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HOW EDUCATION BREAKS the CYCLE of POVERTY: an INTER-REGIONAL STUDY of INDONESIAN HOUSEHOLDS by MASNIARITTA POHAN Sarjana Ekonomi

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HOW EDUCATION BREAKS the CYCLE of POVERTY: an INTER-REGIONAL STUDY of INDONESIAN HOUSEHOLDS by MASNIARITTA POHAN Sarjana Ekonomi HOW EDUCATION BREAKS THE CYCLE OF POVERTY: AN INTER-REGIONAL STUDY OF INDONESIAN HOUSEHOLDS By MASNIARITTA POHAN Sarjana Ekonomi Universitas Katolik Parahyangan Bandung, Indonesia 2000 Magister Sains Perencanaan dan Kebijakan Publik Universitas Indonesia Depok, Indonesia 2003 Submitted to the Faculty of the Graduate College of the Oklahoma State University in partial fulfillment of the requirements for the Degree of DOCTOR OF PHILOSOPHY May, 2013 HOW EDUCATION BREAKS THE CYCLE OF POVERTY: AN INTER-REGIONAL STUDY OF INDONESIAN HOUSEHOLDS Dissertation Approved: Dr. Jeffrey D. Vitale Dissertation Adviser Dr. Brian D. Adam Dr. Arthur L. Stoecker Dr. Keith D. Willett ii Name: MASNIARITTA POHAN Date of Degree: MAY, 2013 Title of Study: HOW EDUCATION BREAKS THE CYCLE OF POVERTY: AN INTER-REGIONAL STUDY OF INDONESIAN HOUSEHOLDS Major Field: AGRICULTURAL ECONOMICS Abstract: The positive contribution of human capital to income has long been studied and shown to be significant. This study shows the importance of public spending on education in order to accelerate growth and reduce poverty. Results suggest that government expenditure on education programs can help overcome negative family socioeconomic conditions, leading to intergenerational improvement of income. iii TABLE OF CONTENTS Chapter Page I. INTRODUCTION ......................................................................................................1 Background ..............................................................................................................1 The Global Problem of Poverty .............................................................1 Economic Growth and The Impoverished ............................................4 Income Redistribution Aspect of Human Capital .................................6 Poverty Alleviation and Indonesia’s Economy.....................................9 Study Objective ......................................................................................................11 Study Contribution .................................................................................................12 Study Organization ................................................................................................13 II. REVIEW OF LITERATURE..................................................................................15 Intergenerational Aspect of Income .......................................................................15 Intergenerational Aspect of Education and Public Spending Impact on Education .............................................................17 Intergenerational Aspect of Health and Public Spending Impact on Health ..................................................................27 Econometrics Theory Review ................................................................................35 III. METHODOLOGY ................................................................................................43 Income Estimation Model ......................................................................................43 Theoretical Model Foundation ...........................................................43 Empirical Model Foundation .............................................................48 Income Estimation Method ................................................................50 Education Estimation Model..................................................................................57 Theoretical Model Foundation ...........................................................57 Empirical Model Foundation .............................................................59 Education Estimation Method ............................................................60 Health Estimation Model .......................................................................................62 Theoretical Model Foundation ...........................................................62 Empirical Model Foundation ..............................................................64 Health Estimation Method ..................................................................65 Variable Description ..............................................................................................66 iv Chapter Page IV. FINDINGS AND MODEL INTERPRETATION ................................................68 Indonesian Household Income Estimation ............................................................68 Cohort 0 Income Estimation ................................................................68 Cohort 1 Income Estimation ................................................................71 Indonesian Household Education Estimation ........................................................74 Cohort 1 Education Attainment in 1997 ..............................................74 Cohort 1 Education Attainment in 2000 ..............................................75 Cohort 1Education Attainment in 2007 ...............................................79 Indonesian Health Estimation ................................................................................83 Cohort 1 Health Quality in 1997 ..........................................................83 Cohort 1 Health Quality in 2000 ..........................................................86 Cohort 1 Health Quality in 2007 ..........................................................87 Model Interpretation ..............................................................................................88 V. CONCLUSION ......................................................................................................92 Conclusion .............................................................................................................92 Policy Implication ..................................................................................................93 Study Limitations and Further Studies ..................................................................94 REFERENCES ............................................................................................................96 v LIST OF TABLES Table Page 1.1 Human development Index Indicators of Selected Indonesian Provinces in 2007 ................................................................................................10 3.1 Gross Regional Domestic Product ......................................................................52 3.2. Sectoral Distribution of Selected Indonesian Provinces ...................................55 3.3. Household Income Comparison to Jakarta ........................................................56 3.4. List of Investigated Variables ............................................................................67 4.1. Explanatory Variables of Individual Income Estimation...................................70 4.2. Explanatory Variables of Cohort 1 Education Attainment ................................76 4.3. Regional Cohort 1 Education Attainment in 2000 .............................................79 4.4. Cohort 1 Educational Attainment in 2007 .........................................................81 4.5. Regional Cohort 1 Educational Attainment in 2007 ..........................................82 4.6. Cohort 1 Health Quality .....................................................................................86 vi LIST OF FIGURES Figure Page 1.1. Education and National Income ...........................................................................2 1.2. Proper Sanitation (% of Population) and National Income .................................3 1.3. Population Living Below $1.25/day and National Income ..................................3 1.4. Ten Percent Highest Income Share and National Income ...................................5 1.5. The Vicious Cycle of Poverty ..............................................................................6 1.6. International Human Development Index Comparison .....................................11 3.1. Solow Growth Model .........................................................................................44 4.1. Expected Cohort 0 Income by Education Levels ...............................................70 4.2. Expected Cohort 0 Income by Health Quality ...................................................71 4.3. Expected Cohort 1 Income by Education Levels ...............................................73 4.4. Expected Cohort 1 Income by Health Quality ...................................................73 4.5. Explanatory Variables of Individual Income .....................................................74 4.6. Public Spending Role on Education ..................................................................83 4.7. Education Role in Breaking The Cycle of Poverty ............................................88 vii CHAPTER I INTRODUCTION 1.1. Background This thesis focuses on the correlation between education improvement, poverty reduction, and national economic growth. Using Indonesia as a case study, it is aimed at shedding light on policies developing countries should implement in order to promote economic performance. 1.1.1. The Global Problem of Poverty Poverty is a disadvantage to society. It constrains people’s spending ability (Attanasio and Szèkely, 2004), lowers market potential which makes investment unprofitable (Cheng and Kwan, 2000), and lowers government’s tax revenue. Government tax revenue only represents 7% of GDP in the Sub-Saharan Africa compared to 22% in industrial countries (Auriol and Warlters, 2005). Difference in lifestyle makes poverty definitions
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