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Protecting Long Term Human Capital in a Financial Crisis: Evidence from the Indonesian Family Life Survey

By Sachet Bangia

The East Asian Financial crisis of the late nineties made its way to Indonesia in January 1998. Using longitudinal data from the Indonesian Family Life Survey (1993-2015), this paper studies the impact of the crisis on education attainment. In the midst of economic upheaval, households with liquid assets at hand, particularly gold, were better able to maintain per capita expenditures. Tracing out the impact of gold ownership on completed education, I find that the effect is most apparent on 7 to 12 year olds in Indonesia. Using within-household variation in completed education, I find that a divergence in the use of gold to protect child education: urban households direct it towards older children, while rural households do the opposite. This result is best understood by considering the effect of the crisis on opportunity costs of schooling. In urban areas, wages declined sharply, while in rural areas, the return to food production increased dramatically. Thus older children in rural areas would be more likely to exit schooling during the crisis, and consequently not benefit from gold ownership in the household. The evidence examined indicates that families sought to protect their children’s long-term human capital, but in households with fewer resources, the children suffered permanent consequences.

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Advisor: Duncan Thomas | JEL Codes: D1, I2, O0

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