MICROFINANCE PAPER WRAP-UP: Child Labour and Schooling Responses to Access to Microcredit in Rural Bangladesh by Asadul Islam and Chongwoo Choe

Written by Asadul Islam and Chongwoo Choe, published January 2009 as Munich Personal RePEc Archive (MPRA), Paper Number 16842, 49 pages, available at http://mpra.ub.uni-muenchen.de/16842/1/schooling-child_work_Bangladesh_Asad.pdf

This study presents a statistical analysis on the adverse effects of microcredit on child labor and children’s schooling in Bangladesh. Designed to be nationally representative, it compares 2,034 households in 13 districts across 91 villages and 23 sub-districts. To decrease selection bias, the study involves a comparison of two groups: the treatment group refers to the group that received microcredit; the control group refers to those from the same villages who did not receive microcredit but are “observationally similar”.

Dr. Asadul and Dr. Chou refute the claims made by scholars that “access to credit [has] a positive effect on children’s education”, especially when given to women, who are proven to prefer spending income on their children’s health and education (Pitt and Khandker 1998; Behrman and Rosenzweig 2002). They argue that the adverse effect of microcredit on children is largely because microcredit loans require the establishment of household enterprises, which require extra labor. Since the amount of the loan is usually not large enough to cover external labor, child labor must be used. Furthermore, short repayment periods and high interest rates may also cause parents to temporarily resort to child labor. According to the authors, “while microcredit programs can alleviate poverty and contribute to rural economy in the short term, they can also result in unintended consequences of adversely affecting children’s schooling, which could exacerbate poverty in the longer term”.

The empirical findings of the study are divided into the following four sections:

1. Impact Estimates by Children’s School Age: The study finds that the adverse effect of microcredit is most significant on primary school children. Girls in primary school are particularly affected, and more so when microcredit is obtained by men. School enrolment for girls decreases by 33 percent when credit is obtained by women, compared to 41 percent when credit is obtained by men. At the secondary school level, there is still a negative impact on girls´ schooling when women obtain credit, but there is no effect when men obtain credit. The effect on boys at the secondary school age was statistically insignificant.

2. Impact Estimates by Household Income: Since participation in microcredit has a positive effect on income, using income as a variable would conflict with the very nature of this study. Therefore, to try to eliminate bias, the authors used parental education as a substitute for income, believing that increased education would have a positive correlation with increased income. The results showed that the more education parents received, the more likely it would be that their children attended school and did not work. In households in which parents only completed primary school, children’s school enrolment decreases by 29.3 percent and child labor increases by 9.7 percent.

3. Microcredit, Household Income and Child Schooling: In contrast to the findings in section two, when microcredit is given to high income households, the probability of child labor decreases and children’s schooling improves. A 10 percent increase in credit given to high-income families reduces child labor by 0.4 percent and improves schooling by 0.8 percent.

4. Impact Estimates by Land Ownership: Land ownership is used here as a symbol of wealth. In poorer households, or those with less land, microcredit decreases the probability of school enrolment for girls, but also decreases the probability of child labor for boys. In less poor households, the result is reversed, perhaps due to the greater need for boys to work on the land.

According to this study, the most vulnerable – girls, young children, the less educated and the poorest of the poor – are the most adversely affected. To decrease the necessity of households to resort to child labor, the authors suggest extending repayment periods, reducing interest rates and increasing loan sizes to allow for the employment of external labor. In addition, they propose more financing at the village level rather than the household level. Finally, they emphasize the need for other policies that directly target children’s education to complement microfinancing.

Dr. Asadul Islam, co-author of this study, is at Lecturer in the Department of Economics at Monash University in Caulfield, Australia. He received a BSS and MSS in Economics from the University of Dhaka in Dhaka, Bangladesh, an MA in Economics from the University of Saskatchewan in Saskatoon, Canada, and a PhD in Economics from Monash University. Fellow co-author, Dr. Chongwoo Choe, is a Professor in the Department of Economics at Monash University in Caulfield, Australia. He received a BA from Seoul National University in Seoul, Korea, an MA in Economics from the State University of New York, NY, and a PhD in Economics from the University of Minnesota located in Menneapolis. More information on the authors and their publications can be found at: http://www.buseco.monash.edu.au/eco/staff/index.php?list=lecturertoprofessor.

By: Stefanie Rubin, Research Assistant

Bibliography:

Behrman, J. and M. Rosenzweig (2002). “Does Increasing Women’s Schooling Raise the Schooling of the Next Generation?”, American Economic Review, 92(1): 323-334.

Pitt, M., S. Khandker, and J. Cartwright (2006). “Empowering Women with Microfinance: Evidence from Bangladesh”, Economic Development and Cultural Change, 54(4):791-831.

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