Financial Access or Price Premiums? A Nuanced View into Improving Farmer Welfare and Reducing Child Labor in Commodity Supply Chains

Millions of smallholder farming households engaged in the production of agricultural commodities grapple with poverty and resort to their children’s labor to boost production and enhance their living conditions. In response, governments, commodity-buying firms, micro-finance institutions, and non-profits have initiated various interventions to improve household welfare and mitigate child labor, but the effectiveness of these interventions remains uncertain. Drawing inspiration from cocoa supply chains, we propose a model that captures a farming household’s need to secure basic subsistence, alongside its decisions on borrowing, saving, consumption, and the reliance on child labor for farm production. With this model, we evaluate the effects of common financial interventions, including improved access to credit and savings and the implementation of price premiums, examining their impacts on household welfare, immediate consumption, and child labor usage. Our analysis reveals a complex landscape: improved access to credit can either decrease or inadvertently increase child labor use, depending on whether households borrow for subsistence or discretionary expenses. Conversely, enhancing access to savings invariably decreases child labor use but might simultaneously decrease household consumption. Furthermore, price premiums can effectively diminish child labor usage only when they are significantly large; otherwise, they may inadvertently incentivize increased child labor use. These results highlight the double-edged nature of financial interventions and underscore the critical need for tailoring strategies to the specific operational dynamics of farming households, ensuring interventions do not inadvertently exacerbate the issues they aim to resolve.