Microfinance & child labor

I’ve seen some interestingly conflicting reports lately on the impacts of microfinance upon education.  Someone directed me to one which showed that microcredit clients were more likely to pull their children out of school to do the domestic work which parents gave up in order to run their microcredit-supported businesses, but I’ve also seen another which found that the children of microcredit clients were actually more likely to be in school, as their parents could more easily pay their school fees.  I can think of several different ways in which these elements of small businesses, children’s labor, and schooling could interact:

  • Maybe the parents who pulled their children out of school to cope with successful businesses worked far from their homes and didn’t have the time to handle both business and domestic work, while successful clients whose children stayed in school worked closer to home and were more easily able to balance the two.
  • Perhaps there’s some sort of U-shaped curve of parental income (as supported by microcredit) and the likelihood of children’s schooling.  Parents who are suddenly busier with work than previously, but are still too poor to afford to hire domestic help, may be the ones more likely to pull their children out of school – the low point of the U.  Parents whose businesses are quite successful, on the other hand, might better be able to pay for both domestic help and school fees.
  • This is probably also correlated with whether parents were successfully able to repay their loans.  There must be some exogenous shocks to parental earnings that affect both their ability to repay their loans and their financial capacity to send their kids to school – drought, for instance.  So one might find microcredit clients pulling their kids out of school for reasons unrelated to their loans.

On an unrelated note, I came across a sentence I totally loved whilst rereading Understanding Poverty recently – “these essays presage what we feel is an important new trend in the economics of poverty: a willingness to take the social and psychological environment of the poor seriously.”  This is probably the most fruitful interaction possible between qualitative and quantitative disciplines in the study of development – a genuine respect for the psychosocial lives of the poor.

Microcredit & entrepreneurship

passbookLoan repayment book, WomensTrust Microfinance, Pokuase, Ghana

I think I missed an important point in my last musings on microfinance – that ex-post savings does actually make sense if the loan is given for investment rather than consumption. So the salient factor in assessing the potential of microloans to help or harm their recipients is also connected to their intentions for the use of the loan, as well as their existing income level.

But this does come back to the broader point currently being raised by many people, about the apparent contradiction between views of the poor as necessarily innovative, and the fact that most people, rich or poor, aren’t good at being individual entrepreneurs.  I do wonder if the “poor as inherent innovators” view doesn’t suffer from some confirmation bias.  There certainly are many memorable examples of entrepreneurship born from poverty, but, as in the developed world, it seems that there’s a subset of people who are actually responsible for innovation.  The demands of living in poverty do include hard work and often creativity, but while those characteristics are also necessary for market-based entrepreneurs, they’re not by themselves sufficient.  Even investment-oriented microloans can turn into consumption-oriented ones, in practice, if their recipients don’t have adequate business strategies and market knowledge for their use.  Perhaps it’s not quite as bad at the level of larger microfinance banks with better data-gathering operations, but at the level of the small organizations at which I’ve worked, there seems to be a lot of fuzziness around the use of loans and their ultimate impacts.  I worry that this is one of the situations where a lack of data may actually end up harming people who really can’t afford to be harmed, in improperly distributing loans.

From Sen’s perspective of freedom, I suppose the ultimate question of entrepreneurship is whether self-determined employment (but perhaps a lower wage) or higher-waged corporate employment (but less career self-determination) is more conducive to personal freedom, in the end.  For the majority of people, I’m guessing it will be the latter, once you average the benefits of a higher wage over all the categories that it affects.