Suddenly, out of the blue, a debate about microfinance and child labour has erupted. Why?

Underage work caused by microloans is an uncomfortable topic for the microfinance sector, given the moral panic easily associated with child labour. It’s nearly impossible for the industry to publicly make dismissive or nuanced statements on the issue. David Roodman (self-styled “impertinent inquirer“) has now stepped up to the plate, publishing a thought-provoking short essay on his blog which critiques recent moves towards – or rather: rumours of some consideration being given to the idea of – enshrining policies against child labour in the microfinance sector’s transnational self-certification schemes.

Yes indeed, what are we going to do about it?

Photo: Children’s Bureau Centennial, Creative Commons Attribution 2.0 Generic

Roodman assumes Hugh Sinclair (self-styled “microfinance heretic“) to be a driving force behind this. While I have my doubts about it being that simple, I do think that, while not a driving force, Sinclair could be a contributing factor.

Which, incidentally, brings me to my hypothesis about the actual issue of child labour. Is microfinance a driving force? Hell no. Could it be a countributing factor? Logically yes. Consider these two very simplified causal chains:

(A) 1. Microloans raise the entrepreneurial activity of families. –> 2. This allows families to raise their incomes. –> 3. Some families can afford to remove their children from work and send them to school. –> 4. Child labour is reduced.


(B) 1. Microloans raise the entrepreneurial activity of families. –> 2. This requires more family members to work. –> …

… at which point we get two possible scenarios:

(B.i) 3. This allows them to raise their incomes. –> 4. Some families can later afford to remove their children from work and send them to school. –> 5. Child labour is increased in the short run, but reduced in the medium/long run.

(B.ii) 3. This doesn’t allow them to raise their incomes. –> 4. Families cannot afford to remove their children from work and send them to school. –> 5. Child labour is increased.

Very simplistic, admittedly. But not too simplistic, as Asif Dowla’s defense of microfinance (comment #1 on the Roodman blog) shows:

After a few rounds of successful loan utilization, the parents send the children to school full-time. Because the successful use of credit eliminate [sic.] the root cause of child labor–poverty, microfinance over time will reduce the need for child labor.

Dowla (author of “The Poor Always Pay Back“, a wholesale endorsement of Grameen with a mystifyingly threatening title) even adds the twist that microfinance actually “rescues” children in Bangladesh from servitude and returns them to the home business, thus “replacing an oppressive form of child labor with a benign one”. Thus, Dowla seems to be suggesting a combination of A and B.i.

Give a microloan, rescue a child, it’s so simple, and we have a novel microfinance success story. This one even forgoes the usual minimum standard of evidence, a name and a smiling beneficiary photo; but as a “native” Dowla claims to know these facts (from the hiring or the employed side?) about underage work in Bangladesh.

Part of the problem or part of the solution?

So, does the causal chain (A) withstand scrutiny? To begin with, both chains A and B simply assume an increase in entrepreneurial activity (link 1), which is hardly a solid assumption: Karlan/Zinman in Manila found that targeted businesses shrank, Banerjee et. al. evidenced only the smallest of increases, and even John Hatch of FINCA estimates that 90 percent of loans go into consumption. But let’s assume it. Still, link 2 is invalidated by the fact that no impact study has plausibly demonstrated rising incomes thanks to microfinance, as summed up infamously by Duvendack’s “foundations of sand” and Roodman’s “zero”. Frankly, without unbiased evidence for positive impacts, we can’t follow this chain. Which, in turn, gives us no basis for believing that (3) families normally can afford to remove their children from work and send them to school, thanks to microfinance, and (4) that child labour is actually reduced.

What about chain B then? It asks who does the increased work in the family business (link 2). Here, for instance the Karlan/Zinman study found that microenterprises with loans actually dropped paid employees, but took in extra unpaid employees in female-run enterprises (both signifcantly). Logically, a small family enterprise means more family helpers, which are likely to be minors, since their opportunity cost on the labour market is smaller and they may not be in school to begin with (fees, etc.). Additionally, microloans are expensive, and free help may be the only way to make payments. Anyone with developing country experience will be aware of the myriads tiny shops and cottage industries, as well as the kids working in many of them. Microfinance funds exactly those kinds of enterprises.

Thus, chain B boils down again to the question of raised incomes. If allowing a child to work in the family enterprise allows it to contribute to a wealth increase (scenario B.i), then child labour still increases in the short run, but decreases in the long run as the same child (or its younger siblings) go to school later. However, if that income increase isn’t real (scenario B.ii), but the increased workload in the microfinance-funded enterprise still must be done by family members, child labour simply increases.

As noted, the impact evaluation literature would point to this (B.ii) as the likeliest outcome. So should we expect microfinance to actually decrease child labour and improve school attendance? Hardly. To phrase the conclusion from this carefully: it is plausible that microfinance increases child labour, but we conversely can’t expect it to decrease child labour.

Is it a problem at all?

But is this a problem? Should we be concerned? Roodman’s four “challenges” suggest that we shouldn’t be. Here are serious rebuttals to each:

  1. Roodman says that the (il)legality of child labour is a poor compass, because many of the things poor people do to survive are illegal anyway. I’ll grant that, but I’ll suggest the argument is spurious and Roodman should distinguish between sensible and unsensible laws; preventing exploitation of children by and large seems good. Also, I’ll suggest that requiring clients to adhere to the law is wise business strategy for microfinance in the long run; it avoids trouble. Sinclair’s comments rightly point to the imperialism of elevating “our” development intervention (microfinance) over “their” laws. And while the comment about “coyote loans” and “pimp finance” may be extreme, public image is a key asset for the microfinance industry, and one it’s been squandering rather recklessly of late. It would be worth remembering how cockfighting loans aroused a number of Kiva lenders; “Nimble Fingers Loans” may go down somewhat worse.
  2. Roodman doubts the ethics of telling struggling parents (or their lenders) what the right choice is, and points to child labour in erstwhile Europe and America, as well as the poor quality of schooling (for some reason he refers to a book chapter by Lant Pritchett lamenting the lack of ambition in, rather than the usefulness of, universal schooling). So: did our forefathers work as children? Yes. Is schooling in many poor communities shoddy? Yes. Does that make child labour any better? We understand the value of education better now than we did in the 18th century; some education is better than none; and compulsory education brought the breakthrough in most societies in the past. So let’s not “kick away the ladder” by justifying child labour with bad schooling and with obscure references to “free choice”.
  3. Roodman says the evidence is inconclusive. But findings like these from Bangladesh should be worrying nonetheless: “The results overwhelmingly indicate that household participation in microcredit programs has adverse effects on children‘s schooling, which are especially pronounced for girls. […] It appears that children taken out from school are more likely to work in household enterprises that are set up with microcredit than in other types of work.” (Islam/Choe: 30) I can’t rise to Roodman’s level of sophistication (sophsitry?) in questioning the econometrics of this study, and perhaps the studies paint an inconclusive picture overall. But the same applies to microfinance effectiveness overall, yet the industry still proceeds on the assumption that microfinance is useful, despite no evidence to prove it. If Roodman wants to be consistent in his agnosticism, he should call for a halt on microfinance activities in the same way as he is calling for a halt in anti-child labour regulation activities. But I haven’t seen him doing that.
  4. Roodman’s final point, about principals and agents, questioning whether microfinance institutions can actually monitor child labour, and warning against the hypocrisy of rules without enforcement, is perhaps the most serious. A ban on microfinance-funded child labour could feasibly be unenforceable. But as an ethical question: should we knowingly be giving loans which we expect to increase child labour, while calling it development, and yet do nothing? Being aware of the problem while ignoring it, even sweeping it under the rug, as opposed to trying to do something about it (and risking failure), seems a worse form of hypocrisy than the one Roodman is worried about.

So, yes, child labour being illegal is one good reason not to finance it; it’s illegal because it harms vulnerable people, instead of being some rational free contract. Yes, it’s right to tell parents to send their kids to school (and even better to give them a good reason to). Yes, we aren’t 100% sure that microfinance increases child labour, but we should be worried that it plausibly does. And finally, yes, the sector should try to do something about it; a good start perhaps being the requirement for microfinance institutions to adhere to local laws and UN conventions on the issue – why not?

Awareness is a good start

Right now this debate is about acknowledging or denying that there might be a problem. Only an acknowledged problem can be investigated and, if need be, solved; otherwise institutional blindness will prevent any action. If microfinance isn’t a driving force behind child labour, but a contributing factor, that seems a serious enough issue to warrant action.

Microfinance enthusiasts are quick to praise any positives they can find, while downplaying or ignoring negative consequences. If – and that’s a real “if” – the microfinance industry wants to do more than quick and ruthless business with the poor, it has to match self-praise with serious attempts to minimise potential harm. Binding transnational guidelines against funding enterprises which use child labour would be a start; then monitor the effectiveness of the guidelines; then improve and further develop the measures.

I’m the first one to lament the present futility and window-dressing, cosmetic, toothless nature of industry-initiated self-regulation in microfinance; where it has failed, governments have tended to step in, as microfinance practitioners should be well aware of. But at the very least, clearly stating the norms which microfinance institutions should adhere to offers a standard to hold them accountable against. Microfinance clients or social movement actors could then point to the promises given and criticise where they haven’t been kept, possibly leading to improvements.

Pragmatically, of course, the question boils down to what the kids will be doing if they aren’t working on the shop floor or the family farm: going to school? or working down a mine? (Dowla’s point being about better or worst forms of child labour). On questions of alternatives, the microfinance community and its academics usually gets caught short, seeking the solution only in more or better microfinance. Let’s not lose sight of the alternatives. Free school meals have proven very effective at improving attendance, and cash transfers at improving enrollment. Obviously, worthwhile and free primary education would be the best solution, but many countries are still far from being able to provide such education. Not exacerbating the problem with the wrong loans in the meantime seems a reasonable goal for the microfinance industry.