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Resource Windfalls and Local Government Behaviour: Evidence From a Policy Reform in Indonesia

Author

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  • Olsson, Ola

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

  • Valsecchi, Michele

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

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.

Suggested Citation

  • Olsson, Ola & Valsecchi, Michele, 2015. "Resource Windfalls and Local Government Behaviour: Evidence From a Policy Reform in Indonesia," Working Papers in Economics 635, University of Gothenburg, Department of Economics.
    • Handle: RePEc:hhs:gunwpe:0635
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    File URL: http://hdl.handle.net/2077/40990
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    References listed on IDEAS

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    Cited by:

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    3. Maurer, Stephan E., 2019. "Oil discoveries and education provision in the Postbellum South," Economics of Education Review, Elsevier, vol. 73(C).
    4. Maldonado, Stanislao, 2014. "The Non-Monotonic Political Effects of Resource Booms," MPRA Paper 85649, University Library of Munich, Germany, revised 18 Dec 2017.
    5. Cassidy, Traviss, 2017. "Revenue Persistence and Public Service Delivery," MPRA Paper 114464, University Library of Munich, Germany, revised 06 Sep 2022.

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    More about this item

    Keywords

    Resource windfalls; fiscal decentralization; Indonesia;
    All these keywords.

    JEL classification:

    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • O20 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - General
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)

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