The effects of trade liberalisation on schooling in India

Eric Edmonds, Nina Pavcnik, 28 May 2008

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India has experienced a substantial economic boom over the last twenty years. Associated with this economic expansion has been a dramatic increase in schooling attendance. Less than half of rural children age ten to fourteen attended school in 1983. By 2000, nearly three out of four were in school. Many factors have influenced India's economic growth and the concurrent increase in schooling. India's radical restructuring of its trade policy, including the August 1991 tariff reductions, have likely played a role in this boom.

Prior to the 1991 reforms, average tariff rates in India exceeded 80 percent. The August 1991 tariff reforms were agreed to by the Indian government as a part of an IMF stabilisation package, following decades of tariff policy stagnation. The reforms reduced the average tariff to 30 percent by 1997 and reduced the large dispersion of tariff rates across industries. Non-tariff barriers to trade, such as import licenses, were also largely eliminated, albeit with some delay. Declining tariffs and increased international competition likely benefited Indian households through lower prices, improved quality and variety of goods and inputs, and increased specialisation of production.

However, the benefits of trade reform were not equally distributed across India. A recent study by Petia Topalova (2005) of the International Monetary Fund documents that Indian communities with a concentration of industries that lost protection have experienced smaller declines in poverty than the national trend.

Why would communities with a concentration of industries losing tariff protection not experience poverty declines as large as experienced elsewhere? There is an adjustment process that occurs with the loss of tariff protection, and adjustment may take time. Topalova's study documents that workers in industries that experienced larger declines in tariffs observed declines in their relative wages, and it appears that adults in affected communities do not experience the same increases in income as experienced in communities better positioned to take advantage of the tariff declines. Patterns of trade adjustment similar to India have documented in countries as diverse as Mexico and Morocco.

Trade liberalisation, poverty, and schooling

The trade adjustment process appears to have affected the education of children who were school-age during the adjustment period. In India, the schooling and literacy of school-age children appears to have been attenuated in areas with a greater concentration of industries that lost protection relative to other parts of India.

Nilgiri district in the Indian state of Tamil Nadu is an interesting example. Prior to the passage of the 1991 tariff reforms, employment in rural Nilgiri was heavily concentrated in tea. In 1991, forty-seven percent of the employed population in rural Nilgiri was directly involved in tea cultivation and another eleven percent of the employed population was in closely related industries. The 1991 reforms reduced tariffs on imported tea from eighty to twenty-four percent in 1997. While poverty declined across almost all of rural India in the 1990s, the fraction of the population living in poverty in Nilgiri actually increased eleven percent and schooling attendance declined by fifteen percent.

Many other changes may have occurred in Nilgiri during this period besides the decline in tariff protection on tea. However, across Indian districts, we see a pattern similar to what the Nilgiri example suggests. Places where employment was more concentrated in heavily protected industries have not experienced the same declines in poverty as elsewhere in India. They also have not experienced the same increases in schooling. Importantly, this association between tariff changes, schooling, and poverty does not seem to be explained by changes in other aspects of economic or education policy. It does not appear to be due to pre-existing time trends in schooling or poverty nor the out-migration of more educated and wealthier individuals from areas where heavily protected industries were concentrated.

In communities with concentrations of industries losing protection, schooling increases lagging behind the national average seem due to the relationship between poverty and tariff reductions. Schooling improvements might be attenuated if the returns to schooling decline in affected communities or if more lucrative employment opportunities become available to children. Neither appears to be case in the present context. If anything, returns to education may be rising in communities losing protection more than in other communities. Some children work more, but this work is largely by girls in household domestic chores. Illiterate adult males and women, two groups who are often substitutes for child labour, do not appear to be working substantially more. Interestingly, far more often than working in the formal labour market, children who do not attend school appear to combine that lack of schooling with a lack of work.

Schooling costs

Why would children not work if poverty is an important reason that they are not attending school? Many writers document the low wages paid to children. While some assert this reflects discrimination against children it may also owe to the fact that children are not very productive workers. The economic returns to working might be minimal, but schooling is expensive. One recent study put direct schooling costs for one child as seven percent of annual income for the poorest decile of the Indian population. Importantly, these schooling costs are concentrated in certain times of the year. Hence, poor households who have difficulty borrowing and saving may see the child's most important economic contribution as the avoidance of schooling costs.

In fact, it appears that the effects of Indian tariff reforms on schooling are smallest in districts where schooling is less costly. Imagine two communities with identical concentrations of the same industries that lost protection. In the community located in a state with school feeding programs, girl scholarships, and overall lower schooling costs, the adjustment process appears to have no impact on schooling. That is, schooling costs appear to be the reason why there is a link between poverty, schooling, and Indian tariff reform.

Conclusions

Because the Indian tariff reforms appear to affect schooling principally through their effect on local poverty rates, it is possible to extrapolate from the Indian tariff reductions to gauge how important poverty reduction has been in driving India's rise in schooling. It appears that falling poverty can account for half of the increase in schooling that has occurred in India over the 1990s. The remaining growth in schooling may owe to changes in schooling costs, increases in perceived returns to education, or changes elsewhere in the economy in the economic opportunities to children.

There are two lessons from this study of Indian tariff reforms that are important for policy. First, in the context of trade liberalisations and opening to international competition, it is not just labour directly employed in protected industries that is affected. The family as a whole should be considered and helped to cope with trade adjustment. The children studied herein, whose schooling is attenuated because they were at critical schooling ages while their communities underwent adjustment, will be affected throughout their lives. Ten years after the tariff reforms started, children of school-age at the time of reforms and living in affected communities have reduced primary school completion rates and diminished literacy relative to children living in communities that were only exposed to the positive effects of trade reform. The effects of a lack of education and illiteracy add up over a lifetime. One reasonable guess is those children of school-age in communities negatively affected by the reforms will experience forty-three percent less lifetime consumption than children in communities that only benefitted from the reforms.

A second lesson from the Indian example is that it might be relatively inexpensive to break the link between a lack of schooling and poverty. Schooling costs might make schooling expensive relative to other things that the household consumes, but in the Indian example, the foregone consumption attributable to those costs seems far more important. Policies that make schooling more affordable or truly free can help break the link between poverty and schooling, perhaps giving poor families a new capacity to help break out of poverty itself.

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Topics: Education, Poverty and income inequality
Tags: educational attainment, India, Poverty, tariff reforms, trade liberalisation

Associate Professor of Economics at Dartmouth College and Director of the Child Labor Network at IZA.

Associate Professor at Dartmouth College and CEPR Research Affiliate

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