Schooling and Labor Market Consequences of School Construction

1. Schooling and Labor Market Consequences of School Construction Paper by Esther Duflo Presentation by Radha Iyengar

2. Motivation • Estimated returns to education are thought to be larger in developing countries than in industrialized countries. • Family and community background are important determinants of both schooling and labor market outcomes

3. Questions to be answered • whether investments in infrastructure can cause an increase in educational attainment • whether an increase in educational attainment causes an increase in earnings

4. The ‘Natural Experiment’ • Look at the effect building schools has on education and earnings in Indonesia • Use a major school launched by the Indonesian government launched (Sekolah Dasar INPRES) program • Between 1973–1974 and 1978–1979, more than 61,000 primary schools were constructed— an average of two schools per 1,000 children aged 5 to 14 in 1971. • Enrollment rates among children aged 7 to 12 increased from 69 percent in 1973 to 83 percent by 1978.

5. Identifying Assumption • Treatment: Intensity of school construction in a geographic area (high vs. low) • Treatment Group: Compare younger cohort (2-6) who were in school the whole time • Control Group: Compare older cohort (12-17) who were done with school by time of constructions • Worry that this is all mean reversion so have a second “falsification check” comparing the older cohort (12-17) to and even older cohort (18-24)

6. Wald Test is the Ratio of these two (Change in Earnings/ Change in Schooling)

8. Bottom Line • A school construction program takes a very long time to generate positive returns (because the costs are incurred early on, whereas the benefits are spread over a generation). • The returns generated are large. The internal rates of return range from 8.8 to 12 percent, well above the average interest rate on government debt in Indonesia during the period.

9. Major Issues #1 • Causal interpretation requires: • No omitted time-varying and region-specific effects correlated with the program. • No changes in trends for different cohorts over time • Some support from Control Experiment but • Control Experiment won’t be valid if both region-specific and cohort specific trends • Unclear what the true counterfactual trend is

10. Cohort-Specific Effects • Large changes in growth also varied by region—but it’s not clear what the overlap is here • Given this, the Returns to Education are not stable, so that the investment decision is not the same • May not be that school construction helped • May be that expected future returns changed differentially by cohorts by region and so investment increased • This wouldn’t happen in older cohorts because no large changes in growth

11. Major Issue #2 • The benefits are, to a large extent, driven by the rapid growth of Indonesia’s GDP from 1973 to 1997 • As Duflo Notes: “If the growth rate had been very low from 1973 until today, the net present value of the program would actually have been slightly negative, according to all specifications but one.”

12. External Validity • Given Indonesia’s expected increase in growth—investment in school is a good idea BUT how much growth is needed is sensitive to specification • May not be appropriate to extend to other populations