Nov 8, 2005, Norbert Schady

Over the past two decades a large number of countries (Argentina, Indonesia, Mexico, Peru, and Russia) have experienced economic crises that led to sharp reductions in incomes and living standards. A broad look at the impact of macroeconomic crises on schooling and health outcomes, however, is inconclusive. For example:

The impact of crises on schooling varies:

• In Latin America, descriptive work suggests school enrollment is unresponsive to macroeconomic crises [1].
• In Indonesia the 1998 financial crisis led to decreases in enrollment rates among children aged 8 to 13, and increases in enrollment rates among children aged 14 to 19, but these changes were small, (one percentage point of enrollment). [2]
• In Côte d’Ivoireweather shocks adversely affected enrollment by 20 percentage points [3].

The impact of crises on infant mortality also varies:

• In the United Stateseconomic downturns are generally associated with decreases in infant mortality [4].
• In the former Soviet Union the collapse in income in many countries was associated with dramatic increases in adult mortality, particularly from alcoholism and suicide, but no obvious change in child health [5].
• The financial crisis of the late 1990s in Argentinadid not affect the infant mortality rate [6].
• In Mexico, the rate of mortality among young children declined more slowly during the economic crises in 1980s and 1990s [7].

Macroeconomic crises and human capital in Peru

Two recent papers carefully analyze the impact of a particularly deep economic crisis in the late 1980s on school enrollment and child health [8]. Between 1987 and 1990 the Peruvian economy collapsed: GDP per capita fell by 30 percent, inflation skyrocketed from 86 percent to 7,500 percent, and real wages in the capital city of Limafell by more than 80 percent.

The magnitude of the economic collapse makes Perua useful place in which to study the effects of crises on schooling and health outcomes. In addition, Peruhas good data on schooling from a set of Living Standards Measurement Study (LSMS) surveys and on infant mortality from Demographic and Health Surveys (DHS). These surveys were used to construct schooling and mortality estimates spanning the period before, during, and after the crisis—an important advantage over much of the earlier literature.

What effect did the macroeconomic crisis in Peruhave on schooling outcomes?

During the crisis, public spending on schooling fell by almost 50 percent. Despite this drop in spending, analysis of the LSMS surveys shows that children were more likely to be enrolled, and less likely to be working during the crisis than in other years. Children exposed to the crisis had also completed more years of schooling for their age than comparable children who were not of school age during the crisis years. These effects of the crisis—higher probability of enrollment, higher grade attainment, lower probability of being employed—affected poor and non-poor households in similar ways.

What accounts for the “positive” effect of the Peruvian crisis on schooling outcomes? To answer this question, it is useful to think about the factors that affect schooling decisions. During an economy-wide shock, employment prospects deteriorate, and wages fall. As a result, the opportunity cost of going to school decreases. On the other hand, households that are credit constrained may not be able to adequately smooth consumption. As a result, they may be forced to take children out of school and put them in the labor market. What this discussion makes clear is that the expected effect of a crisis on schooling is not clear.

In Peru, a middle-income country with high levels of school enrollment, the negative effect of the crisis on the quantity of schooling through reductions in public expenditures, contractions in household income, or a drying-up of credit seem to have been offset by the reduction in the opportunity cost of going to school. Still, when interpreting these findings there is an important caveat: Time series data on tests scores are not available in Peru. Little is therefore known about the impact of the crisis on the quality of schooling, although the decrease in public expenditures suggests that this may be a source of concern.

What effect did the macroeconomic crisis in Peruhave on infant mortality?

Analysis of time series of infant mortality constructed on the basis of retrospective information from the DHS shows that the infant mortality rate increased by 2.5 percentage points during the crisis. This implies that approximately 17,000 more children died than would have in the absence of the crisis.

To understand the effect of the crisis on infant mortality, it is once again useful to think about the channels through which the crisis could have worked. First, the crisis could have caused public health services to deteriorate. Second, it could have led to reductions in household expenditures on inputs to child health, including nutritious foods or medical care for mothers and infants. Third, the crisis could have resulted in changes in the composition of women giving birth—specifically, in a higher fraction of high-risk women giving birth. The analysis for Perusuggests that households were able to protect food expenditures during the crisis, and that the characteristics of women giving birth did not change.

On the other hand, during the crisis per capita public health spending fell by more than 50 percent, the fraction of women giving birth at home increased by about 3 percentage points, and the number of antenatal visits fell significantly. It appears that these changes in access to and use of health services help account for the large increase in infant mortality.

Policy implications

Economic crises like those faced by Latin America in the 1980s, East Asia in 1998, and many African countries on a frequent basis, clearly impose a terrible cost on poor households. Employment prospects deteriorate, incomes fall, and poverty rises. In addition, household investments in the human capital of their children may be affected.

Some of these lost investments may be irreparable—children pulled out of school may not return, other children may die or be badly malnourished. Moreover, if any negative effects of the crisis are concentrated among the poor, macroeconomic crises may contribute to the transmission of poverty across generations.

Although macroeconomic crises have the potential for very serious negative consequences for schooling and child health, a careful review of the literature suggests that broad-brush statements about their effects are unlikely to be informative. Clearly, the nature of the crisis and the government response matters a great deal. In Peru, a particularly deep economic crisis led to very sharp reductions in household incomes, and serious cut-backs in public expenditures in the social sectors. This, in turn, led to a sharp deterioration in child health, but had no visible effect on the quantity of schooling.

Social expenditures in Latin America tend to be highly procyclical. The results for Perusuggest that, at least with regard to health, there may be scope for public policies to protect households during macroeconomic crises. Reforms to budgeting processes—for example, to establish contingency funds for social expenditures during economic downturns—could be important.

In addition, there is need for further careful empirical work on the impact of specific crises on a particular set of child health and schooling outcomes. This could help develop a typology that establishes what crises are likely to have what effects on human capital, and under what circumstances. Such work could serve as the the basis for the development of appropriate responses by governments and the international development community.

NORBERT SCHADY is Senior Economist in the Development Research Group. His research interests include education, labor markets, political economy, and the impact of macroeconomic shocks on human capital outcomes. * research@worldbank.org.

References

[1] For Latin America see David De Ferranti, Guillermo E. Perry, Indermit S. Gill, and Luis Servén, Securing Our Future in a Global Economy, Washington , D.C.: World Bank, 2000.

[2] For Indonesiea see Duncan Thomas, Kathleen Beegle, Elizabeth Frankenberg, Bondan Sikoki, John Strauss, and Graciela Teruel, “Education in a Crisis,” Journal of Development Economics 74(1): 53-85, 2004.

[3] For Côte d’Ivoiresee Robert Jensen, “Agricultural Volatility and Investments in Children,” American Economic Review 90(2): 399–404, 2000.

[4] For the United Statessee Kenneth Y. Chay and Michael Greenstone, “The Impact of Air Pollution on Infant Mortality: Evidence from Geographic Variation in Pollution Shocks Induced by a Recession.” Quarterly Journal of Economics 118(3): 1121–67, 2003; and Christopher Ruhm, “Are Recessions Good for Your Health?” Quarterly Journal of Economics 115(2): 617–50, 2000.

[5] For the former Soviet Union , see Elizabeth Brainerd, “Market Reform and Mortality in Transition Economies.” World Development 26(11): 2013–27, 1998; Elizabeth Brainerd, “Economic Reform and Mortality in the Former Soviet Union: A Study of the Suicide Epidemic in the 1990s,” European Economic Review 45(4–6): 1007–19, 2001; Elizabeth Brainerd and David M. Cutler,”Autopsy of an Empire: Understanding Mortality in Russia and the Former Soviet Union,” Journal of Economic Perspectives 19(1): 107-30, 2005; and Vladimir Shkolnikov, Giovanni Cornia, David Leon, and France Mesle, “Causes of the Russian Mortality Crisis: Evidence and Interpretations,” World Development 26(11): 1995–2011, 1998.

[6] For Argentina see Graciana Rucci, “The Role of Macroeconomic Crisis on Births and Infant Health: The Argentine Case.” University of California, Los Angeles, Department of Economics, 2004.

[7] For Mexico see David M. Cutler Felicia Knaul, Rafael Lonzano, Oscar Méndez, and Beatriz Zurita, “Financial Crisis, Health Outcomes and Ageing: Mexicoin the 1980s and 1990s,” Journal of Public Economics 84(2): 279–303, 2002.

[8] For schooling in Peru see Norbert R. Schady, “Do Macroeconomic Crises Always Slow Human Capital Accumulation?” World Bank Economic Review 18(2): 131–54, 2004 (based on Policy Research Working Paper 2762); and for infant mortality see Christina Paxson and Norbert Schady, “Child Health and Economic Crisis in Peru,” World Bank Economic Review 19(2): 203–23, 2005 (based on Policy Research Working Paper 3260).