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In the Wrong Place, at the Wrong Time: Long-Run Effects of Income Shocks

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In the Wrong Place, at the Wrong Time: Long-Run Effects of Income Shocks In the wrong place, at the wrong time: Long-run effects of income shocks on children's education and health outcomes Preliminary version. J´er´emieGignoux;a Marta Men´endez;b Almedina Musicc November 9, 2017 Abstract This paper analyses the effect of earthquakes that occurred in Indonesia since 1985 on children's human capital outcomes across the life cycle. To this end, we exploit the quasi- random spatial and temporal nature of earthquakes occurrence and rely on individual-level panel data from large-scale household surveys, combined with precise measures of local ground tremors obtained from a US Geological Survey database. The main finding is that children affected by an earthquake before the age of 5 complete on average 0.7 years less schooling. Overall, boys are more at disadvantage in all analysed education outcomes including cognitive function. Results also suggest that affected boys are more likely to engage in child labour which could partially explain the negative results. Affected girls on the other hand exhibit significantly lower health outcomes following an earthquake. While negative effects on children's outcomes persist, there is some differential effect by mother's education level, suggesting that adverse effects are to some extent mitigated by socio-economic status. Keywords: Indonesia; natural disaster; critical age; education; cognitive skills; health. JEL codes: D13, I25, J13, O15. aParis School of Economics bParis-Dauphine University cParis 1/Paris School of Economics 1 1 Introduction Natural disasters occur frequently around the world and have often disastrous consequences. Most recently, the earthquake in Ecuador affected several thousand people with at least 500 killed and over 4.000 injured, the 2010 floods in Pakistan affected 20 million people and the damages of the 2011 Japanese earthquake/tsunami were estimated to cost over 360 billion US Dollars. It is especially in the context of developing countries that natural disasters present an additional challenge to economic and social development. In the absence of insurance and credit markets, (poor) households in low-income countries are particularly vulnerable to such adverse shocks. If families are further forced to decrease investment in their children, natural disasters may increase poverty and its intergenerational transmission (Skoufias(2003) Caruso and Miller(2015)). This paper seeks to estimate short- and long-term effects of income shocks experienced by households following an earthquake on children's education and health measures in the con- text of Indonesia. We also shed some light on the underlying mechanisms. Our research relates to the large literature examining the consequences of different types of adverse shocks on households1. Studies analysing the effects of large-scale natural disasters generally identify negative effects on children's health and education outcomes (Bustelo et al.(2012); Jensen (2000); Cuaresma(2010)). However, considerably less is know about the persistence of these effects as well as the main channels that lead to the negative effects. One exception is Caruso and Miller(2015) who identify negative long-term effects of earthquakes in Peru and provide evidence for the intergenerational transmission of the shock. Using the same dataset Gignoux and Men´endez(2016) analysed the short- and long-run economic consequences of earthquakes for households in rural Indonesia identifying short-term welfare losses, a recovery in the medium run and even welfare gains in the long run (6 to 12 years after the earthquake). The rationale for this research paper stems from the fact that welfare is multi-dimensional. When aid and relief efforts can help recover the reparable damage in terms of assets and income, the loss in human capital, if for example a child is taken out of school following an income shock, may be irreversible. This paper contributes to the literature on the effects of natural disasters in several dimensions. First, we provide empirical evidence of earthquake exposure effects on children's education and 1For economic crises, see for example (Stillman and Thomas(2008); Thomas et al.(2004)); unanticipated weather shocks (Maccini and Yang(2009)); or destructions by war (Akresh et al. (2012a); Akresh et al.(2012b)). 2 health outcomes both in the short- and in the long-term by analysing a wide range of outcome variables (enrolment, grade repetition, dropout probability, school testscore results, cognitive function, probability to work for wage, health measures and educational attainment in years). As such, we contribute to the rising literature on the role of income on children's development (Akee et al.(2010); Baird et al.(2011); Dahl and Lochner(2012); Himaz(2008)). We also investigate whether some periods of childhood appear to be more critical i.e. long lasting than others2. Second, our data allows us to rely on an objective earthquake measure based on geological data providing information on intensity levels and exact location of earthquakes in Indonesia. The geological data is merged with the five waves of the Indonesian Family Life Surveys (1993, 1997, 2000, 2007 and 2014)3 that follow a panel of individuals from early ages into adulthood. Third, we explore dimensions of the underlying mechanisms that lead to the negative effects. When a household experiences a negative income shock there are two poten- tial effects that could affect investment in boys' and girls' schooling. First, a transitory shock affects household income and this will force the household to reduce its current consumption, such as food or school expenditures. Second, in periods of transitory shocks, households often look for alternative income generating activities and therefore, one coping strategy is to rely on child labor. Given that earthquakes are to a large extent exogenous, the main identification strategy consists in applying a simple difference-in-difference model comparing affected and non-affected children in the same age group over time while controlling for some observables. Results show that earthquakes negatively affect children's education and health outcomes with some heterogeneity by area as well as gender. The main finding is that children that have expe- rienced an earthquake have on average lower educational attainments in the long-run. Children that experienced an earthquake at age 0-5 complete on average 0.7 years less schooling com- pared to children that did not experience an earthquake in that age group. Children already enrolled in primary school (age 6-12) at the time when an earthquake occurred also experi- ence negative effects on educational attainment although weaker than the younger cohort. For children enrolled in secondary school (age 13-17), dropout rates are high and they have on average 0.6 years less schooling. Interestingly, boys' educational attainment is more strongly negatively affected than girls'. Boys have on average 0.8 years less schooling compared to 0.6 years of less schooling for girls when the earthquake occurred at age 0-5. When an earthquake 2Cunha et al.(2006) elaborate the concept of critical periods, which emphasizes that some inputs in the production of human capital are consequential at some periods but not at others. 3In this version, earthquakes that occurred between 2007 and 2014 are based on the sub- jective reporting in the IFLS 2014 module. 3 occurred at primary school age, boys have 0.5 less years of schooling while there is no effect on girls. As for secondary school level (age 13-17), earthquakes cause boys to have 0.7 less years of schooling while it is 0.5 years of less schooling less for girls. Short-term effects i.e. an earthquake occurred up to three years ago, reveal that affected children are less likely to be enrolled in school. Again, it is the boys that are more affected. Earthquake effects are stronger at the secondary school level than for the children at primary school level. On average, a child that has experienced an earthquake up to three years be- fore, has a 3 percentage point lower probability of being enrolled in secondary education. In addition, children that have experienced an earthquake show significantly weaker results on a National School Test (taken at the end of primary school) with 5.5 less points for boys and 2.7 less points for girls (the average being at about 25 points for the full sample). A disadvantage of the national test is that only enrolled children are tested. Therefore, we also analyse cogni- tive test results specifically prepared for the IFLS. The strongest negative effect concerns the rural sample: children that have experienced an earthquake have a score of 10 % below the group mean. While boys are at disadvantage in all observed education outcomes, girls that were exposed to an earthquake are at disadvantage in terms of health outcomes, measured by an height-for-age z score. Girls have a height-for-age z score that is 15% below the group mean. Boys' health outcomes are not affected. An exploration of the potential mechanisms reveal that boys that experience an earthquake at secondary school level (age 13-17) are more likely to drop out of school and engage in work for wage which could partly explain their lower educational attainment in the long-run. Results also suggest that an educated mother can have a mitigating effect on the outcomes of children. This is in line with other related papers such as evidence provided by Andrabi et al.(2012) in the context of post-earthquake Pakistan where children's human capital losses were protected if they lived with a mother that had completed secondary school. The paper is organised as follows. Section 2 describes the context and data and section 3 describes the empirical model. Section 4 presents preliminary results and section 5 discusses mechanisms. Section 6 concludes. 2 Context and data Indonesia is the world's fourth most populous country.
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