Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 635: Resource Windfalls and Local Government Behaviour: Evidence From a Policy Reform in Indonesia
Ola Olsson () and Michele Valsecchi ()
Additional contact information
Ola Olsson: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O.Box 640, SE 40530 Gothenburg, Sweden
Michele Valsecchi: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O.Box 640, SE 40530 Gothenburg, Sweden
Abstract: We analyze the impact of a natural experiment in Indonesia that allocated certain district governments with a windfall revenue from natural resource production. Our identification is based on a comparison between bordering districts in provinces that received the windfall with those that did not receive it, before and after the fiscal reform in 1999. We study the impact on a range of outcome variables such as regional GDP, infrastructure quality, employment, education, and household consumption. Our results demonstrate a "flypaper effect" in the sense that the increased revenue led to higher spending without any lowering of local taxes. We argue that the large relative increases in spending on public services contributed to a very strong increase in local GDP levels, led by the agricultural sector. A 100-dollar windfall further increased literacy by about 2 percent and non-food consumption by 67 USD. The strong general tendency of positive effects from the reform stands in contrast to the negative effects emphasized in the resource curse literature.
Keywords: Resource windfalls; fiscal decentralization; Indonesia
52 pages, November 2015
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