education expenditure. We assume that there is a fixed education budget, and compare this program to other education interventions that could have been implemented with the same resources.

Since the salary doubling had no impact on test scores of students taught by incumbent teachers, it is clear that the policy was not cost-effective as a way of improving the quality of education for current students.<sup>31</sup> Thus, the case for across-the-board teacher salary increases as a policy option for improving student learning would have to rely exclusively on longer-run impacts—the possibility that, over time, education quality could improve as higher-quality candidates enter the teaching profession. We provide suggestive estimates on the potential magnitude of this effect below.

Using data on teacher subject-knowledge test scores matched to student value-added from the data set used in this study, de Ree (2016) estimates that a 1σ increase in teacher test scores predicts a 0.175σ/year increase in their effectiveness as measured by student value-added (the estimates are from page 28 of de Ree 2016). So, if we assume that the doubling of pay attracted and led to the selection of teachers who have 1σ better subject test scores than the current stock of teachers, the extensive-margin effect would be to improve student test scores by around 0.175σ/year in steady state after all current teachers have been replaced.<sup>32</sup> Thus, in the long-run steady state, the policy may yield an increase in student test scores of 0.175σ/year through extensive-margin effects at a cost of USD 138 per student per year.<sup>33</sup> However, other salary-related interventions in developing countries have led to comparable increases in learning at much lower cost. For instance, a program that provided individual performance-based bonus pay to teachers in India achieved student test-score gains of 0.15σ/year (averaged across math and language) at an annual cost of only about USD 4 per student, including implementation costs

> 31 In contrast, several other interventions have been able to achieve substantial test-score gains for existing students in developing countries (see Glewwe and Muralidharan 2016 for a review). Thus, if the policy goal of the government was to improve learning outcomes of current students, then it is likely that one or more of these other programs could have been implemented in Indonesia with the resources spent on the salary increases and delivered greater test-score gains. 32 The assumption is not unrealistic in theory since the pay increase moved teacher salaries from the 50th to the 90th percentile of the distribution of college-graduate salaries (a pay increase of over 1σ if salaries are normally distributed). However, in practice, it is very optimistic since it assumes that the teacher selection process would also be modified to _select_ the higher-ability candidates who may be attracted to teaching by the higher pay, which was not the case in the status quo. For instance, as of 2012 (6 years after the reform), nearly 50% of recently recruited teachers (between 24-30 years of age) did not have a bachelor’s degree, despite there being no shortage of college graduates with a teaching degree, suggesting that status quo teacher hiring did not select the most qualified candidates (World Bank 2015). 33 Costs were calculated by taking the monthly certification allowance (2.11M IDR – from section IV.2), multiplying this by 12 and the average number of teachers (9.3, from Table I), and dividing by the average number of children in a school (190, from Table I), using a 9000 IDR/US dollar exchange rate from the period of the experiment (2009-2012). Because it assumes no growth in real teacher salaries over time, this is a conservative estimate of costs.

24