Resource Windfalls and Local Government Behaviour: Evidence From a Policy Reform in Indonesia

Ola Olsson and Michele Valsecchi

No 635, Working Papers in Economics from University of Gothenburg, Department of Economics

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.

Keywords: Resource windfalls; fiscal decentralization; Indonesia (search for similar items in EconPapers)
JEL-codes: H72 O20 Q33 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2015-11
New Economics Papers: this item is included in nep-sea
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Citations: View citations in EconPapers (5)

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