household resources for investing in human capital, leading to greater school enrollment (a positive _income_ effect). On the other, the same factor can generate incentives for leaving school before completing USE by increasing the opportunity cost for youth of staying in school (a _substitution_ effect).

Economic growth rates after 2004 reach around 5 percent, compared to levels of around 3 percent during the 1990s –the only exception is the year 2009, which experienced negative growth in line with most of the countries in the world (Figure 8).<sup>29</sup> Assuming that schooling is a “normal” good, the higher household resources in the 2000s due to better macro conditions would be expected to lessen the capital market restriction and increase schooling investments in general, with an expected positive effect on enrollment through an income effect.<sup>30</sup> The countries with the largest differences in income growth across decades are Peru and Ecuador, with increases in the 2000s of 2.7 and 2.4 points above rates in the 1990s, followed by Panama, Colombia, Brazil and Paraguay, all with rates above 1.5 points (Appendix A.7). The income effect would thus be expected to be greater in these cases. At the other extreme, Chile and El Salvador register lower growth rates during the 2000s –of 2.5 and 2.3 points, respectively, while in Mexico and Guatemala a similar pattern is observed with differences of about 1 point. In these cases, the income effect would be expected to reduce school enrollment.

The panel also shows that the stability of the growth rate is higher during the 2000s especially after the year 2004 –the only exception is the aforementioned sharp contraction in 2009. The yearly inflation rate is also included in the first panel of Figure 8 as a measure of the stability of the macro environment with similar patterns of considerably higher inflation during the 1990s compared to the 2000s –again with the exception of 2008. With the exceptions of the Dominican Republic and República Bolivariana de Venezuela, inflation rates are lower in the 2000s than in the 1990s, with the largest declines in Colombia, Ecuador, Honduras, Mexico, and Uruguay (Table A.7).

In a world with costless credit and insurance markets, larger instability and unexpected shocks are not likely to affect long-term investments in schooling. However, in the presence of these constraints, individuals may have to reallocate resources to absorb instability, which effectively increases the private marginal costs of schooling. If households are risk adverse and find restrictions to insure, greater uncertainty due to macro fluctuations reduces their private marginal benefits in utility terms. When physical capital assets can be used as a buffer, individuals may be able to protect long-term investments in schooling. But in their absence, the reallocation of household resources may lead to reduced schooling investment. If reductions or interruptions in schooling affect subsequent attainment, even temporary shocks can have long lasting effects. This may be the case because age is vital in the schooling process—as a child ages the opportunity cost

> 29 The first panel in Figure 8 shows the average LA yearly per capita real GDP growth rate between 1990 and the year 2012.  GDP and inflation data in Figure 8 are from the ECLAC data base accessible at http://estadisticas.cepal.org/cepalstat. The information on wages, employment and formal sector participation are from our household survey data base.

> 30 Evidence on positive association  between income and school achievement in Hanushek and Woessmann (2010).

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