Children's schooling in Nicaragua: What is the link between educational achievement, borrowing, and gender?

• Date: 01 August 2018
• Author: Olga Kondratjeva,Joyce J. Chen
• DOI: http://doi.org/10.1111/rode.12377
• Published date: 01 August 2018

REGULAR ARTICLE

Children’s schooling in Nicaragua: What is the link

between educational achievement, borrowing, and

gender?

Olga Kondratjeva

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Joyce J. Chen

2,3

1

Center for Social Development,

Washington University in St. Louis,

St. Louis, MO

2

Department of Agricultural,

Environmental and Development

Economics, The Ohio State University,

Columbus, OH

3

Institute of Labor Economics (IZA),

Bonn, Germany

Correspondence

Center for Social Development,

Washington University in St. Louis,

St. Loius, MO.

Email: olga.kondrat@gmail.com

Abstract

The impact of credit has been widely studied, and yet lit-

tle is known about the effect of formal versus informal

loans. In this paper, we contrast the two and their impact

on children’s schooling using longitudinal data from

Nicaragua. To address endogeneity, we utilize both

household fixed effects and locality–year fixed effects.

Our results indicate that, on average, children from bor-

rowing households fare worse than children from nonbor-

rowing households, with male borrowers having a

disproportionately negative effect on boys, and vice versa

for girls and female borrowers. Informal credit is found

to have a protective effect on school attendance, but the

effects of formal and informal credit on cumulative

schooling are found to be statistically equivalent. How-

ever, this appears to mask considerable heterogeneity

within informal borrowing.

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INTRODUCTION

The rhetoric of the early microfinance industry has put strong emphasis on investments in entrepre-

neurial activities, overlooking the broader importance of credit for the economic development of

households (Karlan & Morduch, 2009). In reality, for low-income households, credit provides

access to liquidity beyond investments in productive activities. Households with low irregular

incomes borrow frequently for many different reasons—to invest in productive activities, build

assets, accumulate large lump sums for long-term investments and life-cycle needs (education,

weddings, funerals), smooth consumption over time, and recover after emergencies (Bauchet,

DOI: 10.1111/rode.12377

Rev Dev Econ. 2018;22:1125–1145. wileyonlinelibrary.com/journal/rode ©2018 John Wiley & Sons Ltd

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Marshall, Starita, Thomas, & Yalouris 2011; Collins, Morduch, & Rutherford 2009; Matin, Hulme,

& Rutherford 2002; Todd 1996).

Credit allows resource constrained households to achieve greater economic stability and more

command over their financial lives (Collins et al., 2009; Roodman, 2012), which may lead to

improved household well-being. Conversely, inappropriate use of credit and unfavorable loan terms

can cause over-indebtedness (Schicks, 2013) and severe credit repayment difficulties, leadin g to

debt traps and deeper poverty (Roodman, 2012). While small loans can help cover households’

subsistence needs, it is unlikely that they can have a transformational impact on well-being (Baner-

jee, 2013).

Further differentiating between formal and informal credit sources provides deeper insight into

the role of credit for household well-being. More specifically, formal financial institutions—in

developed and developing countries alike—have long shied away from loans for consumption

smoothing, precisely because this use of credit generally does not increase overall household earn-

ings and often fails to generate even the funds needed for repayment. In the absence of insurance

products, households are then forced to turn to informal credit, in some cases at extremely high

interest rates or involving coercive repayment schemes. However, some informal credit—for exam-

ple, through family and friends—may have better terms even than formal loans, and households

clearly benefit, at least in the short run, from improved consumption smoothing.

Moreover, there is reason to believe that the source of credit may have differential effects on

outcomes, even holding loan terms constant. For example, in the case of education, poor house-

holds are more vulnerable to shocks (Morduch, 1994), and expenditure on children’s schooling is

commonly used to smooth other forms of consumption (Chen, 2011). Moreover, education and

future earnings are not accepted as collateral against loans (Dowla, 2011; Jacoby & Skoufias,

1997), leaving informal loans as the only source of credit to both finance and smooth schooling

expenses. Similarly, if formal credit is invested in productive activities, this may increase the

demand for household labor, with potentially adverse effects on children’s schooling (Pitt &

Khandker, 1998), despite the (positive) income effect (Islam & Choe, 2013; Maldonado &

Gonz

alez-Vega, 2008). Nonmonetary transaction costs associated with formal borrowing (e.g., time

spent traveling to financial institutions and processing new loans) may also be significan t. While

parents are gone, children may be induced to skip school, or required to engage in business or

household work. Pressure to avoid default on a loan may induce households to cut back on educa-

tional expenses or move children into income-generating activities. Conversely, “credit plus”

microfinance programs that provide informational training can alter parents’perceptions about

schooling and improve their knowledge about the benefits of education, increasing the level of

investment in children’s schooling.

Most empirical research, however, focuses on formal credit, despite the prevalence of informal

credit and its importance to households’livelihoods in developing countries.

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More specifically,

between 2011 and 2014, borrowing from a financial institution (a bank or another type of financial

institution) declined from 11.7 to 8.6 percent and borrowing from private informal lenders declined

from 7.0 to 6.5 percent, while borrowing from family and friends increased from 30.2 to 34.9 per-

cent in low-income countries (World Bank, 2012, 2015). Additionally, existing research often com-

pares borrowers utilizing formal sources with a combination of nonborrowers and borrowers

utilizing informal sources (Dalla Pellegrina, 2011). It is difficult to interpret this as a measure of

credit constraints, given large differences across regions in both access to and terms of informal

credit sources. Indeed, this could help explain the heterogeneous effects of microcredit found

throughout the literature; where the impact is small or even negative, it may be that informal credit

markets are functioning relatively well, not that broad-based access to credit is not an important

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