Political Competition and Local Government Performance: Evidence from Indonesia

This paper analyses the impact of political competition on local government performance in Indonesia. This study uses a new database that covers 427 districts in Indonesia, from 2000 to 2013. In Indonesia, local governments are largely responsible for fulfilling basic service delivery and, in this regard, they are extremely powerful. Political competition is measured using the Herfindahl Hirschman Concentration Index for the district parliament election. This variable is potentially endogenous, because political competition is likely to be non-random and correlated with unobservable variables. To solve this problem, I use the lag of political competition for neighbouring districts within the same province, as well as the political competition from the 1955 general election, as instrumental variables for political competition. The degree of political competition has been found to boost real Regional Gross Domestic Product (RGDP) per capita by 1.9%. Furthermore, a one standard deviation increase in political competition would increase RGDP growth by approximately 0.81%. The results also support the findings of previous studies, which have found that stiffer political competition is associated with higher public spending (e.g. infrastructure spending) and pro-business policies.