Fiscal Decentralisation, Local Institutions and Public Goods Provision: Evidence from Indonesia

43 Pages Posted: 22 Dec 2012

See all articles by Sarmistha Pal

Sarmistha Pal

University of Surrey; IZA Institute of Labor Economics

Zaki Wahhaj

University of Kent - Department of Economics; University of Namur; University of Kent - School of Economics

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Abstract

Using data from the Indonesian Family Life Surveys, this paper studies the impact of fiscal decentralisation in Indonesia on local public spending across communities with different types of local institutions. Our results provide evidence of heterogeneity in access to public goods across communities in the period prior to fiscal decentralisation; with significantly greater spending on schools and health centres in communities which observe traditional adat laws (which promote an ethic of mutual cooperation), and less spending on roads, public transport, communications etc. in communities which have a democratic electoral system. Fiscal decentralisation led to an increase in the share of spending on physical infrastructure, as well as a convergence in spending across communities with different types of local institutions.We develop a theoretical model to argue that communities which enjoy a higher level of mutual cooperation would benefit less from investment in public goods which facilitate communication and exchange with outsiders – as these improve the outside options of community members and therefore makes it more difficult to sustain intra-community cooperation. Surprisingly, investment in communications and transport infrastructure in these communities were more restrained during the period of centralised fiscal control.

Keywords: decentralisation, democratisation, mutual co-operation, social and physical infrastructure, local public spending, Indonesia

JEL Classification: D02, H41, O43

Suggested Citation

Pal, Sarmistha and Wahhaj, Zaki, Fiscal Decentralisation, Local Institutions and Public Goods Provision: Evidence from Indonesia. IZA Discussion Paper No. 7076, Available at SSRN: https://ssrn.com/abstract=2192772

Sarmistha Pal (Contact Author)

University of Surrey ( email )

Stag Hill
Guildford, England GU2 7XH
United Kingdom
01483 683995 (Phone)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Zaki Wahhaj

University of Kent - Department of Economics ( email )

Keynes College
Kent, CT2 7NP
United Kingdom

University of Namur ( email )

8 Rempart de la Vierge
Namur, 5000
Belgium

University of Kent - School of Economics ( email )

CT2 7NP
United Kingdom

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