Could Social Impact Bonds Fight Slavery?

Social Impact Bonds as an effective way to tackle the age-old problem of bonded labour in India.


By Dallin Van Leuven, 20th April, 2015 

To pay off a family debt of only $50, 13-year-old Roghini was “mortgaged” to a family that made matchboxes in their home. Paid only 30 cents for every 1,500 boxes she made, Roghini worked alongside 20 other children for 11 hours a day just to try and earn enough to eat—though she often went hungry. The abusive treatment she received drove Roghini into such a deep depression that she tried to end her own life. Finally, three years after she was sold into slavery, a local group was able to pay off the debt and free her.

Millions of men, women, and children are working in India under similar conditions. India’s justice system has tried to free them for decades, to no avail. New strategies are needed where politicians and judges have failed. It is time for investors to step up.

Bonded labour is rooted in finance, after all. In this exploitative practice, a person incurs a debt by taking out a loan. Commonly, these loans are for weddings, medical care, or purchasing land. The borrower is subsequently paid little or no wages so that paying off the loan is impossible. The debt, moreover, can be packaged and sold to others.

Oftentimes, victims of bonded labour are physically penned or abused. They can be stuck in this trap for generations, not knowing that the predatory arrangement is illegal. Despite being outlawed in both the Constitution and the Bonded Labour System (Abolition) Act of 1976, enforcement has been poor.

Even gauging the size of the problem has been impossible. Current estimates vary widely, from individual states reporting that bonded labour does not exist to estimates in 2007 that 65 million children and adults—nearly 6% of India’s population—were forced labourers. Many organizations, such as Human Rights Watch, argue that the number is only increasing.

The Supreme Court of India has sought to improve reporting and enforcement. In the case of Neeraja Chaudhary v. State of Madhya Pradesh (1984), the Supreme Court ruled that “[i]t is the plainest requirement of Articles 21 and 23 of the Constitution that bonded labourers must be identified and released and on release, they must be suitably rehabilitated.” In 1995, the court ordered 13 states to report on the incidence of bonded labour, but only received affidavits claiming that no bonded labour occurred within their respective jurisdictions.

The persistence of the bonded labour system is as much a story about the powerlessness of the Supreme Court to tackle the issue as it is about the ineffectiveness of local law enforcement. In 1997, in another bonded labour case, the Supreme Court entrusted the National Human Rights Commission (NHRC) to monitor the implementation of the law. R. V. Pillai, the former Secretary General of the NHRC said that the enforcement problem is “just a matter of people not doing their work.” For example, the Bonded Labour System (Abolition) Act directs the formation of vigilance committees—which would include a variety of persons from local government, developmental and financial agencies, and the traditionally “lower castes”—to oversee, advise, and properly record anti-bonded labour efforts and provide for the rehabilitation of victims. To date, however, few of these committees have been mustered.

The Ministry of Labour does claim to have identified and released some 285,000 bonded labourers between the passage of the bill in 1976 to 31 March 2004 and to have given financial compensation to roughly 265,000 of them. This appears, however, to be a meager number over almost 30 years. Twelve of the country’s 28 states didn’t report at all. And even these freed labourers, who usually lack education or substantial personal assets, often fall back in the bonded trap. The 20,000 rupees mandated by law to be given to the freed workers labourers (around 332 USD­­), is hardly enough.

But if the answers cannot come from public officials, where will they come from? Rajasthan, India’s largest state, may offer a solution.

There, local and international organizations are teaming up to make an impact on another of India’s resilient problems: the education of girls. In the world’s first Development Impact Bond, an independent grant-making foundation raised 238,000 USD to fund an Indian-based non-governmental organization to work on retaining an extra 10,000 girls in school and expanding services for 20,000 children. Managed by an intermediary, the Development Impact Bond promises a return to investors if the organization is able to meet its goals within the three-year timeframe (paid for by an independent investment fund). In a country where 40 percent of girls do not reach the fifth grade, this initiative seeks to make an impact on a persistent social problem.

This Development Impact Bond is a form of a new kind of social investment that is beginning to gain momentum across the world, often called Social Impact Bonds. These performance-based investment schemes reward private firms for demonstrating success with innovative solutions to public problems, which often result in long-term public savings. Belgium has launched a Social Impact Bond to try and increase the integration and job success of recent migrants. In the U.S., the largest Social Impact Bond in the country—between Massachusetts and a nonprofit named Roca—aims to reduce the recidivism rate of former inmates by 40%.

How could Social Impact Bonds play an important role in ending the practice of bonded labour in India? Through their implementation, organizations could be incentivized and empowered to increase awareness of the problem, identify victims, and appeal for their release. Perpetrators of bonded labour would be liable to prosecution. Furthermore, these organizations can help those liberated organize in ways that would help them avoid re-victimization and engage in profitable economic activities.

Organizations, financed by Social Impact Bonds, could also improve the outcomes of former bonded labourers by helping them gain assets and begin their own commercial enterprises. A report on bonded labour in India by the International Labour Organization cites examples of such initiatives. In one such case, former bonded labourers from stone quarries in Pudukottai district were organized into co-ops and given their own quarrying contracts. Under Indian regulations, freed bonded labourers are even given priority in a variety of government programs, including the distribution of public lands. The workers pooled their rehabilitation money together to purchase equipment.

There are plenty of local and international organizations that would be willing to work on this issue. A pilot program, such as the one in Rajasthan, could illustrate the effectiveness of this model on a smaller scale before expanding to other areas in India or South Asia (Bangladesh, Pakistan, and Nepal also have significant populations of bonded labourers).

U.S. Senators Bob Corker and Robert Menendez of the Foreign Relations Committee announced a bipartisan measure to raise 1.5 billion USD to combat modern slavery (before Menendez stepped aside due to his own legal woes). The fund, raised with the help of contributions from a variety of private and international donors, would fund programs that have a demonstrable effect on the practices of forced labour and human trafficking. Social impact bonds, like the one proposed here, might be an appropriate place to start.

The drafters of India’s Constitution, along with prime ministers, parliamentarians, and Supreme Court justices have all tried to bring about an end to the crime of bonded labour for generations. However, they have confronted deep cultural norms, corruption, limited budgets, and ineffectual local officials, which have proved that the problem is too large and complex to eradicate through words and legislation alone. Innovative strategies, such as Social Impact Bonds, could prove to be a 21st century solution to an age-old problem.­­

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