Effects of corruption on formula-based intergovernmental fiscal transfer allocations in Indonesia

Crawford School of Public Policy
Photo by World Intellectual Property on Flickr

Event details

ACDE Seminar

Date & time

Tuesday 31 August 2021


Online via Zoom


Blane Lewis, Australian National University

Fiscal transfers from the central government to local governments are of paramount importance in financing local service delivery, especially in developing countries. In this context formula-based intergovernmental transfers are thought to be especially effective in maximising the potential economic benefits of decentralised public sectors and minimising political influence. However, recent research emphasises that formula-based transfers may not be as immune to political manipulation as previously thought. I investigate the impact of local public corruption on the distribution of formula-based transfers. Focusing on the case of Indonesia, I find that corruption has no direct effect on formula-based grants. However, corruption does indirectly affect transfer allocations through its impact on district personnel spending, which serves as a key factor in the allocation formula. Rising corruption leads to increased district spending on civil servant salaries and allowances, which in turn inadvertently results in greater transfer revenue for districts. I determine that increased corruption-induced personnel spending is largely a function of rising teacher salary payments.

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