The Geography of Human Capital: Insights from the Subnational Human Capital Index in Indonesia

Abstract

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.