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Resource Windfalls and Local Government Behavior: Evidence from a Policy Reform in Indonesia

Abstract
We analyze the impact of a natural experiment in Indonesia that allocated certain district governments with a windfall revenue from natural resource production. Our identification is based on a comparison between bordering districts in provinces that received the windfall with those that did not receive it, before and after the fiscal reform in 1999. We study the impact on a range of outcome variables such as regional GDP, infrastructure quality, employment, education, and household consumption. Our results demonstrate a "flypaper effect" in the sense that the increased revenue led to higher spending without any lowering of local taxes. We argue that the large relative increases in spending on public services contributed to a very strong increase in local GDP levels, led by the agricultural sector. A 100-dollar windfall further increased literacy by about 2 percent and non-food consumption by 67 USD. The strong general tendency of positive effects from the reform stands in contrast to the negative effects emphasized in the resource curse literature.
Other description
JEL: H72, O20, Q33
URI
http://hdl.handle.net/2077/40990
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  • Working papers
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gupea_2077_40990_4.pdf (651.2Kb)
Date
2015-11
Author
Olsson, Ola
Valsecchi, Michele
Keywords
Resource windfalls
scal decentralization
Indonesia
Publication type
report
ISSN
1403-2465
Series/Report no.
Working Papers in Economics
635
Language
eng
Metadata
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