Elsevier

World Development

Volume 39, Issue 10, October 2011, Pages 1808-1819
World Development

Measuring the Impact of Microfinance on Child Health Outcomes in Indonesia

https://doi.org/10.1016/j.worlddev.2011.04.009Get rights and content

Summary

Microfinance has become a staple of modern development policy as a means to facilitate anything from gender equality to growth. It can facilitate the sharing of health-related information among parents, promote the bargaining power of women in the household, aid in the development of important health-related infrastructure, and help households smooth consumption in the wake of unexpected economic shocks. Using data from the Indonesian Family Life Survey (1993–2000), we find that the presence of microfinance institutions in communities significantly improves the health of children.

Introduction

A large body of literature exists on the determinants of child health,1 but because much of the early work was limited to cross-sectional data, research on the intertemporal determinants of child health is still developing. Over time, children’s health can be disrupted in numerous ways. Household idiosyncratic shocks like prime-age adult mortality or illness lead to significant changes to household income and wealth.2 If households are unable to smooth consumption in the wake of such shocks, the negative effects on child health may be substantial. Similarly, non-idiosyncratic shocks such as drought or financial crisis can also be detrimental to children’s health.

The impact of these non-idiosyncratic, macroeconomic shocks on child health outcomes is just now beginning to be understood. Hoddinott and Kinsey (2001) find that the 1994–95 droughts in Zimbabwe significantly lowered annual growth rates for children, with the effects still present 4 years after the drought. Similarly, Yamano, Alderman, and Christiaensen (2005) find that the drought in Ethiopia from 1996 to 1997 resulted in increased rates of child stunting. Paxson and Schady (2005) report an increase of 2.5% points in the infant mortality rate for children born during the economic crisis in Peru in the late 1980s. Using panel data from Russia during its recent economic transition, Fedorov and Sahn (2005) conclude that time-varying economic determinants related to household income and macroeconomic indicators like food prices account for a relatively large amount of the variation in child growth, far more than had been previously found in studies using cross-sectional data. One implication of these studies is that macroeconomic policy has a potentially important role in determining child health outcomes.

One such policy that offers great promise is microfinance. Microfinance has become a staple of modern development policy as a means to facilitate anything from gender equality to poverty reduction (Khandker, 2005). One way that microcredit has been hypothesized to influence child health outcomes is through the development of parents’ social capital. In a recent study, Nobles and Frankenberg (2009) find that children from households with lower levels of wealth and human capital fare better when their mothers are more active participants in community organizations. The reason participation is thought to influence child health is that these informal networks provide a way for parents to circulate information about such things as nutrition and communicable diseases. In this sense, social capital in developing communities plays a similar role in the improvement of child health as formal maternal education does in more developed communities (Nobles & Frankenberg, 2009).

Another related mechanism for affecting child health is through the empowerment of women. Historically, microfinance has often been aimed specifically at increasing women’s access to credit. As Miller and Rodgers (2009) argue, anything that improves the economic well-being of women will affect household bargaining power. With greater power, women are in a better position to bargain for a greater share of household resources to be allocated toward expenditures that improve the health and well-being of children.

In addition to expanding the social capital of parents and the economic power of women, the presence of microfinance institutions in a community is likely to affect child health through more traditional mechanisms. For example, the availability of credit for entrepreneurs is likely to lead to economic diversification and wealth creation throughout the community. This increase in wealth will eventually support the development of health-related infrastructure such as sanitation and medical facilities.

Credit also provides an important tool for smoothing household consumption in the wake of unexpected shocks. In a recent article, Gertler, Levine, and Moretti (2009) investigate the importance of access to microfinance institutions in the wake of heterogeneous shocks. They find that access to credit significantly improves consumption smoothing in the wake of adult illness. Of course, credit can also help households respond to macroeconomic shocks. For example, Foster (1995) found that, compared to those without access to credit, households in Bangladesh with such access were better able to smooth household consumption following the floods of 1988. He speculates that small-scale lending programs such as microcredit may even be able to positively affect child health outcomes in the face of these kinds of macroeconomic shocks. To date, however, we know of no other research that has attempted to quantify such an effect.

The purpose of this paper is to determine whether the presence of microfinance institutions within a community affects child health outcomes. This study uses data from the Indonesian Family Life Survey (IFLS) 1993–2000. The IFLS not only collects anthropometric data on children, but it also has detailed information at the community level regarding the types of financial institutions available as well as other key infrastructure that typically come with development. In addition, because the survey itself spans the years of the Asian financial crisis and its aftermath, it provides an interesting case in which to examine the effects of changes in the presence of microfinance institutions on child health. Between 1993 and 1997, Indonesia experienced significant growth immediately preceding the crisis that started in late 1997. From 1997 through the eventual recovery, communities not only experienced large variations in income and wealth, but also in the presence of factories, sanitation, health facilities and, of course, microfinance.3 The idea is to exploit this shock-induced variation to distinguish the effects on child health due to changes in the presence of microfinance and those due to changes in other indicators associated with community development.

The organization of the paper is as follows: (1) a brief history of microfinance institutions in Indonesia is provided, including a taxonomic discussion of modern institutions and their defining characteristics; (2) the econometric model is presented with specific attention to how we address the issue of identification; (3) the data are defined and descriptive statistics for the sample are discussed; (4) results for the models are presented; and (5) relevant implications are discussed.

Section snippets

Microfinance in Indonesia

Indonesia’s microfinance industry is one of the oldest and most commercialized in the world. In this section, we provide a brief overview of the development of Indonesia’s financial system as it pertains to our focus on the types of microfinance institutions available throughout Indonesia during our sample period.

Econometric model

Consider the health, h, of the ith child, in household g, in village j at time t. Child health outcomes are commonly measured by anthropometrics like height or weight (or combinations of these). According to Strauss and Thomas (1998), height is the best long-term indicator of nutritional status in children. Moreover, height has also been shown to be correlated with productivity, wages, and long-run growth (Strauss & Thomas, 1998). For this reason, we follow the literature and use height as our

Data and summary statistics

This study uses data from the first three waves of the Indonesian Family Life Survey (IFLS). The IFLS is a longitudinal socioeconomic and health survey based on a random sample of Indonesian households. The survey collects data on individuals and their respective households and communities, including information on fertility, health, education, migration, employment, and community resources. The survey sample represents 83% of the Indonesian population living in 13 of the country’s 26

Regression results

Model 1, the benchmark model, estimates Eqn. (2) via instrumental variables. Due to the presence of heteroscedasticity, we use generalized method of moments (GMM). The benchmark model includes controls for changes in real household expenditures per person (ΔlnHHFOODPC). In all models, URBAN and ΔELECTRICITY are used as instruments for ΔSMALLMFI. First-stage regressions for each model estimated are reported in Table 7, Table 8 of the Appendix.

Models 2–5 then introduce, one-by-one, the potential

Discussion

So what can we infer about the effect of small MFIs on child health? Recall the four theoretical explanations for why the presence of MFIs might affect child health. Smaller MFIs could: (1) facilitate the acquisition of parents’ (especially mothers’) social capital, thereby increasing parents’ knowledge of nutrition and other health concerns; (2) increase the bargaining power of women, leading to a shifting of household resources toward expenditures that improve the well-being of the children;

Conclusion

While other researchers have speculated about the possible impact of microfinance on child health outcomes, this paper is the first to our knowledge to investigate the hypothesis. Ultimately, the data strongly support this link. The presence of microfinance institutions in communities has a large and positive effect on relative changes in children’s health. Sorting out this relationship, however, is not without its challenges.

The largest of these has to do with endogeneity. While we are able to

Acknowledgments

The authors gratefully acknowledge assistance from Kathleen Beegle, David Newhouse, participants at the Eastern Economics Association’s annual conference, and the insightful comments and suggestions of the referees.

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