prices are also a lot less volatile. And, though not immediately obvious, the government's persistent refusal to allow the market to function in the case of the oil sector has resulted in a situation where the country's largest private sector refiner, Reliance Industries, has had to begin shutting down its retail outlets! The latest in this unending series of decisions is the decision to extend the ban on child labour to more areas such as households and restaurants.

Much has been said on this policy, on how it will be observed more in the breach, and how families will starve since it is unlikely the parents will get more lucrative jobs just because their children aren't allowed to work. On the other side, there are the usual articles about the inhuman conditions in which these children are made to work, stunting their growth and so on. The government, not surprisingly, has weighed in on the side of the latter set of arguments""when middle class sorts like you and I see beggars on the street, isn't our first reaction a demand that begging be banned? After all, the only other option to save our souls is to do what poor Prince Sidharth of Lumbini did when confronted with such sights.

The fact of the matter is there is no need to introduce any legislation to ban child labour as, with the growth of the economy and increase in wage levels, child labour is on the decline anyway. Data from the National Sample Survey show, the number of children below 15 who are working has declined, from 18 million in 1983 to 12 million in 1993-94 to 9.9 million in 1999-00. As a proportion of the total population, child labour fell from 10.5 per cent in 1983 to 6.3 per cent in 1993-94 and to 4.5 per cent in 1999-00, the latest year for which the details of the NSS' large sample have been released to the public. You could say that even 9.9 million children working are 9.9 million too many, but it's a declining trend.

And the reason why it is a declining trend is important, for this will show whether it will continue or not. After all, if the trend is towards child labour getting extinct on its own, any move to force the pace, by banning for instance, will only ensure that those policing the system will be able to extract some money for allowing industrial and other units to continue to employ child labour. Internationally, it has been found, Deepak Lal cites evidence in his latest book Reviving the Invisible Hand, that once per capita incomes touch $5,000, child labour disappears. This happens for two reasons. One, at higher income levels, parents can support their children. Two, as economies develop, and the demand for skilled labour grows, so does the wage premium to be got by more years of education""naturally, then, parents are willing to put in that extra effort to see their children get an education.

Another factor that ensures child labour's secular decline is the low share of such wages in family incomes. The NSS data show that the share of child labour incomes was under 1 per cent of incomes earned by all those working in the country in 1999-00, down from 2.5 per cent in 1983. The reason for this is, first, the declining share of child labour in the labour force, and, two, the very low wages for such labour""wages for the 10-15-year-olds are around a third that of the 15-59-year-olds. Even for the poor, in 1999-00, child labour income accounted for under 2 per cent of the family income. Clearly, more economic growth which will lift wage incomes will hasten this decline.

Surjit Bhalla, who has dissected the data, finds there is a significant correlation between education levels and salaries. In 1999-00, an illiterate person got a wage of Rs 39.5 per day, as compared to a high school graduate's Rs 160.6 and a college graduate's Rs 242.6. More important, the difference or the education premium has increased over the years. In 1993-94, the high school graduate earned 3.6 times as much as the illiterate (it was 4.1 in 1999-00)""given the services revolution of the past few years, the differential is sure to have shot up since.

As a result, data from Bhalla show, while private expenditure on education has grown 10.8 times from 1983 to 1999-00, this grew even faster for the bottom 40 per cent of the population. Indeed, even traditionally worse off groups like SC/STs and Muslims increased the number of years of schooling for children for this reason. For the average female child, the number of years of schooling rose from 1.91 in 1983 to 3.11 in 1999-2000, while for the SC/ST girl child this rose from 1.27 to 3.05 and from 1.62 to 2.71 for the Muslim girl child.

The market is working well, and delivering the results expected. All that the government needs to do is to let it function.

suniljain@business-standard.com