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

Treena Wu, Maastricht Graduate School of Governance

Families in developing countries invest less in education that would be expected. This dissertation investigates whether families have a low preference for education, are confronted with low market returns or they face actual constraints to fully investing in their children aged 6 – 15. Using the Asian Financial Crisis in Indonesia as a natural experiment, this dissertation finds that there are two main constraints to human capital investment.

The first constraint is low family income and this is given that families have to finance up to 60% of their children’s entire education. While nearly all children aged 12 completed formal primary school 21% did not transition to junior high after the financial crisis. Low family income entails children shifting to lower quality alternative schooling such as non-formal schooling for child workers and home schooling. Also children tend to shift away from full time schooling and shift towards simultaneous schooling and work. However parents of higher ability children are more likely to continue investing if their children are close to completing junior high as opposed to just beginning junior high. As such, there is evidence of dynamic complementarity in educational investment.

The second constraint is inadequate state provision of school resources particularly in underdeveloped areas across the Indonesian archipelago. Disadvantaged children from underdeveloped areas then have lower educational achievement than children from areas that have high levels of economic activity. When the state introduces infrastructure such as electricity for schools and households in underdeveloped areas, this improves the children’s educational achievement as there is more time for learning activity.

Keywords: investment in education, developing countries, child workers

Venue: Minderbroedersberg 4-6, Maastricht

Date: 26 January 2011

Time: 10:00 - 12:30  CET