To the ones in need or the ones you need? The political economy of central discretionary grants − empirical evidence from Indonesia

Abstract

We analyze the allocation of discretionary grants from the central government to local governments in Indonesia. Using OLS and Fixed Effects models on an unbalanced panel data set for more than 400 Indonesian districts covering the period 2005-2013, we investigate whether the allocation of the grants is determined by the need of a district, by political alignment of the central government with the local district heads, or by reelection motives of the incumbent president. We find that grant allocations are not determined by need characteristics and that political considerations matter significantly. Districts with low support for the president received significantly more than the core supporting districts, especially in the year of national elections. This effect is limited to the first term of the president. In the second term, after which reelection is impossible, political considerations were largely absent. This pattern is consistent with the view that the incumbent president considers discretionary grants as an instrument to increase reelection probabilities. Unlike the evidence for most countries, we find no effect for political party alignment with local district heads. Our results are robust to the inclusion of a number of other variables capturing competing motives.

Mediating distributive politics: political alignment and electoral business cycle effects on municipality financing in Greece

“…Finally, the paper is subject to limitations, some of which open avenues for further research. Whilst the Greek electoral system in our study period offers significant advantages (concurrent elections for all municipalities, variation in parties in both the upper-and lower-tier government levels), it does not allow for the examination of the influences considered in papers such as Carozzi and Repetto (2016), Gonschorek et al (2018) and Dalle Nogare and Kauder (2017). 13 It is unclear from our study whether mayors are unintentionally involved in this misallocation of resources or whether they are willing volunteers.…”

“…It is worth noting that other factors have also been found to affect the alignment channel of intergovernmental grants. Gonschorek et al (2018) and Dalle Nogare and Kauder (2017) highlight the impact of term limits on electoral politics in Indonesia and Italy, whilst Carozzi and Repetto (2016) find birthplace bias alongside re-election considerations in the distortion of intergovernmental grants by Italian parliamentarians. Golden and Min (2013) provide a range of studies that consider further factors such as cultural and ethnic favouritism.…”

“…Support for both propositions has been found in a range of empirical studies across different countries. The 'swing' hypothesis has been evidenced by Dahlberg and Johansson's (2002) work on Swedish municipalities, Castells and Solé-Ollé (2005) and Solé-Ollé (2013) for infrastructure investments in Spanish regions, Case (2001) on block grants in Albania and Gonschorek et al (2018) on discretionary grants in Indonesia. The 'core' voter hypothesis is supported by the findings of Rodríguez-Pose et al (2016a, b) that investment is directed in 'core' voting NUTS3 regions in Greece, Ansolabehere and Snyder's (2006) work on intergovernmental transfers in the USA and the study of German discretionary grants by Kauder et al (2016).…”

“…Due to the relatively homogenous (ethnically and culturally) population of Greece, these factors are unlikely to be at play for this study. Similarly, the lack of term limits and single-member-only electoral districts make it impossible to consider factors such as the ones by Gonschorek et al (2018), Dalle Nogare and Kauder (2017) and Carozzi and Repetto (2016).…”

“…The existence of multi-member parliamentary constituencies which do not correspond to municipal boundaries makes a study of the influence of home town bias (a laCarozzi and Repetto (2016)) particularly difficult whilst there is no term limits in either lower-or upper-tier government levels in Greece as is the case forGonschorek et al (2018) and Dalle Nogare andKauder (2017).…”