Decentralization & Quality of Local Governance in Indonesia

Research Question
How does the impact of decentralization on local governance quality in Indonesia, especially at village level?

Indonesia Big Bang Decentralization Reform

History
Economic, social and political crisis 1997/98 Severe inter-regional inequalities A threatened national unity
East Timor independence in 1999

June 1999: first free and fair elections (legislative) August 1999: Law 22/1999 and Law 25/1999 passed Fully implemented in 2001

Indonesia Big Bang Decentralization Reform

Dimension
Fiscal (more on spending than expenditure) Administrative (function) Political (local election)
Local council & district head First direct election in 2005

Imbalanced Fiscal Decentralization

Source: Eckardt & Shah (2006) based on data of 294 Indonesias local governments in 2005

Source: Akita and Subkhan (2004)

Source: Akita and Subkhan (2004)

What have been done

Growth (Pepinsky & Wihardja 2011) --> Neutral

What have been done (cont.)

Inter-jurisdictional competition (del Granado et al. 2008
Yardstick competition and expenditure spillover effect Not tax competition

Public goods and service provision (Chowdury et al. 2009; 2010; Simatupang 2009; Skoufias et al. 2011; Sjahrir & KisKastos 2011) health, education and infrastructure
Improvement in outcome and deliveries/availability Responsiveness and preference matching increased No evidence in local capture Fiscal decentralization matters more than political decentralization

What have been done (cont.)

Corruption (Henderson & Kuncoro, 2004; 2011)Politics matters

However
Most study is using district level data Governance and political economy aspects is under-researched

Why governance?
The puzzle behind public spending & outcome
Cross country (Rajkumar & Swaroop 2008) Indonesia (Sumarto et al 2004; Suryadarma 2012)

Why governance?
The puzzle behind public spending & outcome
Cross country (Rajkumar & Swaroop 2008) Indonesia (Sumarto et al 2004; Suryadarma 2012)

Definition
the institution by which authority is exercised and public resource are managed... (de Mello & Barenstein 2001)

Why governance? (cont.)

Measurement
World Bank voice & accountability, political stability, government effectiveness, regulatory quality, rule of law, control of corruption. Political Risk Services Group corruption, bureaucratic quality, rule of law, risk of expropriation of property.

Why village?
Policy planning and implementation
Ex: Poverty program
Targeting Disbursement

Unique nature of village governance in Indonesia

Urban village (Kelurahan) Appointed Leader Rural village (Desa) Elected leader

Related works
Elected vs. Appointed Leader
Mu & Zhang (2011) public resource distribution

Election and accountability

Martinez-Bravo et al (2011) policy change in favour of voter preference re-election incentive

Leaders characteristics
More educated leaders generate higher growth (Besley 2011)

Data
Indonesia Family Life Survey (IFLS). A longitudinal socioeconomic and health survey. 4 waves:
IFLS1 (1993), IFLS2(1997), IFLS3(2000), IFLS4(2007).

Representing 83% of the population in 1997. 13 provinces from 27 provinces in 1997. 312 communities in rural and urban. IFLS1 7,224 households and 22,000 individuals. Re-contact rate above 90% in each wave. Individual household community.

Descriptive Statistics

Village leader selection methods 1997/2007

Village Fiscal Autonomy

Corruption change 2000/07

Empirical Model
GQ = f ( LSM, FA, PE, POV, X)
GQ = change in governance quality; LSM = change in leader selection method; FA = change in fiscal autonomy; PE = a group of political economy variables (voter behaviour/characteristics and leader education); POV = initial poverty rate; X = a group control variables.