Microfinance and education.

An NBER working paper asks, among other things, whether increasing access to capital could have negative effects on education between generations. The abstract, with relevant bit underlined:

We use an RCT to analyze the impact of microcredit on poverty reduction, child and teenage labour supply, and education. The study population consists of loan applicants to a major MFI in Bosnia who would have been rejected through regular screening. Access to credit allowed borrowers to start and expand small-scale businesses. Households that already had a business and where the borrower had more education, ran down savings, presumably to complement the loan and achieve the minimum investment amount. However, in less-educated households consumption went down. A key new finding is a substantial increase in the labor supply of children aged 16-19 year old together with a reduction in their school attendance, raising important questions about the unintended intergenerational consequences of relaxing liquidity constraints for self-employment and business creation or expansion.

Microfinance is one of those ideas that, if it were to work perfectly, could have tons of positive outcomes. But in practice, the populations who would be the target recipients of loan aid are otherwise disadvantaged in ways other than capital stock that it makes microfinance a very dangerous tool. 

From the paper: 

Beyond these results we break new ground by showing that the loans led to a large decline in school participation and an increase in labor supply of children aged 16 to 19. However, the labor supply and schooling of children below 16 was not affected. The increased labor supply of the 16-19 year olds may at first sound surprising if one believes that the loan would have alleviated a liquidity constraint, allowing children to increase schooling. However, the other force at play is the new opportunity to start or expand a business. Without enough liquidity the household will have to muster resources from elsewhere if the loan brings the business opportunity within reach. The children can wait for their pay until liquidity permits or can be paid more easily in kind. Internal labor may also be cheaper than hiring someone from the outside market either because of regulatory or supervisory costs. So there is both a price and a liquidity effect pushing in favor of internal labor and a reduction in schooling. The inefficiency can be magnified if the parents, who are the funding source for education, care more about their utility than their child’s and thus undervalue the future benefits of education relative to the value that the child would attach to it. In this case an unintended consequence of the microcredit intervention is to worsen the outcomes for children, while transferring resources to the parents. On the other hand the inefficiency is mitigated if only those children with a low return to education are pulled from school now that an employment opportunity has arisen where there was none before. However, the effect is rather large and in all likelihood one would expect future returns to education to be quite high for many of these children in an economy [Bosnia] with still very high potential for growth and catch-up with the rest of Europe.