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

Pal, S and Wahaaj, Z (2012) Fiscal Decentralisation, Local Institutions and Public Goods Provision: Evidence from Indonesia .

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Abstract

Access to public infrastructure is understood to be central to economic growth. Good governments that invest in essential public goods and services (e.g., transport/ communications) realise high rates of return (e.g., Easterly, 2001). Decentralization is identi�ed by many as an important policy reform to improve the delivery of public goods and services in developing countries. Since �scal decentralisa- tion provides greater decision-making power to local governments, its impact on public goods provision should, arguably, depend on the quality and nature of local institutions. The relevant local institutions should include not only the processes through which communities make collective decisions regarding public spending, but also the informal institutions which facilitate economic exchange and maintain law and order within the community. We develop a theoretical model of inter- and intra-community trade to argue that communities that have higher levels of mutual cooperation should have a stronger preference for spending on social goods, e.g. schools and health centres, as opposed to physical infrastructure. Using the Indonesian Family Life Survey community-level data from 1997 and 2007, we �nd evidence of heterogeneity in public goods spending across communities in the period prior to �scal decentralisation, with greater spending on social goods in communities which observe traditional (adat) norms, and less spending on physical infrastructure in communities with a democratic electoral system. Fiscal decentral- isation led to an increase in investments in physical infrastructure, as well as a convergence in spending across communities with di¤erent types of local institutions.

Item Type: Other
Divisions : Faculty of Arts and Social Sciences > Surrey Business School
Authors :
AuthorsEmailORCID
Pal, SUNSPECIFIEDUNSPECIFIED
Wahaaj, ZUNSPECIFIEDUNSPECIFIED
Date : December 2012
Additional Information : Posted here with permission of the publisher.
Depositing User : Symplectic Elements
Date Deposited : 11 Jan 2013 18:11
Last Modified : 09 Jun 2014 13:14
URI: http://epubs.surrey.ac.uk/id/eprint/734312

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