Local political fragmentation: Fiscal and service delivery effects in Indonesia

This study examines the direct and indirect impact of local political fragmentation on fiscal and service outcomes in Indonesia, focusing particular attention on the interaction between local legislatures and directly elected executives. The investigation uses newly accessed data on council size—a common measure of political fragmentation—over two recent electoral periods. The analysis employs a regression discontinuity design, which assists in overcoming problems associated with the endogeneity of council size. The study determines that council size directly suppresses local government spending, as other recent work has also found. The effects of council size are also indirectly expenditure-constraining. When councils are small the impact of direct executive elections on spending is positive; as council size grows positive election effects decline; and when councils become particularly large the influence of direct elections on expenditure becomes negative. Recent research on this topic contends that such constraints on local spending are constructive—they reflect useful limitations on the budget maximizing tendencies of local administrations. This analysis argues otherwise. It posits that the reduced spending caused by fragmentation adversely affects service delivery and therefore constitutes a harmful effect. The study provides evidence to show that increasing council size does indeed negatively influence service outcomes. (revised Feb2017)