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We examine the evolution of educational assistance in Indonesia, following two decades of government decentralization, and its effect on education quality. Using Indonesia Family Life Survey data, we exploit as exogenous rule the variation in the implementation of government decentralization to compute difference-in-difference estimators. Indicative evidence suggests decentralization has facilitated collusion between village authorities and marginalized private schools, with substantial increases in educational assistance and financial resources, especially to religious schools. Despite dominant rent-seeking behaviour and self-interest motives, increased public resource allocation to private schools impacted positively on student achievement. Our results also emphasize the role of social norms in undermining efficient public goods allocation after decentralization.

AbstractThis paper investigates evidence on deficits in economic inclusion, focussing on the labour market in Indonesia. Increasing job polarization and an accompanying rise in earnings inequality on account of technological development and globalisation over the past few decades have augmented concerns about the attainability of governments' perennial objective of inclusive growth. However, there are circumstances in which declining or levelling earnings gaps may be more of a bane than a boon for a country's long-term economic health. Using the particularly interesting case of Indonesia, which has reduced and subsequently levelled off its earnings inequality in the midst of impressive growth, this paper studies how structural factors and labour market policies influence dynamics of inequality. The study finds evidence of a strong role of structural characteristics, which appears to indicate that reductions in earnings inequality may be more of a bane than a boon for Indonesia's long-term prosperity. The paper concludes with broader insights and a discussion on policy implications that extend beyond the Indonesian context.

AbstractThis paper explores the spatial heterogeneity in the human capital potential of Indonesia's next generation by constructing and analyzing sub-national human capital indices (HCI) for 34 provinces and 514 districts in Indonesia. The paper identifies data and methodological constraints in the construction of these sub-national indices and proposes and implements strategies to overcome these challenges. Several interesting findings emerge from the analysis. First, Indonesian's young generation can only achieve 53% of their future productivity relative to the full benchmark of health and education. Second, the variation in aggregate human capital potential across space in Indonesia is staggering: some parts of country are almost at par with countries like Vietnam and China while others have human capital levels that are comparable to Chad, Niger, and Sierra Leone. Third, differences in learning outcomes as measured by harmonized test scores account for the largest share of the variation in human capital across Indonesia, suggesting that the challenge of providing quality education remains one of the most important obstacles to equalizing opportunities for the next generation of Indonesians. And fourth, the correlation between government spending and performance on HCI at the district level appears rather weak, reinforcing conclusions reached by other recent studies that have highlighted the importance of focusing on the quality of spending. Finally, this paper also shows that Indonesia's human capital registered a modest improvement from 0.50 in 2013 to 0.53 in 2018 with stronger progress observed among the already top performing provinces.