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Education in Crisis: The Impact and Lessons of the East Asian Financial Shock 1997-99

Education For All 2000 Assessment Study
By Jonathan Ablett and Ivar-André Slengesol, The World Bank
(6 January 2000 version for EFA Regional Meeting)
EXECUTIVE SUMMARY
Full Report (PDF) - Rapport francais (PDF)

When Crises Strike

With the long-term benefits of education in mind, this review asks how the East Asian financial crisis affected education, measured by indicators such as enrollment, dropout and continuation rates. It also examines how local authorities, NGOs, bilateral donors and international agencies helped mitigate the detrimental effects of the crisis. The study focuses on two countries, Indonesia and Thailand, while less thoroughly exploring three others, Korea, the Philippines and Malaysia. There are two reasons - one organizational and one practical -- for this selectivity. First, it allows for an in-depth analysis of the two countries. Second, there are, so far, few surveys on the impact of the crisis in Korea, the Philippines and Malaysia. In closing, the paper tries to draw up some lessons for responses to future crises..

The Importance of Education

Both theory and empirical evidence suggest that education - in particular, primary and lower secondary education - is vital to economic growth. "New" neo-classical theories hold that growth is driven by technological change, which is perceived as an endogenous, separate factor in the production process. It follows that education promotes economic growth through increased individual productivity spurred by the acquisition of new skills and attitudes as well as through the accumulation of knowledge itself. Many empirical surveys, such as the World Bank's East Asian Miracle (1993), indicate that investments in education yield high returns in low- and middle-income countries. Financial shocks may, however, upset the growth-encouraging physical capital-human capital balance. When export prices plummet, the stock market crashes, the currency collapses, or bonds default, people - the market as well as the government - may lose their long-term perspective. Both households and authorities look to cut their spending on items that do not reap an immediate benefit, education being in a vulnerable position. One key finding of studies that have explored the impact of financial-economic shocks on education is that the lowest income groups tend to suffer the most.

Indonesia

Economic and Social Impact

The beginning of the Indonesian part of the region wide crisis can be marked from July 21, 1997, when the Rupiah fell by 6 percent against the United States Dollar. As the financial shock grew into an economic and social crisis, GDP contracted by 13.8 percent in 1998. Inflation was rampant, reaching 77 percent in December 1998. The rise in unemployment was relatively moderate. Hardest hit, urban households experienced a 30-percent income loss between August 1997 and August 1998. Pre-crisis Education Challenges: Prior to the crisis, the key issue facing the Indonesian education system was the declining rates of primary school completion and continuation to junior secondary schools. Underlying the declining rates were increasing inefficiencies and declining school quality. Effect on Education: Survey-results on enrollment vary from a slight increase to a fall of 11%, depending on the age group. Secondary schools generally recorded more severe enrollment (and dropout) changes than primary schools. The lowest income groups and students living in urban areas experienced the sharpest drops in enrollments. Key Responses: Schools cut their fees. Mainly because of fierce inflation, government did not manage to maintain real education spending. On a positive note, preliminary results on the comprehensive Back-to-School campaign, which includes a scholarship program, are encouraging.

Thailand

Economic and Social Impact:

The Thai government was forced to float the Baht on July 2, 1997 after a series of costly but ineffective attempts to save the increasingly overvalued currency. IMF-led austerity measures reduced the external deficit but contributed to the recession. GDP shrank by 8 percent in 1998. Unemployment more than doubled between February 1997 and February 1998, from 2 to 4.8 percent. The prices increase were moderate; inflation averaged 8.6 percent in 1998. Poor, rural households suffered the biggest income losses (on average 18 percent in real terms).

Pre-Crisis Education Challenges: The most recent five-year education plan (the eighth since 1960), has moved away from access and equity considerations to a fresh emphasis on quality improvements in student scores and on curricula that reflect the needs of communities and the workforce. The other clear accent is on system-wide reform - from teacher training to policy determination.

Effect on Education:

The crisis had a moderate impact on overall enrollment. Primary enrollments remained unchanged, while pre-crisis secondary enrollment increases stagnated. World Bank analyses indicate that an increasing number of students left school at important transition points. Dropout data are somewhat ambiguous.

Key Responses:

Households increased their real spending on education. The government kept real education expenditure at constant levels throughout the crisis. Scholarship and loan programs were expanded.

Impact on Education and Responses in Korea, the Philippines and Malaysia

Korea:

Overall gross enrollment rates increased slightly between 1997 and 1998. But at the same time dropout rates in elementary schools increased sharply. Transition rates (elementary-middle-high school) remained constant at 100 percent. There was a shift from private to public education. Households largely protected education from overall expenditure cuts, but spending on private tutoring decreased sharply (by 39 percent for the lowest income group.) The government implemented range of social protection measures.

The Philippines:

Pre-crisis primary enrollment increases of roughly 3 percent slowed to 0.7 percent between 1997 and 1998. Secondary school enrollment decreased by 8 percent. between 1997 and 1998. Private schools at all levels suffered the most severe losses. The dropout ratio was negatively affected only for public secondary school students. Education's share of the total household budget increased slightly between 1997 and 1998. The government has provided, on a limited scale, scholarships and feeding programs.

Malaysia:

The crisis had a mild impact on primary and secondary education. The number of students enrolled in secondary school increased by 14 percent between 1996 and 1998. But tertiary institutions are struggling to keep up with demand from students forced to return from universities overseas. The government managed to maintain, and even increase, its education budget during the crisis. Authorities are encouraging the founding of private institutions to increase the number of higher education spaces.

Impact on Education and Responses in Korea, the Philippines and Malaysia

Accounting for some cautionary points - the mixed impact of, and responses to, the crisis; the varied levels of the education systems; the relative limited scope of the data gathered so far - we can draw the following general conclusions from the reviews of the five countries, particularly of Indonesia and Thailand:

Enrollment rates have not declined as much as feared. Secondary enrollments seem to have been more affected than primary ones;
The mitigation of these enrollment declines seem to have been achieved in part through household and school-level adjustment;
But also the governments' continued commitment to education, resulting in relatively stable education expenditures -- with the important exception of Indonesia -- also contributed to keeping up access levels;
Children from poor households have been affected more severely than children from non-poor households. One indicator is dropouts, which shows that poor families have withdrawn their children at a greater rate than their wealthier counterparts;
Some students have shifted from private to public schools, suggesting that wealthier households have felt the impact of the crisis as well;
The economic crisis has exacerbated existing difficulties in the education systems. A reoccurring problem in many countries is low transition rates; many primary students do not make it to junior secondary schools.

Some questions remain unanswered. Most important, the surveys reviewed reveal little about the direct impact on the quality of education. One can infer that quality deteriorates as resources available diminish, but there is need to measure this perceived effect more carefully.

Lessons for the Future

Despite its limitations, this review, coupled with previous experiences with education in crisis, provides a guide for current action and a useful basis for understanding the dynamics of impact of the crisis on education.
One long-term strategy is to promote the proven economic and social benefits of education. In East Asia, the shared grass-root commitment to education translated into an commendable dedication by schools, communities and families to protect schooling as the crisis broke;
Another crisis-mitigating policy is to make the education system as efficient as possible. The key is flexibility - in the case of the financial-economic shock, the system should be able to cost-effectively adjust to changing conditions. Increasing private ownership may be one way to ease the burden of governments during crises.
When economic calamity strikes, protecting the education budgets stands out as a key concern. Authorities should strive to avoid reductions and delays in salaries to teachers. When reduced budgets are unavoidable, arbitrarily cutting across the board is rarely the best solution. Rather, administrators should prioritize essential items;
Identifying the hardest-hit groups and target assistance at these is equally important. The ferocity of the East Asian crisis demonstrates the urgency with which crisis-mitigating policies and programs need to be implemented. Governments must carefully track the effects of their adjustment and austerity programs; monitoring systems should be strengthened. At the same time, authorities should not lose track of the longer-term priorities of the educational system; and,
As a final point, there is an obvious remedy: avoiding sickness altogether. Within a wider perspective, the East-Asian financial shock has spotlighted the need for effective early warning systems that allow authorities to preempt future crises. Today, in the wake of the most recent crisis, donors and governments alike are increasingly stressing the importance of transparency and good governance.