School of Economics

2012 Discussion Papers


School of Economics Discussion Paper 12/16

December 2012


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

Sarmistha Pal and Zaki Wahhaj
University of Surrey and University of Kent



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 cooper-ation 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.

JEL Classification: D02, H41, O43


Keywords: Decentralisation; Democratisation; Mutual co-operation; Social and physical infrastructure; Local public spending; Indonesia


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