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Does Fiscal Decentralization Encourage Corruption in Local Governments? Evidence from Indonesia

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  • Anisah Alfada

    (Graduate School of Asia Pacific Studies, Waseda University, Tokyo 169-8050, Japan)

Abstract

This study examines the effects of fiscal decentralization on corruption by analyzing whether the degree of fiscal decentralization facilitates or mitigates the number of corruption cases in Indonesia’s local governments. The research utilizes a panel data model and a system Generalized Method of Moments (GMM) estimator to assess the degree of fiscal decentralization on corruption in 19 provinces for the period between 2004 and 2014. The estimation results reveal that the degree of fiscal decentralization, both expenditure and tax revenue sides, drives a growing number of corruption cases in local governments. A lack of human capital capacity, low transparency and accountability, and a higher dependency on intergovernmental grants from the central government may worsen the adverse effects of corruption. Our results suggest that a more heterogeneous population and higher political stability mitigate the adverse effects of corruption. Furthermore, this is the first corruption study in Indonesia to create corruption measures from the number of corruption cases investigated by the Indonesia Corruption Eradication Commission as well as extensive, provincial-level government financial data. As a result of using these different datasets, this research advances existing empirical studies and makes policy recommendations for the local governments in Indonesia.

Suggested Citation

  • Anisah Alfada, 2019. "Does Fiscal Decentralization Encourage Corruption in Local Governments? Evidence from Indonesia," JRFM, MDPI, vol. 12(3), pages 1-14, July.
    • Handle: RePEc:gam:jjrfmx:v:12:y:2019:i:3:p:118-:d:248305
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    Cited by:

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    3. Fuzheng Luo & Nengsheng Luo, 2020. "Inter-Provincial Market Fragmentation and Regional Economic Development in China," Sustainability, MDPI, vol. 12(8), pages 1-18, April.
    4. Mihaela Onofrei & Ionel Bostan & Elena Cigu & Anca Florentina Vatamanu, 2023. "Ensuring Budgetary Resources at the Level of Local Communities in the Current Social-Economic Context: Evidence for Romanian Municipalities," Economies, MDPI, vol. 11(1), pages 1-16, January.
    5. Kshitiz Shrestha & Jorge Martinez‐Vazquez & Charles Hankla, 2023. "Political decentralization and corruption: Exploring the conditional role of parties," Economics and Politics, Wiley Blackwell, vol. 35(1), pages 411-439, March.
    6. Lin-Feng Yue & Jing-Ran Sun & Long-Jian Yang, 2022. "The impact of fiscal centralization policies on education expenditure among Chinese local governments," Quality & Quantity: International Journal of Methodology, Springer, vol. 56(4), pages 2281-2300, August.
    7. Cong Minh Huynh & Hoai Nam Tran, 2021. "Moderating effects of corruption and informality on the fiscal decentralization—economic growth nexus: Insights from OECD countries," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 92(2), pages 355-373, June.
    8. Livia Nathan & Khoirul Aswar & Jumansyah ‎ & Sri Mulyani & Hardi ‎ & Azwir Nasir, 2022. "The Moderating Role of Natural Resources Between Fiscal Decentralization, Government Internal Audit, Law Enforcement and Corruption: Evidence from Indonesian Local Government," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 16(4), December.

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