Constraints to Human Capital Investment in Developing Countries: Using the Asian Financial Crisis in Indonesia as a Natural Experiment

Abstract

ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20 Education is considered to be one of the drivers of economic growth. However, parental investment in education is lower in developing countries than in devel-oped countries. This raises the question whether parents in developing countries face low market rates of return on education or have a low preference for educa-tion, or whether they face investment constraints. This thesis aims to determine the constraints to human-capital investment in developing countries, using the financial crisis in Indonesia in the late 1990s as a natural experiment. The research determined two constraints at the primary school and junior high (SMP) levels during the crisis: (1) resource constraints in infrastructure, as meas-ured by the availability of electricity for learning in school and at home; and (2) monetary constraints, as measured by family income. Chapter 2 finds that parents used various adaptive strategies to ensure that their children continued their edu-cation during the financial crisis, including shifting them to non-formal and infor-mal schooling (including home schooling); ensuring monthly school fees were paid at the expense of other educational costs; and selecting only those children with higher abilities to continue to SMP. Chapter 3 finds that 12-year-old children who live and go to school in areas where there is electricity achieve higher test scores than children in under-developed areas, owing to the fixed placement of the national electricity grid in Indonesia. Chapter 4 finds that children who simultaneously worked and attended school during the financial crisis did not impair their human-capital accumulation as much as would have been expected; children, especially boys older than 12 years, carried out more waged work during the crisis. But the prevalence of childhood labour increases the probability of poor outcomes in the formal labour market in adulthood. Nonetheless, child apprentices continuing the traditional family trade may provide high social returns. Chapter 5 finds that reductions in family income (and, consequently, in spend-ing on education) during the financial crisis were compensated for by increased time spent on education. Parents accounted for the loss in returns from previous educational investment on the stock of human capital accumulated by the child. There was also dynamic complementarity of investment, particularly for children who were close to completing SMP but less so for those who had just started SMP.