Administrative Overspending in Indonesian Districts: The Role of Local Politics

World Development Vol. 59, pp. 166–183, 2014 Ó 2014 Elsevier Ltd. All rights reserved. 0305-750X/$ - see front matter www.elsevier.com/locate/worlddev

http://dx.doi.org/10.1016/j.worlddev.2014.01.008

Administrative Overspending in Indonesian Districts: The Role of Local Politics ¨ NTHER G. SCHULZE * BAMBANG SUHARNOKO SJAHRIR, KRISZTINA KIS-KATOS and GU University of Freiburg, Germany Summary. — We analyze the determinants of the excessive administrative spending of local governments in Indonesia. In an unbalanced panel data set of 399 districts for 2001–09, we show that the proliferation of districts has not led to increased administrative spending; instead a lack of political accountability is responsible for this excess. The degree of political competition influences the level of administrative spending significantly; newly introduced direct elections of district heads, however, did not curtail the waste. Ó 2014 Elsevier Ltd. All rights reserved. Key words — administrative expenditures, decentralization, direct elections, Indonesia, Asia

1. INTRODUCTION

democratic accountability mechanisms are compromised, local governments and bureaucracies may not spend the money in the best interest of the populace, i.e., on the public services needed most, but rather on increasing the perks of the office through better and more offices and cars, more frequent travels, more staff etc. (Niskanen, 1971). 3This would explain the high levels of administrative spending. Administrative overspending is a wasteful activity for the benefits of office holders and as such, a sort of “legal corruption,” with corruption being defined as misuse of public office for private gain. Another explanation for the high average spending on administration may be the continued proliferation of new districts in Indonesia (Fitrani, Hofman, & Kaiser, 2005). The number of districts increased from 336 in 2001 to 477 in 2010. If the establishment of new districts (pemekaran) entailed large set-up costs for the new administration, average administration expenditures would be significantly higher than without pemekaran, during a transition period, but this would not necessarily point toward administrative overspending due to a lack of accountability. 4 In principle, the proliferation of districts could be regarded as an enhancement of the homogeneity of the population within a district, allowing a better matching of public services with the preferences of the population. Burgess et al. (2012), however, argue that the emergence of new districts is a consequence of rent-seeking activities of local elites rather than a strive to enhance the efficiency of government services. This paper looks into the determinants of administrative overspending of local governments in Indonesia. In particular, we analyze whether the stepwise introduction of democratic accountability channels through the election of district heads

Administrative expenditures of Indonesian districts are extremely high by international comparison. On average, districts spend around a third of their entire budget on general administration and not on public services. Corresponding figures are 3% for US counties and for UK districts, 8% for Norway, and 13% for Tanzania. 1 Even though budgetary delineations may differ across countries and local jurisdictions may serve different sets of functions, which makes figures not directly comparable, the extraordinarily high figures for the Indonesian local governments point toward large inefficiencies in the process of public service delivery at the local level. One reason for these inefficiencies may be that the decentralization process in Indonesia has substantially weakened accountability mechanisms at the local level. Indonesia’s sweeping decentralization, written into law in 1999 and implemented in 2001, devolved almost 40% of the budgetary responsibilities to the regions (provinces and districts) and transferred a number of very important functions, such as primary and secondary education, health services, environmental protection, and infrastructure, predominantly to the districts (World Bank, 2007). This devolution of authority to the local level has shifted substantial financial resources and decision power to units that previously were merely executing orders from the center. 2 Bureaucratic accountability was removed and should have been replaced by effective democratic accountability. In 1999, Indonesia had its first democratic election after the authoritarian “New Order” regime collapsed. Starting in 2000, district heads were elected by the now democratically elected local parliaments whenever the terms of the effectively appointed district heads from the “New Order” era came to an end. In a second reform step, beginning in 2005, district heads were directly elected with the aim of strengthening democratic accountability of local governments. It is debatable how effective the democratic accountability mechanisms in Indonesia at the local level really are. There are indications that corruption, which was rampant under Suharto, has not declined significantly after decentralization and democratization but has rather become more decentralized and less organized (Hill, 2012; Hofman, Kaiser, & Schulze, 2004, 2009), and that the political process on the local level has been partly characterized by money politics and powerful local elites (Aspinall, 2010; Mietzner, 2005, 2010). If the

* We would like to thank Cut Dian Agustina for clarifying our data related questions. Earlier versions of this paper were presented at the Freiburg Conference on Decentralization and Democratization in Southeast Asia 2012 and at the econometrics seminar at the University of Freiburg. We would like to thank conference and seminar participants for useful comments and discussions. We are also very grateful to Astri Gautama for her outstanding research assistance and to Hal Hill, Marcus Mietzner, and two anonymous referees for very helpful comments. All remaining errors are our own. This research has been supported by the German Ministry of Education and Research (BMBF) under grant number 01UC0906. Final revision accepted: January 15, 2014. 166

ADMINISTRATIVE OVERSPENDING IN INDONESIAN DISTRICTS: THE ROLE OF LOCAL POLITICS

by the local parliaments and subsequently directly by the electorates has led to reduced administrative spending. 5 As the timing of direct and indirect elections varies exogenously across districts, such an effect would be well identified. We investigate whether differences in formal and informal accountability mechanisms across districts may systematically explain differences in administrative spending levels. We also look at the party composition and the degree of political concentration in the local parliament (DPRD) and study whether educational profiles affect the degree of overspending. In addition, we take the ethno-linguistic composition at the district level into account. Lastly, we analyze to what extent the proliferation of new districts has changed the amount and composition of administrative overspending over time. Our paper is the first to analyze administrative overspending of Indonesian districts and among the first to analyze this phenomenon in decentralized developing countries. 6 Existing literature on local government administrative overspending is sparse and mostly related to selected developed countries (Borge, Falch, & Tovmo, 2008; Kalseth & Rattsø, 1998; Rongen, 1995 on Norway, Revelli, 2010 on England). The paper that comes closest to ours is Lewis (2006), who analyzes the inefficiency of Indonesian districts’ tax administration and shows that indirectly elected district heads do not perform better than appointed ones. His focus is thus much narrower than ours, as tax administration is only a small part of total administrative expenditures. This lack of research is astonishing, given that a substantial number of developing countries have decentralized with the aim of improving governance quality and that excessive overspending at the local level could severely compromise the success of such decentralization reforms. Moreover, there is a substantial body of literature warning against local capture (Bardhan & Mookherjee, 2000; Bardhan & Mookherjee, 2006a, 2006b; Galasso & Ravallion, 2005; Reinikka & Svensson, 2004, and others), of which administrative overspending is an important variant. Our paper thus contributes to the empirical literature on decentralization in developing countries (e.g., Bardhan, 2002; Prud’homme, 1995) as well as to that on local capture (see above). Indonesia is a particularly interesting case for studying the phenomenon of excessive administrative spending at the local level, not only because of its sheer importance (Indonesia is the fourth biggest country in the world, the third largest democracy, and the second largest in the developing world), but more significantly because it is a young democracy with a history of weak institutions and high levels of corruption, including a corrupt civil service (McLeod, 2005). As well, it has recently experienced a “big bang” decentralization with a dramatic shift of power from the center to the regions (Hofman & Kaiser, 2004). These circumstances allow us to analyze to what extent the dual reform of democratization and decentralization, both rapid and fundamental, have improved governance quality as measured by the amount of resources spent on bureaucracy and government itself rather than on services for the people. 7 Our results indicate that accountability mechanisms are weak at the local level and that democratization has not yet contributed significantly to the reduction in wasteful local government spending on its own administration. The creation of new districts has led to a temporary shift in the sub-components of administrative spending but not to a sustained higher administrative spending per capita. Pemekaran thus cannot explain the high levels of administrative spending; instead, a lack of political accountability, which differs across districts, is the prime explanatory factor. Political concentration in the local

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parliament leads to higher overspending, as compared to more fragmented local parliaments. A higher vote share for Golkar, the dominant party in the “New Order” era, is significantly associated with higher administrative spending, too. Our findings contribute to an emerging view that decentralization and democratization at the local level in Indonesia have yet to deliver tangible results in terms of better governance (Hill, 2012; Lewis, 2010; Mietzner, 2010). While these analyses are well informed, they do not rest on econometric evidence. Our paper aims at filling this gap. The paper proceeds as follows. The following section contains theoretical considerations and derives testable hypotheses. Section 3 provides background information on decentralization and democratization at the local level in Indonesia. Section 4 presents some qualitative evidence on administrative overspending. Section 5 introduces the data and the empirical approach, Section 6 discusses the results. Section 7 concludes. 2. THEORETICAL CONSIDERATIONS Decentralization replaces the functions of a central decisionmaking unit with many local decision-making units. This allows better preference matching and the generation of location-specific knowledge (Oates, 1972) as well as the ability of people with heterogeneous preferences to sort into their preferred jurisdiction (Tiebout, 1956). As decisions are made closer to the people themselves, the transparency of, and citizens’ participation in the decision-making process should, in principle, be higher. This should improve governance quality and reduce wasteful overspending on the own district administration. Yet, this effect depends on the degree of accountability of decision makers to the citizens. Democratization at the local level, which shortly followed the 2001 decentralization reform, replaced hierarchical accountability by democratic accountability. The introduction of democratic structures at the local level should therefore reduce the degree of overspending to the extent that the new accountability mechanism performs better than the old one. 8 This should be a nonuniform process as the quality of the democratic process and the rule of law at the local level may differ systematically across districts. Thus we should expect the degree of administrative overspending to depend systematically on district characteristics that determine governance quality. The efficient per capita spending levels on district administration will also differ systematically with district characteristics. First, we should expect strong economies of scale since a district administration has large fixed-cost components (e.g., the costs for the bureau of the district head, the local parliament, the local revenue office etc.). Second, the administrative costs per capita should rise with lower accessibility of the population as measured for instance by the area, the number of villages, the terrain, or access by sea. Lastly, we should expect the demand for general administrative services to rise with the stage of development as measured by GDP per capita or urbanization. We summarize this in: Hypothesis 1. Administrative expenditures per capita should decline with population and with accessibility of the population but rise with the stage of development. In addition to differences in administrative technology we should expect that richer districts will spend more on all government functions including general administration. This leads to:

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Hypothesis 2. Administrative expenditures per capita rise with per capita revenues.

making the task of holding district heads accountable, more difficult.

The literature provides two reasons why local administrative spending could be excessive: bureaucratic self interest and local capture. The theory of bureaucracy as put forward by Niskanen (1971) posits that the bureaucracy exhibits an inherent tendency to increase its budget as bureaucrats enjoy higher status and better pay with increasing size of their budgets or bureaus. Moreover, the perks of the office also increase with budget size in various ways (more luxurious and more frequent business travels, better and bigger offices, drivers, official cars etc.). That makes the bureaucracy strive for larger budgets, but also each bureau to strive for a larger share of the overall budget. As the central district administration is often more influential than the sector bureaus (health, education, infrastructure etc.), not the least because the district head is a direct beneficiary of a larger administration budget, administration budgets tend to increase if the bureaucracy is not reigned in. Capture of government funds through local elites is a recurring phenomenon in developing and threshold countries (inter alia, Galasso & Ravallion, 2005; Olken, 2007; Reinikka & Svensson, 2004). 9 It diverts government funds intended for public service provision to private funds or other unintended public usages. Administrative overspending is a variant of local capture as it redirects public funds away from the people it is intended for and instead benefits bureaucrats. The main difference to regular corruption is that administrative overspending is not considered illegal in most cases (while corruption is), and that benefits for bureaucrats may not be as direct, as when they appropriate money. However, the general public is harmed equally. While the welfare effects of decentralization in developing countries are still a moot point and the evidence is highly country-specific (Bardhan & Mookherjee, 2006b), it is clear that powerful local elites, where they exist, have more scope for local capture by the devolution of authority through decentralization. 10 One effective way to reign in the bureaucracy and the local elite is to discipline district heads with the threat of not reelecting them if they perform poorly. For instance, Ferejohn (1986) models a principal-agent model in which the incumbent (the agent) seeks to minimize effort subject to a reelection constraint and the electorate (the principal) sets a minimum performance necessary for re-election. This leads to a better albeit not optimal performance of the incumbent. Besley and Case (1995) show in their political yardstick model that if people cannot observe the effort of their incumbent, they may still evaluate his or her performance by comparing it with the performance of the incumbents of similar, neighboring districts. Seabright (1996) observes that much information on governments’ performances is nonverifiable and thus not useful in court, which makes the contracts between electorates and incumbents necessarily incomplete. Elections are therefore the only way to reward or punish the incumbent. A decentralized organization allows each local constituency to hold the incumbent directly accountable, while in a centralized state, each local constituency can hold the central incumbent accountable only in concert with a majority of the population eligible to vote. Thus, according to Seabright (1996) decentralization strengthens accountability. 11 We summarize the notion of democratic elections as a disciplining device for incumbents in the third hypothesis. We note that direct elections of district heads are potentially more disciplining than indirect elections through local parliaments because MPs add another layer to the principal-agent problem

Hypothesis 3. Districts with democratically elected heads have lower levels of administrative overspending; directly elected district heads have lower administrative expenditures per capita than indirectly elected district heads. Bardhan and Mookherjee (2000) portray local capture in a model of probabilistic voting with informed and uninformed voters of three different income group levels, with the share of uninformed voters declining with income level. Voters vote for one of two parties; informed voters base their decisions on the policy platforms and their party preferences; uniformed voters base their decisions on the relative campaign spending of the parties and their party preferences. A subset of rich voters form an effective lobbying group; their contributions to the two parties are made in accordance with party policy platforms, which are endogenously determined to maximize political support. Campaign contributions are used by the parties to sway uninformed voters to their favor. In equilibrium, local capture is higher when electoral competition is lower, lobby groups are better organized (i.e., the fewer free riders exist in the group of rich individuals), and the share of uninformed voters is larger. Bardhan and Mookherjee’s results are intuitive: A more cohesive interest group provides more campaign contributions and thus a larger incentive to alter the policy in its favor; a larger share of uninformed voters provides more scope to use campaign finances to persuade voters to vote for the party and thus increase the incentives for parties to cater to the interest group in exchange for lobbying contributions; and lower electoral competition makes a possible punishment for a policy of local capture by informed voters at the ballot box less threatening. We adopt the results of the seminal paper on local capture by Bardhan and Mookherjee for the Indonesian context of a multiparty system and regard administrative overspending as a form of local capture favoring the ruling elite (in form of more jobs for its members and higher status and more perks in the office for their leading members). We use the literacy rate to proxy basic political awareness. This gives us the following hypotheses: Hypothesis 4. Administrative expenditures per capita are higher in districts with lower education levels, as measured by the literacy rate. Hypothesis 5. Administrative expenditures per capita are higher in districts with higher political concentration. They are higher if a party holds the majority of seats in the local parliament. Electoral accountability is weaker if a party holds a dominant position in the local parliament (DPRD), which implies that the political process is not very competitive. Dominant parties, supporting the district head, who needs approval for his/her budgetary decisions by the DPRD, need not fear being penalized for agreeing to excessive spending for administrative purposes. We therefore expect overspending to be higher in districts with a less competitive political environment. Lastly, it has been shown empirically that corruption increases with the existence of natural resources (Bhattacharyya & Hodler, 2010; Van der Ploeg, 2011) and with higher ethnic fragmentation (Galasso & Ravallion, 2005; Mauro, 1995; Olken, 2006), both of which lead to higher rent-seeking, with the latter leading additionally to lower public goods provision

ADMINISTRATIVE OVERSPENDING IN INDONESIAN DISTRICTS: THE ROLE OF LOCAL POLITICS

(Alesina, Baqir, & Easterly, 1999). As administrative overspending is similar to corruption this gives us: Hypothesis 6. Administrative expenditures per capita increase with the existence of natural resources and decrease with ethno-linguistic concentration in the district. As districts are very heterogeneous, with respect to these factors we do not expect a uniform pattern of administrative overspending over time and across districts. Bardhan and Mookherjee (2000, p. 139) conclude their paper by stating “The contrasting roles of these diverse factors suggest that the extent of relative capture at the local level may well turn out to be context- and system-specific. This creates the need for empirical research to identify the nature of relative capture in any given setting, in order to appraise the potential pitfalls of decentralization.” We provide such an analysis for Indonesia 10 years into the decentralization. 3. DECENTRALIZATION, DEMOCRATIZATION, AND THE EMERGENCE OF NEW DISTRICTS IN INDONESIA The Indonesian decentralization process has lead to unprecedented and large-scale devolution of authority from the center to the districts. Since 2001, the local governments of the regencies (kabupaten) and cities (kota) have gained considerable administrative, political, and fiscal autonomy. 12 Administrative decentralization devolved the majority of public service responsibilities to provincial and local governments. The center retained the functions of defense, security, justice, foreign affairs, fiscal affairs, religion, forestry, and currency and transferred the rest of the functions to the districts. The provinces received mainly coordinating and backstopping powers and remained directly responsible to the center. Law 22/1999 also stipulated that districts were responsible for the sectors (bidang pemerintahan wajib) health, education, public works, environment, communications, agriculture, industry and trade, investment, land, cooperatives, manpower, and infrastructure. During Suharto’s “New Order” regime, political parties were limited to three, and were heavily regulated. District heads were effectively appointed. In 1999, a total of 48 political parties participated in the free election, with 21 of them gaining seats in the center parliament and 45 in at least one of the

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292 districts’ parliaments. 13 Decentralization law 22/1999 gave these newly democratically elected local parliaments the right to elect the heads of the local governments (bupati in kabupaten and walikota in kota). The incumbent district heads were allowed to serve their full terms, which came to an end at different points in time as they had been appointed at different times under Suharto. In 2004, the revised decentralization law on regional autonomy (Law 32/2004) prescribed that the heads of local governments should be directly elected by the local population (Pilkada). 14 These direct elections were expected to increase electoral accountability at the local level and thus improve local governance. The first batch of direct elections took place in 2005; subsequently, all indirectly elected district heads were gradually replaced by directly elected ones since all incumbents were allowed to finish their five-year terms. 15 As with the indirect elections, the timing of the direct elections was historically predetermined, which allows a clear identification of the potential accountability effects of indirect and direct elections (cf. Table 1). Despite these electoral reforms, rent-seeking behavior continued. After 1999, many local parliaments used their newly acquired power to demand money from aspiring candidates in exchange of votes (Buehler, 2010). The introduction of direct elections in 2004 did not stop this rent-seeking behavior. Instead of local parliaments, it is now the political parties who sell their nomination to aspiring candidates (Buehler & Tan, 2007; Lindsay, 2009; Mietzner, 2005; Buehler, 2010). This resulted in random relationships between the parties and the candidates and to some extent in random coalitions among parties (Mietzner, 2005, 2010). These relationships often ended after the election, thus creating difficulties for constituents in holding political parties and the eventual winner accountable (Buehler & Tan, 2007). Administrative decentralization resulted in a large increase in the number of local governments (from 292 in 1999 to 477 in 2010, cf. Table 1). The splitting of administrative units, the so-called pemekaran or “blossoming” of districts, was a bottom-up process, in which the proposal came from the “child” district with prior approval from the originating (or “parent”) district’s government and parliament (Government Regulation or PP 129/2000). The proposed new district had to meet a set of technical requirements, 16 however, it was unclear how effective the evaluation process was (Fitrani et al., 2005) as some of these newly created districts seemed to lack the infrastructure to deliver public services (Decentralization Support Facility., 2007). The splitting districts phenomenon

Table 1. Proliferation of new districts and elections of district heads Year

No. districts

District’s heads who are Indirectly elected

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

336 348 370 410 434 434 434 451 477 477

Directly elected

Number

%

Number

%

178 208 316 392 248 192 164 49 74 0

53.0 59.8 85.4 95.6 57.1 44.2 37.8 10.9 15.5 0

186 242 270 402 403 477

42.9 55.8 62.2 89.1 84.5 100

Notes: The number of districts is based on the number of districts that received block grants (DAU) each year. Source: List of bupati/walikota from Min. of Home Affairs, the World Bank Indonesia, and the Asia Foundation. Local direct election data comes from Min. of Home Affairs, KPU, the Asia Foundation and the World Bank Indonesia (cf. Sjahrir et al. (2013), Table 1).

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seems to have been driven by fiscal incentives but also followed ethnic and political divisions and interests to capture natural resources (Fitrani et al., 2005). The revised government regulation (PP 78/2007) introduced more technical requirements and a stricter application procedure and approval process. In 2010, President Susilo Bambang Yudhoyono halted further splitting proposals in order to further evaluate the performances of the newly created districts. 17 Fiscal decentralization predominantly affected the expenditure side of the district budgets, while most taxes remained centrally set and administered. It resulted in a substantial increase in the central government’s transfers to the regions: the formula-based General Allocation Grants (Dana Alokasi Umum/ DAU), the earmarked Special Allocation Grants (Dana Alokasi Khusus/DAK), shared tax revenues, and shared (nontax) natural resources revenues. These transfers are collectively aimed to equalize the fiscal capacity across districts, subject to their needs and capacity, in order to provide basic public services (World Bank, 2003). By 2011, around 35 percent of total Indonesian government’s core public expenditure were carried out by local governments, which, however, collected only less than 2.5 percent of total government revenues (World Bank, 2012). Moreover, while central transfers were earmarked to specific purposes before decentralization, starting in 2001, districts became considerably freer in allocating their expenditures subject to the general requirements of local public service provision. Districts’ public expenditures more than doubled from 2001 to 2007 and rose further steeply in 2008 and 2009. Despite this overall increase, the share of administrative expenditures did not decline notably. On average, the government administration sector received 30% of total public expenditures. This is double the average allocation for infrastructure (15%) and around 4% less than the average allocation for education (34%), making it the second highest budget item from 2001 to 2009 (see Figure 1). 4. SOME QUALITATIVE EVIDENCE ON ADMINISTRATIVE OVERSPENDING

1000

Govt. Administrative Health

Education 500

p.c. Public expenditures (in '000 Rupiah)

1500

In order to illustrate the forms of administrative overspending, we carried out an internet search for cases of excessive

Infrastructure Agriculture

0

Other sectors

2001

2002

2003

2004

2005

2006

2007

2008

2009

Years

Figure 1. Per capita districts’ public expenditure by sector. Notes: The figure maps annual total p.c. expenditures by sector for the sample of the 418 Indonesia districts with full data. The others category includes the sectors of public law and order, economy, environment, housing and public facilities, tourism and culture, religious affairs, and social protection. Source: SIKD, Min. of Finance and DAPOER INDO, World Bank Indonesia

administrative spending at the local level. We searched the online archives of Kompas, Jawa Pos News Network and the online newspage www.Detik.com. Kompas, founded in 1965, is the most influential daily newspaper in Indonesia with a circulation of 500.000 nationwide; its online version, www.kompas.com, recorded 15 million unique visitors (that is, visitors attributable to a unique IP address) and 105 million page views per month in 2012 (Infoasaid, 2012). Jawa Pos News Network (JPNN) is the largest print media group in Indonesia that owns more than 140 regional daily newspapers; the Jawa Pos Group’s online news portal, www.JPNN.com, has currently 1.42 million unique visitors with 4.56 million page views per month (www.alexa.com). Launched in 1998, www.Detik.com is the first online only news website and as such, the pioneer of Indonesia’s internet news industry. It focuses on economics, politics, and information technology, and is famous for its speed in delivering breaking news. For search terms we used “graft” and “misappropriation” as well as the type of spending item such as “business travel spending,” “official house and office development,” and included search terms for “bupati,” “governor,” and their deputies and other local officials. Media mostly picked up stories about misappropriation in business travel, with 34 total mentions out of 119 articles (see Table 6 in the appendix). Further 27 articles referred to the procurement of goods and services (for instance, of luxurious office cars). The remaining stories describe, among other cases of misappropriation, overspending on building new offices and official residences (12), public funding of re-election campaigns by local politicians (11) as well over-spending on catering and other household services (10) and operational costs (10). The graft or misappropriation actors most often named were bupatis, mayors, and governors, with 39 out of 119 articles. Other local government officials (heads of local agencies or regional secretaries) received 43, local parliamentarians 38 mentions. Even though newspapers concentrate on high profile cases and thus this anecdotal evidence is not representative, it shows ways in which the administrative expenditures can be inflated for personal use. We shortly outline a few cases that received larger publicity. (1) Kabupaten Talaud, North Sulawesi: On February 9, 2010, the North Sulawesi High Court had announced Talaud’s bupati, Elly Engelbert Lasut, as suspect in a misappropriation case from the local budget during 2006–08, for business travel spending of Rp 7.7 billion (around $630k). 18 He was detained on July 20, 2010. Later, it was revealed that Elly ordered the treasurer to transfer the business travel spending of Rp 3.1 billion (around $254k) in total to his several personal bank accounts and two other personal accounts. The district treasurer also stated that Elly ordered her to transfer operational and maintenance spending along with the business travel budget to his personal account. Bupati Elly was sentenced to 7 years in prison. 19 (2) Kabupaten Tasikmalaya, West Java: In October 2013, Tasikmalaya Corruption Watch (TCW) reported misappropriation allegations against the bupati and his deputy. The misappropriation is related to business travel spending by the two officials that was unusually large for a oneday trip, amounting to Rp 902 million (around $74 k). 20 (3) Riau Province: The governor, bupatis, local government officials, and DPRD chairmen all received excessively expensive official cars. The governor received a Mercedes-Benz for Rp 1.2 billion ($98 k), and several bupatis received Land Cruisers (the most expensive of which was purchased for Rp 2.7 billion or around $220 k). 21

ADMINISTRATIVE OVERSPENDING IN INDONESIAN DISTRICTS: THE ROLE OF LOCAL POLITICS

(4) East Kalimantan Province: The governor and deputy governor of East Kalimantan received two official cars (Toyota Land Cruiser ZX) for Rp 1.8 billion ($147 k) from the 2009 budget. A year after that, DPRD chairmen received the same official car. 22 (5) Kabupaten Garut, West Java: Bupati Agus Supriadi financed several houses and luxury cars for himself and his family from the local budget. He allegedly misappropriated Rp 6.9 billion ($565 k), among others, for servicing personal debt and buying furniture. In November 2006, he bought a car for his wife under the budget item goods and services procurement. Earlier in 2006, he also allegedly bought another car for Rp 387 million ($30 k), budgeted under guest food and beverages. The bupati was sentenced to 10 years in prison. 23 While these examples highlight obvious misuses of the local budget, they are selective and most likely not representative. In particular, newspapers tend to focus on court cases but report less frequently cases of wasteful but legal expenses. We therefore turn to the systematic analysis of the available statistical evidence. 5. DATA AND EMPIRICAL APPROACH (a) Dependent variables Our fiscal data set includes 418 districts in Indonesia for the period from 2001 to 2009. We created an unbalanced panel data set in order to include both the parent and the child districts resulting from the splitting of districts. Due to missing data, we exclude the provinces of Nanggroe Aceh Darussalam, Papua, and Papua Barat. We also exclude the capital, DKI Jakarta because the districts in Jakarta are not autonomous. Our main source of district governments’ fiscal data is the Regional Financial Information System (Sistem Informasi Keuangan Daerah/SIKD) of the Ministry of Finance. Due to changes in the budget format during the years observed, we follow the classification used by the Indonesia Database for Policy and Economic Research (DAPOER INDO) of the World Bank Indonesia. The latter contains expenditure data classified according to the economic categories staff, capital, goods and services, and other administrative expenditures. Our dependent variable is the natural logarithm of per capita public expenditures on the government administration sector (realized expenditures). We define administrative expenditures as all expenditures that are incurred to administer the local governments. According to this definition, we consider all expenditure items classified under the section of general government administration (coded 1 in DAPOER INDO). This expenditure category contains the following expenditure items reported under general government administration (Bagian Urusan Umum Pemerintahan) based on the law Kepmendagri 29/2002 and the revised law Permendagri 13/2006: 24 general government (pemerintahan umum), development planning (perencanaan pembangunan), unity and local politics (kesatuan bangsa dan politik dalam negeri), personnel (kepegawaian), people and villages empowerment (pemberdayaan masyarakat dan desa), statistics (statistik), archive (kearsipan), and communication and informatics (komunikasi dan informatika). All these functions are performed by the government administrations. By far the biggest share of these administrative expenditures pertain directly to the running of the general government: in 2007, 86% of total government administration expenditures were spent on general government while the other functions,

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including development planning, received less than 5% (see Table 7 in the Appendix). The general government includes, among others, the offices of the secretariats of local governments (Sekretariat Daerah/Sekda), local parliaments (Dewan Perwakilan Rakyat Daerah/DPRD), the local revenue offices (Dinas Pendapatan Daerah/Dispenda), the local financial management offices (Badan Pengelola Keuangan Daerah), and subdistrict offices (Kantor Kecamatan). The composition of administrative expenditures has remained fairly unaltered throughout the study period. From 2001 to 2009, staff expenditures received on average 34% of total government administrative expenditures, followed by goods and services (30%), others (26%), and capital expenditures (10%) (cf. Figure 3 in the Appendix). Expenditure items classified under others include unspecified spending (lain-lain), unforeseeable spending (belanja tak terduga), interest payments, and financial assistance to lower regions (subdistricts or villages). 25 (b) Controls According to our hypotheses, the determinants of administrative expenditures include factors that capture the cost of an efficient administration, available resources, as well as factors that explain to what extent the observed administrative expenditures exceed their efficient level. The latter set of determinants proxies the effectiveness of formal and informal accountability mechanisms. To capture the economies of scale of the efficient administrative technology (Hypothesis 1, see Section 2), we include population size, the logarithm of the district area, the number of villages, the share of landlocked villages and of those with flat surface. While costs should rise with the area and the number of villages, the share of landlocked villages and those with flat surface should decrease costs, as hilly terrain and islands in the archipelago either require outposts or more costly travel than villages accessible by land. Urbanization could either increase or reduce administrative spending: closer proximity should reduce administrative costs while, at the same time, urban environments pose additional administrative requirements, thereby increasing the costs. A larger distance to Jakarta may increase costs as it may capture less oversight of the center and hence, more discretionary scope; moreover, travel to the capital may be more expensive. A larger distance may also capture lower price and wage levels, thereby reducing costs. Higher levels of economic activity and income, as measured by real regional GDP per capita, may increase the demand for administrative services and the costs of factor and material inputs, thereby increasing administrative expenditures. Available resources should positively affect spending levels for all governmental functions (Hypothesis 2), even if the coefficient for administrative spending should be significantly below unity for an efficient administration. We measure available resources by the amount of total fiscal revenues per capita, which includes own source revenues as well as revenues from resource sharing schemes (cf. Agustina, Fengler, & Schulze, 2012). Accountability mechanisms are captured by a number of variables. First, we include a dummy that is one, if the district head was directly elected, and zero otherwise, to check whether direct elections have increased accountability and have led to less wasteful government spending (Hypothesis 3). Second, we include the literacy rate to capture how educated the electorate is, as a better educated populace might hold the incumbent accountable more effectively, which would lower administrative spending (Hypothesis 4). Literacy rates

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may potentially proxy for the importance of the electoral accountability channel, but also for informal accountability mechanisms. Optimally, we would have preferred to include measures of media penetration over the time period, but we could not find consistent time-varying information on media availability. We also include the interaction effects of literacy rates and revenues per capita with direct elections, to allow for the accountability effect to depend on fiscal resources or educational profile of the electorate. 26 Third, for the reduced sample of districts that did not split up over our time frame, we can also investigate the relative importance of further political factors, like the party concentration in and party composition of the local parliaments (Hypothesis 5). Since we cannot trace the composition of the parliaments in districts that split up in between elections, we can only meaningfully collect this information for the nonsplitting districts. 27 We apply two measures: a majority indicator (a dummy variable that is one if any party has a vote share of more than 50%) and the Hirschman-Herfindahl index of political concentration in the local parliament. To account for different parties’ inclination to approve excessive administrative spending in the district, we also control for vote shares that the major political parties, Golkar, PDIP, PKB, and PPP, received in the local elections. Fourth, we include an indicator of resource-rich districts, which takes one if a district received natural resources shared revenue (zero otherwise), as well as a measure of the ethno-linguistic concentration in the district in 2000 (Hypothesis 6). Lastly, our controls for district splits consist of a full set of splitting dummies, marking up to 5 years before the split-up of a district and up to 5 years after the district split-up. Moreover, we differentiate between the effects after the split-up for the parent district and those for the child districts. Descriptive statistics for all variables are found in Table 8 in the Appendix. (c) Empirical models We address the determinants of administrative expenditures by estimating pooled OLS regressions. We use an unbalanced panel of old and newly formed districts instead of grouping all newly formed districts with their original parents and treating them as a single unit throughout the whole time period. This approach enables us to disentangle the behavior of old and newly formed districts and allows a more precise tracking of the splitting-up entities. We cluster standard errors at the parent district level, allowing for an unspecified form of serial correlation of disturbances as well as for a cross-sectional correlation between districts that used to belong to the same entity. The baseline estimating equation relates the natural logarithm of per capita administrative expenditures in the district as well as the size of its main components, to a set of control variables in the following form: ln EXP it ¼ bX i þ cZ it þ kt þ f ðsij Þ þ eit ;

ð1Þ

where we observe up to i = 1,. . .,399 districts over 9 years (t = 2001,. . .,2009). The time invariant factors Xi include geographic controls for scale and technology (area, share of coastal and flat villages, and distance to Jakarta). The time variant controls Zit capture further scale and technology variables (district population, number of villages, and urbanization) as well as fiscal and economic size variables (total per capita revenues, real GDP per capita, and resource-rich indicator) and literacy rates, and in a second set of regressions, political variables such as party compositions, or party concentration.

We also include a full set of year indicators kt to capture common macroeconomic and policy shocks. All models PincludeP a set P of splitting up indicators, f ðsij Þ ¼ j sij þ jþ sij p þ þ jþ sij c ; ðj ¼ 4; . . . ; 5Þ, which record the years before the split up of districts (sij) as well as the years following the split up separately for the parent ðsij p Þ and the child ðsij c Þ districts. We expect to see considerable differences between parent and child districts since in the latter, new administrative capacities need to be built, and hence, investments into the administrative infrastructure should be considerably larger at the beginning. In a second set of regressions, we restrict our attention to districts that did not (yet) split up, which allows us to test for the effects of the political environment. We collected information on the seat composition of each local parliament for the 197 districts that did not split up during 1999–2009 and identified the concentration of party power within the parliament. 6. RESULTS (a) Baseline results Table 2 presents the baseline estimates for the total administrative spending as well as for the four economic classifications: spending on staff, on capital goods, on goods and services, and on other, unspecified purposes. The baseline regressions focus on differences in administrative technology. The data broadly confirm Hypothesis 1 (Section 2): scale effects play a significant role in explaining administrative spending. All types of per capita administrative expenditures, except for the rather special “others” category, decrease with population size. A larger district area increases the costs of administration, but only in terms of investments in capital and goods and services. For total administrative expenditures, estimates do not reach usual significance levels. The number of villages has a positive but insignificant effect on overall costs and most sub-components. 28 Administrative costs are also negatively related to the share of flat and more easily accessible (landlocked) villages, although these effects are statistically significant only for the second variable. The distance to the center plays a less clear-cut role: while other administrative expenditures are smaller in more remote districts, the expenditures on administrative staff become actually larger. Total administrative expenditures, as well as most of its subcategories, are larger in more urbanized areas, except once again for the rather specific “others” category. This might reflect the fact that more urbanized areas use partially different administrative technologies and thus opt for costlier/more complex administrations. Finally, as expected, total administrative expenditures (and “others”) increase with GDP per capita, indicating that districts with higher economic activity require a more sophisticated administration. Administrative expenditures also increase with the fiscal size (Hypothesis 2). All expenditure types have a close to unitary elasticity with respect to total per capita revenues. In other words, they rise almost proportionally with available resources—districts do not realize economies of scale with respect to fiscal resources. The fact that financially better endowed districts have a larger share of unspecified expenditures (the elasticity exceeds 1) is alarming because district heads have more discretion over this category and hence can use it more easily to distribute political rents or favors. 29 Better education, as measured by the literacy rate, reduces spending in the categories “capital” and “others,” which is

ADMINISTRATIVE OVERSPENDING IN INDONESIAN DISTRICTS: THE ROLE OF LOCAL POLITICS

173

Table 2. Baseline specification, pooled OLS estimates Dependent classifications

ln p.c. Government Administrative Expenditures

ln Population ln Area Number of villages (in 00) Share of vill. w. flat surface Share of landlocked villages ln (1 + distance to Jkt) Urbanization rate ln p.c. Total fiscal revenues ln Real GRDP p.c. Resource rich indicator Literacy rate Time effects Split effects Observations R-squared

Total (1)

Total (2)

Staff (3)

Capital (4)

Goods and Services (5)

Other (6)

0.087** (0.037) 0.006 (0.014) 0.009 (0.012) 0.052 (0.062) 0.158** (0.074) 0.009 (0.017) 0.146** (0.069) 0.942*** (0.051) 0.046** (0.023) 0.003 (0.024) 0.195 (0.179) Yes No 1,889 0.917

0.080** (0.040) 0.003 (0.015) 0.007 (0.012) 0.054 (0.061) 0.153** (0.074) 0.010 (0.017) 0.143** (0.071) 0.949*** (0.054) 0.047** (0.023) 0.004 (0.025) 0.221 (0.178) Yes Yes 1,889 0.843

0.193*** (0.052) 0.018 (0.020) 0.020 (0.020) 0.101 (0.093) 0.114 (0.111) 0.043* (0.024) 0.211** (0.089) 0.782*** (0.076) 0.012 (0.033) 0.056 (0.035) 0.125 (0.267) Yes Yes 1,889 0.705

0.159* (0.085) 0.101*** (0.036) 0.059* (0.033) 0.032 (0.115) 0.024 (0.136) 0.054 (0.043) 0.524*** (0.185) 1.137*** (0.104) 0.050 (0.050) 0.001 (0.058) 0.806* (0.418) Yes Yes 1,889 0.869

0.201*** (0.057) 0.054*** (0.020) 0.022 (0.018) 0.017 (0.069) 0.174** (0.083) 0.027 (0.024) 0.261*** (0.100) 0.835*** (0.071) 0.048 (0.031) 0.031 (0.032) 0.347 (0.229) Yes Yes 1,889 0.651

0.136* (0.078) 0.028 (0.025) 0.040** (0.019) 0.183 (0.111) 0.138 (0.125) 0.127*** (0.034) 0.123 (0.128) 1.082*** (0.102) 0.198*** (0.042) 0.078 (0.049) 1.245*** (0.323) Yes Yes 1,889 0.916

Notes: All models are estimated by unbalanced panel data (pooled OLS). Robust standard errors, clustered at the parent-district level are reported in parentheses. The number of districts is 399. * Significance at the 10% level. ** Significance at the 5% level. *** Significance at the 1% level.

Splitting Districts Effect to Gov. Admin. Total Exp. Child districts

.2 .1 -.1

0

Estimated coefficients

.2 .1 0 -.2

-.2

-.1

Estimated coefficients

.3

.3

.4

.4

Parent districts

-4

-3

-2

-1

0

1

2

3

Timing before and after split

4

5

-4

-3

-2

-1

0

1

2

3

4

5

Timing before and after split

Figure 2a. Splitting districts effects, total administrative expenditures. Notes: The figures map coefficient estimates and confidence intervals of dummy variables for parent and child districts indicating the timing before and after the split for the sample of the 384 Indonesia districts with full data. Data on new districts are based on number of districts that received DAU in each year. Source: Min. of Finance.

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Splitting Districts Effect to Gov. Admin. Staff Exp. Child

0 -.2

-.1

Estimated coefficients

0 -.1 -.3

-.3

-.2

Estimated coefficients

.1

.1

.2

.2

Parent

-4

-3

-2

-1

0

1

2

3

4

5

-4

-3

Timing before and after split

-2

-1

0

1

2

3

4

5

Timing before and after split

Splitting Districts Effect to Gov. Admin. Capital Exp. Child

1.1 .9 .7 .5

Estimated coefficients

.3

.9 .7 .5 .3

-.3

-.3

-.1

-.1

.1

.1

Estimated coefficients

1.1

1.3

1.3

1.5

1.5

Parent

-4

-3

-2

-1

0

1

2

3

4

5

Timing before and after split

-4

-3

-2

-1

0

1

2

3

4

5

Timing before and after split

Figure 2b. Splitting districts effects, administrative staff and capital expenditures. Notes: See notes to Figure 2a.

consistent with our Hypothesis 4, yet for total administrative expenditures this effect is not significant. Resource-rich districts have higher administrative spending as proposed in Hypothesis 6, but these effects are insignificant. (b) Proliferation of new districts (Pemekaran) Model (1) in Table 2 does not account for splitting districts, while models (2)–(6) include a full set of splitting dummies: four for the four years preceding the split, one for the year of the split and five for the years following the split, the latter two categories separately for the newly created district (“child”) and the remaining district (“parent”). The estimated values are shown graphically in Figures 2a and b, separately for total expenditures and selected subcategories. The solid line connects the point estimates of the splitting dummies; the shaded area depicts the 95% confidence interval.

Figure 2a shows that overall administrative expenditures per capita do not rise; the splitting dummies are all insignificantly different from zero. Hidden behind these aggregate figures is a clear change in the spending composition, especially for the child district. For the parent district, staff expenditures increase in the year preceding the split in order to build up personnel to be transferred to the child district, they then decline to normal levels in the year after the split. Capital expenditures do not change in per capita terms. In contrast, the child district initially has significantly lower per capita staff expenditures as it still needs to hire civil servants. Staff expenditures increase significantly in year four and five after the split and almost reach normal levels. Capital expenditures per capita are significantly higher after the split as new offices in the new district capital have to be set up and equipped. This effect starts to decline in the third year after the creation of the new district (see Figure 2b).

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Table 3. The effect of direct elections, pooled OLS estimates Dependent

ln p.c. Government Administrative Expenditures (1)

(2) **

ln Population ln Area Number of villages (in 00) Share of villages with flat surface Share of landlocked villages ln (1 + distance to Jkt) Urbanization rate ln p.c. Total fiscal revenues ln Real GRDP p.c. Resource rich indicator Literacy rate

0.080 (0.040) 0.003 (0.015) 0.007 (0.012) 0.054 (0.061) 0.153** (0.074) 0.010 (0.017) 0.143** (0.071) 0.949*** (0.054) 0.047** (0.023) 0.004 (0.025) 0.221 (0.178)

Direct election

(3) **

0.080 (0.040) 0.003 (0.015) 0.007 (0.012) 0.054 (0.061) 0.153** (0.074) 0.010 (0.017) 0.143** (0.071) 0.949*** (0.054) 0.047** (0.023) 0.004 (0.025) 0.222 (0.178) 0.004 (0.022)

Direct  Literacy rate

0.079 (0.040) 0.003 (0.015) 0.007 (0.012) 0.055 (0.061) 0.152** (0.074) 0.010 (0.017) 0.143** (0.071) 0.950*** (0.054) 0.047** (0.023) 0.003 (0.025) 0.135 (0.200) 0.197 (0.163) 0.212 (0.176)

Direct  ln p.c. Total fiscal revenues Time effects Split effects Observations R-squared

Yes Yes 1889 0.917

Yes Yes 1889 0.917

(4) **

Yes Yes 1889 0.917

(5) **

0.081 (0.039) 0.004 (0.015) 0.008 (0.012) 0.063 (0.062) 0.150** (0.074) 0.011 (0.017) 0.146** (0.071) 0.982*** (0.056) 0.046** (0.023) 0.004 (0.025) 0.235 (0.178) 0.828*** (0.281)

0.059*** (0.020) Yes Yes 1889 0.917

0.080** (0.039) 0.003 (0.015) 0.008 (0.012) 0.063 (0.062) 0.150** (0.074) 0.011 (0.017) 0.146** (0.071) 0.982*** (0.056) 0.046** (0.023) 0.004 (0.025) 0.213 (0.202) 0.852*** (0.296) 0.053 (0.181) 0.058*** (0.021) Yes Yes 1889 0.917

Notes: All models are estimated by pooled OLS regressions on unbalanced panel data. Robust standard errors clustered at the parent-district level are reported in parentheses. The number of districts is 399. * Significance at the 10% level. ** Significance at the 5% level. *** Significance at the 1% level.

This shift in expenditure categories, however, leaves the overall administrative expenditures rather unchanged in per capita terms. 30 In other words, the proliferation of new districts is unable to explain the high level of administrative expenditures. A lack of accountability is thus the prime candidate for explaining the excessive spending of local governments on themselves rather than on services for their population. (c) Accountability mechanisms The effectiveness of the accountability mechanisms cannot be estimated directly as they are not directly observable. But we can estimate whether changes in accountability mechanisms over time or variations in variables that proxy accountability channels across districts over time had any significant effect on the extent of overspending. We have already analyzed the effect of varying literacy rates, which has produced weak evidence for a limiting effect of education on excessive spending as predicted in Hypothesis 4 (cf. Table 2). We now analyze whether the introduction of direct elections, in which voters can hold district heads accountable for excessive overspending, has reduced administrative expenditures (Hypothesis 3). If such an accountability mechanism was regarded as effective, rational district heads seeking reelection would anticipate this disciplining device and thus spend less.

The results are provided in Table 3. We focus on total administrative spending as we are concerned with the aggregate overspending as a measure of wasting public resources. Direct elections have no significant effect on administrative spending and the point estimate is very small (model 1); if we include an interaction term with literacy levels, the effect of direct elections becomes positive and the interaction effect negative, as expected, indicating that better educated electorates can use electoral accountability better. However, the estimated coefficients do not reach usual significance levels (model 3). We allow for heterogeneous effects of direct elections depending on the financial endowment of the district. Indeed, our results show that direct elections increase administrative spending significantly in districts with relatively low fiscal endowments and decrease it for districts with more fiscal resources and thus higher administrative spending (in the 4th and 5th quintile of the distribution of fiscal resources, models 4 and 5). 31 Overall, however, we find no support for Hypothesis 3: direct elections did not considerably reduce administrative spending. We opted for pooled OLS because many important determinants of administrative spending are time-invariant and thus focusing on within variation would portray too narrow a picture. We did however run a fixed effects panel regression as a robustness check. Results are reported in Table 9 (Appendix).

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WORLD DEVELOPMENT Table 4. The effect of parliament composition, pooled OLS estimates

Dependent

ln p.c. Government Administrative Expenditures (1)

ln Population ln Area Number of villages (in 00) Share of villages with flat surface Share of landlocked villages ln (1 + distance to Jkt) Urbanization rate ln p.c. Total fiscal revenues ln Real GRDP p.c. Resource rich indicator Literacy rate Direct election Ethno-linguistic concentration index

(2) **

0.130 (0.065) 0.010 (0.021) 0.031 (0.028) 0.067 (0.079) 0.031 (0.107) 0.016 (0.021) 0.243** (0.105) 0.884*** (0.104) 0.086** (0.040) 0.003 (0.037) 0.531** (0.245) 0.029 (0.027) 0.060 (0.049)

Direct  Ethno-linguistic concentration

(3) *

0.128 (0.065) 0.010 (0.022) 0.031 (0.028) 0.073 (0.079) 0.024 (0.107) 0.015 (0.021) 0.241** (0.105) 0.888*** (0.103) 0.088** (0.040) 0.002 (0.037) 0.553** (0.244) 0.005 (0.032) 0.096* (0.057) 0.069 (0.050)

(4) **

0.130 (0.063) 0.014 (0.021) 0.020 (0.024) 0.077 (0.079) 0.033 (0.110) 0.029 (0.020) 0.245** (0.101) 0.876*** (0.099) 0.086** (0.041) 0.022 (0.034) 0.196 (0.236) 0.030 (0.027) 0.042 (0.047)

(5) **

0.132 (0.064) 0.010 (0.021) 0.028 (0.026) 0.081 (0.078) 0.015 (0.108) 0.022 (0.020) 0.241** (0.102) 0.874*** (0.103) 0.093** (0.041) 0.012 (0.035) 0.419* (0.238) 0.029 (0.027) 0.052 (0.047)

0.665*** (0.187)

Political concentration index

0.100** (0.050)

Majority indicator Share of Golkar Share of PDIP Share of PKB Share of PPP Constant Time effects Split effects Observations R-squared

0.103 (0.066) 0.004 (0.021) 0.021 (0.029) 0.072 (0.078) 0.004 (0.111) 0.023 (0.020) 0.221** (0.103) 0.904*** (0.104) 0.087** (0.042) 0.004 (0.036) 0.334 (0.251) 0.025 (0.027) 0.086* (0.051)

0.866 (1.927) Yes No 1039 0.891

0.767 (1.923) Yes No 1039 0.891

0.577 (1.841) Yes No 1039 0.896

0.827 (1.886) Yes No 1039 0.893

0.504*** (0.178) 0.175 (0.122) 0.287** (0.145) 0.184 (0.173) 0.106 (1.957) Yes No 1039 0.895

Notes: All models are estimated by balanced panel data (pooled OLS). The sample is restricted to districts that did not split between the 1999–2004 elections. Robust standard errors clustered at the parent-district level are reported in parentheses. The number of districts is 197. * Significance at the 10% level. ** Significance at the 5% level. *** Significance at the 1% level.

Results for the variables that are included in both regressions are quite similar in sign and significance, but not in magnitude for all cases. Notably the coefficient for population is higher in the fixed effects regressions and the one for log of per capita revenue is lower, indicating that administrative expenditures are adjusted to larger population and higher revenues only over time. Table 4 presents the effects of parliament composition, broadly confirming Hypothesis 5. As parliament composition is available only for the districts that did not split, we restrict our analysis to this group. Our results show that administrative

spending increases significantly with political concentration (model 3) and if a party commands a majority position (model 4). Also a higher vote share for Golkar, the dominant party under Suharto rule, is significantly associated with higher administrative spending. Our results suggest that the political environment—parliamentary composition in particular—is an important determinant for the extent of wasteful spending. Ethno-linguistic concentration seems to increase local administrative spending, yet this effect is not statistically significant in all specifications, yielding evidence that is weakly in contrast with what we expected in Hypothesis 6. 32

ADMINISTRATIVE OVERSPENDING IN INDONESIAN DISTRICTS: THE ROLE OF LOCAL POLITICS

(d) Travel expenditures

177

a dominating party, and a larger vote share for Golkar allow their civil servants to spend more on travel.

We analyze one particular spending item, which arguably is a special bonus for incumbent politicians and bureaucrats: expenditures for travel. This includes travel within the district, but also to the province and national capitals or abroad. Because of changes in the budget reporting format at the district level, we have data on travel expenditures only for the period 2001–06. Travel expenditures per capita increase significantly with the district area, urbanization, and fiscal resources, as expected, and decline with population due to economies of scale and the share of villages easily accessible by land. Table 5 provides the results. Resource-rich districts have higher travel costs, which is consistent with a resource curse leading to lower institutional quality and as a consequence, leaving more discretionary scope to the local administrators to use public funds for their benefit. As before, districts with higher political concentration,

7. CONCLUSION In this paper we have analyzed the excessive spending of Indonesian district governments on their own administration. Amounting to almost a third of the total budget, administrative spending is the second biggest budget item and constitutes in that order of magnitude a large misallocation of public resources. We could exclude the proliferation of new districts as a reason for these high levels of administrative spending. Instead, we regard administrative overspending as a manifestation of poor governance and thus, a lack of accountability at the local level. Since accountability mechanisms are not directly observable for such large number of districts, we exploited variations of proxies for formal and informal

Table 5. Travel expenditures, pooled OLS estimates Dependent

ln Population ln Area Number of villages (in 00) Share of villages with flat surface Share of landlocked villages ln (1 + distance to Jkt) Urbanization rate ln p.c. Total Fiscal Revenue ln Real GRDP p.c. Resource rich indicator Literacy rate

ln p.c. Government Administrative Expenditures on Routine Travel (1)

(2)

(3)

(4)

0.489*** (0.103) 0.181*** (0.046) 0.040 (0.042) 0.136 (0.129) 0.385** (0.155) 0.052 (0.058) 0.584*** (0.217) 0.615*** (0.115) 0.081 (0.066) 0.130** (0.063) 0.206 (0.453)

0.500*** (0.102) 0.194*** (0.046) 0.048 (0.041) 0.149 (0.128) 0.364** (0.154) 0.033 (0.059) 0.624*** (0.212) 0.595*** (0.113) 0.079 (0.064) 0.142** (0.064) 0.540 (0.503) 0.820*** (0.298)

0.496*** (0.103) 0.189*** (0.046) 0.044 (0.042) 0.173 (0.129) 0.320** (0.155) 0.034 (0.059) 0.617*** (0.214) 0.596*** (0.114) 0.090 (0.064) 0.143** (0.064) 0.378 (0.464)

0.467*** (0.103) 0.174*** (0.046) 0.041 (0.042) 0.144 (0.123) 0.333** (0.152) 0.037 (0.057) 0.589*** (0.210) 0.595*** (0.110) 0.097 (0.063) 0.134** (0.063) 0.400 (0.505)

Political concentration index

0.206*** (0.076)

Majority indicator Share of Golkar Share of PDIP Share of PKB Share of PPP Time effects Observations R-squared

Yes 905 0.75

Yes 905 0.76

Yes 905 0.76

0.819*** (0.290) 0.209 (0.262) 0.024 (0.305) 0.299 (0.413) Yes 905 0.76

Notes: All models are estimated by pooled OLS regressions for unbalanced panel data. Robust standard errors, clustered at the parent-district level are reported in parentheses. The years observed are 2001–2006. The sample is restricted to districts that did not split between the 1999 and 2004 elections. A constant is included in all specifications. The number of districts is 197. * Significance at the 10% level. ** Significance at the 5% level. *** Significance at the 1% level.

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accountability mechanisms across districts and time. We found weak evidence that education levels matter. The introduction of direct elections of district heads did not have a significantly favorable effect on administrative spending for the entire sample. Upon closer inspection we could identify that direct elections increased administrative spending for districts that are not financially well endowed and reduced it for the richer ones (those that have high admin spending levels to begin with). Overall the introduction of direct elections changed little for the better. Our results are based on the analysis of a novel data set on administrative spending of Indonesian districts and thus provide the first quantitative analysis of the determinants of administrative overspending, which is a variant of local capture. In addition to this study, it would be very desirable to complement a quantitative analysis like ours with a qualitative analysis in a mixed-method approach. A qualitative analysis could in particular look into the relationship between administrative overspending and corruption, collusion, and nepotism, for which reliable quantitative data at the district level are unavailable. This caveat notwithstanding, our result underscores the notion that institutional change needs to be encompassing to generate the desired effect. It may simply not be sufficient to change one institutional regulation, even if it is a core one, if the general environment has changed little and the actors see no incentives for changing their behavior. For accountability

to work at the local level, the political system has to be truly competitive. This is what our second set of results provides evidence for: in districts with little political competition, as measured by party concentration or the existence of a dominant party in the local parliament, the waste of public resources is even worse. More transparency of, and higher competition in the political process as well as lower barriers to entry in the political market may be important elements for improving the formal accountability mechanism. In particular it would be desirable to make it easy for independent candidates to run for the office of district heads as this would break the parties’ monopoly to nominate candidates, which they use to extract rewards from hopeful candidates in exchange for their nomination (Mietzner, 2010). Even though independent candidates have been allowed to run since 2008, effective barriers to entry are still too high and nominations are too costly to make the political system open and competitive at the local level. Successful candidates will seek to recover these “entry fees.” Higher budgetary transparency and competitive local media would put the issue of excessive administrative expenditures on the political agenda. Even if our results may disappoint hopes for rapid improvement of governance quality through decentralization and democratization, seeing that we are just a little more than a decade into democratized and decentralized Indonesia’s history, it may be too early to hand down the final verdict on the success or failure of these reforms. The best may be yet to come.

NOTES 1. Systematic evidence on local governments’ administrative expenditures is unavailable, especially for developing countries. Still it is obvious from these figures that Indonesia’s administrative expenditures far exceed typical levels. Data are taken from http://www.census.gov/govs/estimate/ historical_data_2007.html, http://www.ukpublicspending.co.uk/ year_spending_2010UKmn_12mc1n#ukgs302, http://www.svt.ntnu.no/ iso/jorn.rattso/Papers/jkjrpolcontrolofadm.pdf and http://www.logintanzania.net/docs/lgfr2007.pdf and refer to the years 2010 (United Kingdom, United States of America), 2007 (Tanzania) and 1990 (Norway). 2. The increase in transfers from the center has led to a build up of bank deposits by districts, which made the ability to wisely spend the financial funds a major concern (Lewis & Oosterman, 2008). 3. Kis-Katos and Sjahrir (2013) show that local governments have adopted a more need-based spending pattern after decentralization. They analyze the spending pattern on core public services, but not on local administration. These findings are not contradictory: A stronger needs orientation in the spending on services does not preclude a consistently high spending on the own administration. 4. The proliferation of districts may still be excessive as argued by Burgess, Hansen, Olken, Potapov and Sieber (2012). 5. Wang and Yao (2007) show that elections of village committees in rural China have led to a reduction in administrative expenditures and income given to township governments. 6. Lewis (2005) analyzes fiscal behavior of Indonesian districts after decentralization but does not analyze the efficiency of administration or the extent of administrative spending. Sjahrir, Kis-Katos, and Schulze (2013) analyze political business cycles in a spending category at the discretion of the district head, which is a subcomponent of administrative spending, but do not analyze the determinants of administrative (over-) spending.

7. Indonesia is also particularly suited to analyze these issues econometrically because of the large number of districts, the exogenously differently timed introduction of direct elections, which allows clear identification and for a developing country high data quality. 8. The old accountability mechanism was through centralized, autocratic decision-making and local implementation through appointed officials accountable to the center; the new mechanism is decentralized decision making through democratically elected district heads and the local parliament and local implementation by the local administration accountable to the district head. 9. It has long been noted that decentralization may lead to local capture. James Madison writes in The Federalist paper No. 10: “Men of factious tempers, of local prejudices, or of sinister designs, may by intrigue, by corruption, or by other means, first obtain the suffrages, and then betray the interests of the people. The question resulting is, whether small or extensive republics are more favorable to the election of proper guardians of the public weal; and it is clearly decided in favor of the latter. . .” (Hamilton, 1868, p. 110). 10. See Bardhan and Mookherjee (2006b) for a survey on the literature on decentralization and local capture and Kis-Katos and Schulze (2013) for a survey on corruption in Southeast Asia. 11. See also Farfan (2014) for a modern variant of the argument. A central organization of the state implies bundling the provision of multiple public goods and thus allows adjusting to asymmetric shocks to goods provision while decentralization unbundles the provision and improves accountability. We cannot cover all other models on elections as disciplining devices for public office holders. 12. The legal framework for decentralization was laid out by law 22/1999 on regional autonomy and law 25/1999 on intergovernmental fiscal relations.

ADMINISTRATIVE OVERSPENDING IN INDONESIAN DISTRICTS: THE ROLE OF LOCAL POLITICS

179

13. Source: Homepage of General Election Commission (KPU), http:// www.kpu.go.id. Twelve out of 45 parties gained only one seat in less than five district parliaments.

23. See http://news.detik.com/read/2007/07/31/174846/811627/10/2-rumah-bupati-garut-disita-kpk and http://politik.news.viva.co.id/news/ read/34259-kpk_eksekusi_mantan_bupati_garut.

14. The same law also increased the central administrative control of local planning and budgeting by giving the provinces supervisory (instead of coordination) powers. In addition, the center also revised the decentralization law on intergovernmental fiscal relations (Law 33/2004).

24. These are government regulations that regulate local governments’ budget reporting formats. The expenditure items are called obligatory roles or urusan wajib in Permendagri 13/2006.

15. District heads were appointed for 5 years with one possible reappointment in the old regime (law 5/1974). The term limit of 5 years was kept in newer regulation and local government heads remained limited to two consecutive terms (Art. 234 of law 32/2004). 16. The technical requirements: (i) economic performance, measured by GRDP and Own Source Revenue (PAD); (ii) district’s potential, measured by available resources and infrastructure for financial and economic activities, education, health, transportation and communication, and tourism and manpower; (iii) district’s socio-cultural condition, measured by available infrastructure for religious, socio-cultural, and sport activities; (iv) socio-political condition, measured by political participation of the public and people’s organization; (v) technical indicators such as population, area, and minimum number of sub-districts (see Government Regulation PP 129/2000). 17. See http://nasional.kompas.com/read/2010/01/21/20114161/. 18. See http://regional.kompas.com/read/2010/02/09/21122884/Bupati.Talaut.Jadi.Tersangka.Korupsi.9.8.Miliar, http://regional.kompas.com/ read/2013/10/17/1419400/Kasus.Biaya.Perjalanan.Dinas.Bupati.4.Pejabat.Tasikmalaya.Diperiksa and http://regional.kompas.com/read/2010/ 09/23/23211479/Bupati.Minta.Dikirim.ke.Rekening.Pribadi. 19. See http://regional.kompas.com/read/2010/12/17/22045241/ Elly.Lasut.Dituntut.9.Tahun.Penjara-3 and http://regional.kompas.com/ read/2012/04/09/12552781/twitter.com. 20. See http://regional.kompas.com/read/2013/10/17/1419400/ Kasus.Biaya.Perjalanan.Dinas.Bupati.4.Pejabat.Tasikmalaya.Diperiksa and http://www.tempo.co/read/news/2013/10/12/058521305/DipolisikanBupati-Tasikmalaya-Kembalikan-Uang. 21. The officials claimed that the spending would be within reason because they needed those cars to visit the villages that are not easily accessible. http://news.detik.com/read/2005/10/07/161842/457270/10/ akhirnya-anggota-dprd-riau-dapat-mobil-dinas-terrano, http://news.detik.com/read/2012/11/22/160216/2098475/10/2/sudah-biasa-mobil-dinaskepala-daerah-di-riau-berharga-miliaran-rupiah. 22. The state secretary stated that the spending for these official cars was within the rules of official cars procurement issued by the central government. He also stated that these cars are necessary to support the job of the governor and deputy governor around the province. http:// news.detik.com/read/2010/02/03/185319/1292326/10/mobil-dinas-gubernur-wagub-kaltim-seharga-rp-18-m.

25. While inspecting the data, we found some inconsistencies in the economic classification of government expenditures, which resulted in overestimated administrative expenditure figures. The most common problem was a misclassification of expenditures for staff in other sectors (especially education) under general administration expenditures. This problem was especially pronounced in the first years after decentralization, which suggests that administrative incapability might have been a major issue behind this finding. After a detailed examination of the data and interviews with the World Bank team in Indonesia, we designed a procedure that dropped 68 out of 2812 observations that were obviously subject to misspecification (see Appendix B for details). 26. We also included a dummy variable for indirectly (and democratically) elected district heads as there were still appointed district heads in the early years of our sample period (cf. Table 1). However, this variable never turned out to be significant. 27. Party composition of the parliament should in principle be available also for newly created districts and their parent districts. Yet, extensive field research showed that neither the election commission nor the Ministry of Home Affairs compile and collect these data. 28. The increase in other expenditures may be a consequence of more costly elections, which are budgeted under this category. 29. This interpretation is supported by the finding that significant political business cycles (PBC) exist in this expenditure category. These PBC exist only for direct elections and only if the incumbent is running for reelection (cf. Sjahrir, Kis-Katos, & Schulze, 2013). 30. The split dummies for goods and services and other expenditures are insignificant. 31. We also tested whether direct elections had a different effect for those bupatis and walikotas who could not run again, as they had served the previous term as indirectly elected district head and were ineligible for reelection. (District heads face a limit of two terms.) The underlying rationale for this is that accountability works predominantly through the threat of being voted out of office and that an insignificant overall effect may be the result of mixture of a significant effect for first termers and an insignificant effect for those who cannot run again. Yet, the inclusion of a last term dummy interacted with direct elections did not turn out to be significant. 32. The inclusion of the ethno-linguistic concentration measure does not affect the estimates of the other coefficients in any significant way. Again, we ran FE regressions, which are available upon request. These estimates are less reliable as there is little variation in the political variables, which change only with elections, i.e., only once.

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Bardhan, P., & Mookherjee, D. (2006b). Decentralization, corruption and government accountability. In S. Rose-Ackerman (Ed.), International handbook on the economics of corruption (pp. 161–188). Cheltenham, UK: Edward Elgar. Besley, T., & Case, A. (1995). Incumbent behavior: Vote-seeking, taxsetting and yardstick competition. American Economic Review, 85(1), 25–45. Bhattacharyya, S., & Hodler, R. (2010). Natural resources, democracy and corruption. European Economic Review, 54(4), 608–621. Borge, L.-E., Falch, T., & Tovmo, P. (2008). Public sector efficiency: The roles of political and budgetary institutions, fiscal capacity, and democratic participation. Public Choice, 136(3), 475–495. Buehler, M. (2010). Decentralisation and local democracy in Indonesia: The marginalization of the public sphere?. In E. Aspinall, & M. Mietzner (Eds.), Problems of democratization in Indonesia: Elections, institutions and society (pp. 267–287). Singapore: Institute of Southeast Asian Studies. Buehler, M., & Tan, P. (2007). Party-candidate relationships in Indonesian local politics: A case study of the 2005 regional elections in Gowa, South Sulawesi province. Indonesia, 8, 41–69. Burgess, R., Hansen, M., Olken, B., Potapov, P., & Sieber, S. (2012). The political economy of deforestation in the tropics. Quarterly Journal of Economics, 127(4), 1707–1754. Decentralization Support Facility. (2007). Costs and benefits of new region creation in Indonesia: Final report. Jakarta: Decentralization Support Facility. Farfan, A. (2014). Decentralization as unbundling of public goods provision. Department of International Economic Policy Working Paper. Freiburg: University of Freiburg. Ferejohn, J. (1986). Incumbent performance and electoral control. Public Choice, 50(1–3), 5–26. Fitrani, F., Hofman, B., & Kaiser, K. (2005). Unity in diversity? The creation of new local governments in a decentralizing Indonesia. Bulletin of Indonesian Economic Studies, 41(1), 57–79. Galasso, E., & Ravallion, M. (2005). Decentralized targeting of an antipoverty program. Journal of Public Economics, 89(4), 705–727. Hamilton, A. (1868). The federalist: Number X. In A. Hamilton (Ed.), The federalist: A commentary on the Constitution of the United States (pp. 104–112). Philadelphia: J.B. Lippincott & Co.. Hill, H. (2012). Corruption and development: The Indonesian experience. In S. Khoman (Ed.), A scholar for all: Essays in honour of Medhi Krongkaew (pp. 150–164). Bangkok: Thammasat University Press. Hofman, B., & Kaiser, K. (2004). The making of the big bang and its aftermath: A political economy perspective. In J. Alm, M. V. Jorge, & S. M. Indrawati (Eds.), Reforming intergovernmental fiscal relations and the rebuilding of Indonesia (pp. 15–46). Cheltenham, UK: Edward Elgar. Hofman, B., Kaiser, K., & Schulze, G. G. (2004). Korruption und Dezentralisierung – Erste Erfahrungen aus Indonesien. DIW Vierteljahreshefte zur Wirtschaftsforschung, 73(2), 226–246. Hofman, B., Kaiser, K., & Schulze, G. G. (2009). Corruption and decentralization. In C. J. G. Holzappel, & M. Ramstedt (Eds.), Decentralization and regional autonomy in Indonesia (pp. 99–113). Singapore: Institute for Southeast Asian Studies. Infoasaid. Indonesia – Media and telecoms landscape guide. (2012). Accessed 29.12.2013 (Online document). Kalseth, J., & Rattsø, J. (1998). Political control of administrative spending: The case of local governments in Norway. Economics and Politics, 10(1), 63–83. Kis-Katos, K., & Sjahrir, B. S. (2013). Does local governments’ responsiveness increase with decentralization and democratization? Evidence from sub-national budget allocation in Indonesia. Occasional Paper No. 16. BMBF-Southeast Asian Studies Group, University of Freiburg. Kis-Katos, K., & Schulze, G. G. (2013). Corruption in Southeast Asia – A survey of recent research. Asian-Pacific Economic Literature, 27(1), 79–109. Lewis, B. (2005). Indonesian local government spending, taxing and saving: An explanation of pre- and post-decentralization fiscal outcomes. Asian Economic Journal, 19(3), 291–317. Lewis, B. (2006). Local government taxation: An analysis of administrative cost inefficiency. Bulletin of Indonesian Economic Studies, 42(2), 213–233.

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APPENDIX A. ADDITIONAL FIGURES AND TABLES See Figure 3 and Tables 6–9.

APPENDIX B. THE DATA CLEANING PROCEDURE The inspection of the data showed some obvious misspecifications of expenditures in wrong expenditure categories, especially in the years following the change in accounting stan-

800 600

Others exp

400

Capital

200

Goods & Services

Staff 0

p.c. Administrative expenditures (in '000 Rupiah)

ADMINISTRATIVE OVERSPENDING IN INDONESIAN DISTRICTS: THE ROLE OF LOCAL POLITICS

2001

2002

2003

2004

2005

2006

2007

2008

2009

Years

Figure 3. Per capita administrative expenditures by economic classification. Notes: The figure maps yearly total p.c. administrative expenditures (according to their economic classification) for the sample of the 418 Indonesia districts with full data. Source: SIKD, Min. of Finance and DAPOER INDO, World Bank Indonesia.

181

outliers using a set of statistical criteria. We proceeded in three steps. First, we identified outliers in administrative expenditures for those districts that had misclassified the teachers’ salary as administrative expenses. For this purpose, we excluded all observations for which (1) the share of administrative staff expenditures to total expenditures were at least two standard deviations above the sample mean, and for which at the same time (2) the share of educational staff expenditures to total expenditures was at least two standard deviations below the mean (Rule I). In a second step, we tried to make sure that all excluded observations are truly outliers and do not only reflect low teachers’ salaries because of low pupil numbers. Thus, we kept all observations in the sample (irrespective of whether they fulfilled Rule I), for which per pupil expenditures ranged above the sample median (Rule II). We defined the number of pupils based on Susenas, a household data set representative at the district level, which records the total number of students enrolled in primary, junior, and senior secondary schools. In a third step, we repeated the above procedure to check for similar misspecifications in the health and administrative sector, applying Rule I also to the salaries of health staff (doctors and nurses) (Rule III). By following Rules I–III, we dropped a total of 68 out of 2812 observations.

dards for local governments. We corrected these obvious misspecifications of administrative expenditures by identifying the

Table 6. Number of media reports mentioning different graft and misappropriation cases Cases

Source

Election funding Business travel spending Procurement of goods and services Operational costs Spending on household services Spending on personnel Unexpected spending Personal use of funds General misappropriation Offices and official residences development Total mentions Online archive since

Kompas.com

JPNN.com

Detik.com

Total

5 22 8 3 1 1 1 2 8 9 60 2008

3 2 1 0 2 1 0 1 5 0 15 2009

3 10 18 7 7 2 2 1 0 3 53 2004

11 34 27 10 10 4 3 4 13 12 128

Notes: The table categorizes the contents of 119 reports on graft and misappropriation of local administrative budgets, published in the above three online media outlets.

Table 7. Per capita administrative expenditures in 2007 by functions Functions Development planning Unity and local politics General government Personnel People and village empowerment Statistics Archive Communication and informatics

p.c. Govt. Administrative Expenditures (in 1000 Rp)

%

10.08 8.82 235.24 9.43 6.60 0.03 0.75 2.71

3.68 3.22 85.96 3.45 2.41 0.01 0.27 0.99

Notes: The table displays per capita administrative expenditures in 2007 by functions for the sample of 384 districts. 2007 is the latest year, for which these functional classifications are available. Source: SIKD, Min. of Finance.

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WORLD DEVELOPMENT Table 8. Descriptive statistics

Variable

Definition and source

ln p.c. Government Administrative Expenditure on: Total Staff Capital Goods and services Other

ln Population ln Area Number of villages (in ‘00) Share of villages with flat surface

Share of landlocked villages

ln (1 + distance to Jkt)

Urbanization rate ln p.c. Total Fiscal Revenue

ln Real GRDP p.c.

Resource rich indicators

Literacy rate

Ethno-linguistic concentration index

Political concentration index

Majority indicator Share Share Share Share

of of of of

Golkar PDIP PKB PPP

ln p.c. Govt Administrative Routine Expenditure on Travel

Natural logarithm of per capita government administrative expenditure on: Total Staff Capital Goods and services Other Source: SKID, Min. of Finance and DAPOER, World Bank Indonesia Natural logarithm of population Source: Central Bureau of Statistics (BPS) Natural logarithm of area Source: Basic data for DAU calculation, Min. of Finance Number of villages Source: Potensi Desa (Podes), BPS Number of villages with flat topographical surface relative to total number of villages Source: Podes, BPS Number of landlocked villages relative to total number of villages Source: Podes, BPS Natural logarithm of 1 + distance from district’s capital to Jakarta Source: The World Bank Indonesia Share of population in urban area Source: Socio-Economic Survey (Susenas), BPS Natural logarithm of per capita total fiscal revenue Source: SKID, Min. of Finance and DAPOER, World Bank Indonesia Natural logarithm of Real Gross Regional Domestic Product (GRDP) per capita Source: BPS A dummy equals one if a district receive natural resource shared revenue Source: SKID, Min. of Finance and DAPOER, World Bank Indonesia Number of people above 15 years of age who can read relative to total population. Source: Susenas, BPS A concentration index based on ethno-linguistic composition at the district level (Herfindahl–Hirschman index) Source: Population Census 2000, BPS A concentration index based on political party’s votes at the local parliament election (Herfindahl–Hirschman index) A dummy equals one if a district has one party that received more than 50% of the votes Votes received by Golkar relative to total votes Votes received by PDIP relative to total votes Votes received by PKB relative to total votes Votes received by PPP relative to total votes Source: Election data 1999 and 2004 are from KPU Natural logarithm of per capita government administrative routine expenditure on travel. Source: SKID, Min. of Finance

Mean

Std. Dev.

Min

Max

12.653 11.590 10.131 11.335 11.141

0.846 0.882 1.279 0.889 0.983

10.260 9.320 4.249 8.995 6.668

16.229 15.509 14.141 15.206 14.370

12.806

0.898

9.502

15.246

7.301

1.611

2.776

10.834

1.666

1.251

0.090

12.660

0.613

0.257

0.004

1.188

0.815

0.223

0

1.000

6.670

0.818

2.989

7.972

0.380

0.316

0

1.000

13.808

0.749

12.206

17.367

15.442

0.662

14.061

19.273

0.354

0.478

0

1.000

0.912

0.071

0.533

0.998

0.351

0.333

0.004

0.998

0.228

0.097

0.094

0.761

0.147

0.355

0

1.000

0.259 0.212 0.106 0.095

0.145 0.151 0.130 0.072

0 0 0 0

0.842 0.869 0.707 0.442

8.714

1.135

4.536

12.377

Notes: The number of observations is 1889 from 399 districts from 2001–2009. The number of observations for political indicators from election data is 1039 from 197 districts that did not split and for which election data and ethnic–linguistic concentration data are available. The number of observations for government administrative routine expenditure on travel is 1333 from 384 districts from 2001–2006.

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183

Table 9. The effects of direct elections, FE estimates Dependent

ln p.c. Government Administrative Expenditures (1)

ln Population Urbanization rate ln p.c. Total fiscal revenues ln Real GRDP p.c. Literacy rate

(2) ***

0.415 (0.060) 0.095 (0.111) 0.349*** (0.067) 0.093 (0.071) 0.344 (0.273)

Direct election

(3) ***

0.415 (0.060) 0.095 (0.111) 0.350*** (0.067) 0.094 (0.072) 0.353 (0.274) 0.012 (0.017)

Direct  Literacy rate

(4) ***

0.412 (0.059) 0.094 (0.111) 0.354*** (0.066) 0.095 (0.072) 0.314 (0.275) 0.193 (0.139) 0.200 (0.150)

Direct  ln p.c. Total fiscal revenues Time effects Split effects Observations R-squared

Yes Yes 1889 0.883

Yes Yes 1889 0.883

Yes Yes 1889 0.883

(5) ***

0.402 (0.059) 0.099 (0.110) 0.388*** (0.066) 0.087 (0.072) 0.277 (0.274) 0.629** (0.243)

0.045** (0.018) Yes Yes 1889 0.884

0.402*** (0.059) 0.098 (0.110) 0.388*** (0.065) 0.088 (0.072) 0.264 (0.275) 0.674*** (0.252) 0.095 (0.157) 0.042** (0.018) Yes Yes 1889 0.884

Notes: All models are estimated by unbalanced panel (Fixed Effects regressions). Robust standard errors clustered at the parent-district level are reported in parentheses. The number of districts is 399. * Significance at the 10% level. ** Significance at the 5% level. *** Significance at the 1% level.

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