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Fiscal Decentralization and Development: How Crucial is Local Politics?

Author

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  • Pal, Sarmistha

    () (University of Surrey)

  • Roy, Jaideep

    () (University of Birmingham)

Abstract

Does fiscal decentralization in a politically decentralized less developed country help strengthen democratic institutions at the grass root level? And is the impact of such decentralization on local politics important in determining local development? Our study on Indonesia suggests that fiscal decentralization enhanced free and fair local elections, though the incidence of elite capture, and the consequent breakdown of local democracy, was also present in significant proportions. Fiscal decentralization promoted development mostly in communities which transited out from elite capture to embrace free and fair elections. This was followed by communities that experienced the emergence of elite capture. Communities that continued to remain under either elite capture or free and fair elections did the worst. These findings suggest that while the emergence of elite capture exists, it may not necessarily be the most harmful. Instead, and surprisingly so, stability of local polity hurts development the most.

Suggested Citation

  • Pal, Sarmistha & Roy, Jaideep, 2010. "Fiscal Decentralization and Development: How Crucial is Local Politics?," IZA Discussion Papers 5286, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp5286
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    References listed on IDEAS

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    1. International Monetary Fund, 2001. "Fiscal Decentralization and Governance; A Cross-Country Analysis," IMF Working Papers 01/71, International Monetary Fund.
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    More about this item

    Keywords

    local politics; less developed nation; decentralization;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure

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