Does Microcredit Influence Parent’s Decision To Send A Child To School Or To Work? Evidence From Vietnamese Rural Households

Given the increased attention to microfinance and its role in reducing poverty in the developing world, it is important to consider the effects of microcredit on household decision making beyond those that affect household income and expenditure. Using three-year panel data drawn from the Vietnam Household Living Standard Surveys 2010, 2012 and 2014, this study assesses the impact of microcredit on household decisions on child schooling and child labor for rural Vietnam. Distinct from existing studies that rely on dichotomous participation dummies of child labor and schooling, this study uses average working hours per day as a proxy for child labor and schooling gap to measure the quality of child schooling. The analysis employs instrumental variable methods featured in various regression models to control for the possible endogeneity of credit and thereby identify the true effect of credit on the outcome variables. For both indicators of microcredit participation—the dichotomous participation dummy and the accumulated amount of microcredit received per household— the analysis shows that credit participation by households encourages child labor as a result of a rise the demand for child labor and lowers the quality of child schooling in households that are recipients of microcredit. More credit enables households to expand their production activities by acquiring more capital inputs and thus precipitating them to practice more child labor. More credit widens the schooling gap of children, and this undesirable effect is strongly observed for schooling gaps of more than one year. These findings raise a number of important policy issues. Microcredit programs are widely praised for their well-documented effect of raising household welfare and reducing household poverty, but what is generally ignored is the adverse effects of microcredit on child schooling and child labor. These results suggest the contribution of microfinance to the Sustainable Development Goals (SDGs), which include the reduction of both poverty and child labor, is more complicated than is generally recognized. When introducing and evaluating of microcredit programs that target the poor in developing countries, the positive income effects of microcredit must be therefore weighed against the negative child labor effects.