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Evaluating fiscal equalization in Indonesia

Author

Listed:
  • Hofman, Bert
  • Kadjatmiko
  • Kaiser, Kai
  • Suharnoko Sjahrir, Bambang
Abstract
This paper presents a methodology to evaluate fiscal decentralization focusing on the potential mis-targeting of intergovernmental fiscal equalization transfers. The approach builds on an explicit comparison and the summary measurement of different (horizontal) allocation distributions across states or localities. Whereas formula-based fiscal transfers have the merit of being transparent and promoting revenue predictability in fiscal decentralization, in practice, two challenges emerge: (1) What are the appropriate formula designs given the sub-national data constraints evident in most decentralizing developing countries? and (2) How costly in terms of mis-targeting to the presumed expenditure needs and fiscal capacity are deviations from these types of benchmark formulas (for example, due to historical factors or the need to meet establishment costs such as civil service wages)? The authors illustrate this approach by assessing Indonesia's evolving intergovernmental fiscal system instituted in the 2001 Big Bang decentralization. The discussion comes against Indonesia's recent policy decision to fully fund sub-national civil servant wages as part of the base general allocation grant (DAU) transfers, raising questions about both incentive effects for local governments and potential mis-targeting. The authors identify potential efficiency losses from the DAU's horizontal misallocation from half a dozen alternative scenarios found in the policy dialogue, ranging from 9 to 30 percent-on the order of US$ 3.9 billion-of the overall annual size of this large intergovernmental transfer. The scale of these tradeoffs highlights the importance of intergovernmental transfers in more general debates in public finance for decentralized countries.

Suggested Citation

  • Hofman, Bert & Kadjatmiko & Kaiser, Kai & Suharnoko Sjahrir, Bambang, 2006. "Evaluating fiscal equalization in Indonesia," Policy Research Working Paper Series 3911, The World Bank.
    • Handle: RePEc:wbk:wbrwps:3911
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    References listed on IDEAS

    as
    1. Zhuravskaya, Ekaterina V., 2000. "Incentives to provide local public goods: fiscal federalism, Russian style," Journal of Public Economics, Elsevier, vol. 76(3), pages 337-368, June.
    2. World Bank, 2003. "Decentralizing Indonesia : A Regional Public Expenditure Review Overview Report," World Bank Publications - Reports 14632, The World Bank Group.
    3. Blane Lewis, 2001. "The New Indonesian Equalisation Transfer," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 37(3), pages 325-343.
    4. Roy Bahl & Bayar Tumennasan, 2004. "How Should Revenues from Natural Resources be Shared in Indonesia?," Chapters, in: James Alm & Jorge Martinez-Vazquez & Sri Mulyani Indrawati (ed.), Reforming Intergovernmental Fiscal Relations and the Rebuilding of Indonesia, chapter 9, Edward Elgar Publishing.
    5. World Bank, 2000. "Health Strategy in a Post-Crisis, Decentralizing Indonesia," World Bank Publications - Reports 15707, The World Bank Group.
    6. Fitria Fitrani & Bert Hofman & Kai Kaiser, 2005. "Unity in diversity? The creation of new local governments in a decentralising Indonesia," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 41(1), pages 57-79.
    7. Roy Bahl & Bayar Tumennasan, 2002. "How Should Revenues From Natural Resources Be Shared?," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0214, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Takahiro Akita & Awaludin Aji Riadi & Ali Rizal, 2019. "Fiscal Disparities in Indonesia under Decentralization: To What Extent Has General Allocation Grant(DAU) Equalized Fiscal Revenues?," Working Papers EMS_2019_05, Research Institute, International University of Japan.
    2. Skoufias, Emmanuel & Narayan, Ambar & Dasgupta, Basab & Kaiser, Kai, 2011. "Electoral accountability, fiscal decentralization and service delivery in Indonesia," Policy Research Working Paper Series 5614, The World Bank.
    3. Pelzl, Paul & Poelhekke, Steven, 2021. "Good mine, bad mine: Natural resource heterogeneity and Dutch disease in Indonesia," Journal of International Economics, Elsevier, vol. 131(C).
    4. Heru Wibowo, 2012. "Understanding intra-household expenditure distribution in Indonesia," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 4(2), pages 97-114, April.
    5. Kotsogiannis, Christos & Schwager, Robert, 2008. "Accountability and fiscal equalization," Journal of Public Economics, Elsevier, vol. 92(12), pages 2336-2349, December.
    6. Kruse, Ioana & Pradhan, Menno & Sparrow, Robert, 2012. "Marginal benefit incidence of public health spending: Evidence from Indonesian sub-national data," Journal of Health Economics, Elsevier, vol. 31(1), pages 147-157.
    7. Frances Stewart & Alex Cobham & Graham Brown, 2007. "Promoting Group Justice: Fiscal Policies in Post-Conflict Countries," Working Papers wp155, Political Economy Research Institute, University of Massachusetts at Amherst.
    8. Cassidy, Traviss, 2017. "How Forward-Looking Are Local Governments? Evidence from Indonesia," MPRA Paper 97776, University Library of Munich, Germany, revised 01 Jun 2019.
    9. Brosio, Giorgio, 2014. "Decentralization and Public Service Delivery in Asia," ADB Economics Working Paper Series 389, Asian Development Bank.
    10. Fitria Fitrani & Bert Hofman & Kai Kaiser, 2005. "Unity in diversity? The creation of new local governments in a decentralising Indonesia," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 41(1), pages 57-79.
    11. Comola, Margherita & de Mello, Luiz, 2010. "Fiscal Decentralization and Urbanization in Indonesia," WIDER Working Paper Series 058, World Institute for Development Economic Research (UNU-WIDER).
    12. Nasution, Anwar, 2016. "Government Decentralization Program in Indonesia," ADBI Working Papers 601, Asian Development Bank Institute.
    13. James CUST & Ridwan D. RUSLI, 2014. "The economic spillovers from resource extraction: a partial resource blessing at the subnational level?," Economic Growth Centre Working Paper Series 1402, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    14. M A B Siddique & Heru Wibowo & Yanrui Wu, 2014. "Fiscal Decentralisation and Inequality in Indonesia: 1999-2008," Economics Discussion / Working Papers 14-22, The University of Western Australia, Department of Economics.

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    Keywords

    Economic Theory&Research; Public Sector Management and Reform; Fiscal Adjustment; Regional Governance; Urban Governance and Management;
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