The Political Economy of Redistribution in Indonesia

Political Patronage and Favoritism in Intergovernmental Fiscal Transfer Allocations

Political patronage involves politicians providing benefits or resources in exchange for political support or loyalty. Favoritism, particularly in intergovernmental fiscal transfers, can lead to unequal access to resources and perpetuate inequalities. To combat this, policymakers must prioritize transparency and accountability in resource distribution, ensuring fair treatment for all regions.

A new e-book on The Political Economy of Redistribution in Indonesia by Gerrit Gonschorek seeks to advance the scholarly understanding of how different institutional intergovernmental transfer designs influence patronage and favoritism in public fund allocations. Using Indonesia as a case study, the author explores current theories on the factors influencing the distribution of public funds. The book exploits distinctive differences between various institutional intergovernmental transfer designs to investigate their influence on the prevalence of favoritism and patronage in public fund allocations, in the world’s third-largest democracy and biggest economy of Southeast Asia.

The e-book contributes to the existing literature on the political economy of redistribution in three main ways:

  • First, the analysis compares different institutional transfers within the same emerging country. In contrast to the existing literature, the quasi-experimental setup permits the investigation of special interests in public funds allocations, holding the political system, the observation period, and the government officials involved constant while varying the institutional transfer design.
  • Second, it adds to the small body of literature that analyzes political patronage in young democracies and within an emerging country context. Indonesia is a young democracy characterized by low ideological cleavages, little party loyalty, and the prevalence of money politics in its political system. These features characterize several developing countries yet contrast sharply with the established democracies for which patronage has been analyzed.
  • Third, this book provides the first analysis investigating patronage and favoritism in Indonesia, the third-largest democracy in the world and a dominant country in Southeast Asia, implementing large-scale democratization and fiscal decentralization reforms starting in 1999.

The book is divided into six chapters:

  • Chapter One lays out the motivation for the research and its relevance, explains its contribution to the existing literature, and gives an outlook on the book.
  • Chapter Two provides a systematic analysis of Indonesia’s intergovernmental fiscal transfer system, examining its size, allocation mechanism, and economic rationale. Furthermore, the chapter points out major changes in the institutional setup and in the relative magnitudes of the transfers effected by the  administration. This allows assessing to what extent the Jokowi administration in Indonesia has shifted the policy stance on (fiscal) decentralization and critically evaluating the effectiveness and efficiency of the existing system, including recently implemented reforms. The analysis concludes that substantial parts of Indonesia’s intergovernmental fiscal transfer system allow for the misallocation of public funds based on the government official’s personal (favoritism) and/or political agendas (patronage).
  • Chapter Three examines the allocation of the central discretionary grant program, ‘Tugas pembantuan’ (TP), to districts in Indonesia. The program, which funds physical infrastructure, requires presidential approval for every funded project. The study uses OLS and fixed effects models on an unbalanced panel data set from 2005–2013 to investigate whether the allocation is based on district need, political alignment of local district heads with the central government, or reelection motives of the incumbent president.
  • Chapter Four analyzes the influence of favoritism on the allocation of the ‘Dana Dekonsentrasi’ (Dekon, DK) subnational discretionary grant program from the provincial government to districts in Indonesia. DK grants are the largest source of discretionary funds allocated from the provincial to the district level, intended for non-physical tasks. By law, they should be allocated in accordance with general principles, namely “harmonious national and regional development.” However, the government does not define specific allocation criteria, allowing provincial governors to allocate funds discretionarily. The chapter uses a unique panel data set of 410 Indonesian districts from 2005–2013 to investigate whether the birthplace of the provincial governor determines fund allocation at the district level.
  • Chapter Five analyzes the effectiveness of non-discretionary formula-based transfers in Indonesia’s public fund allocations against patronage and favoritism. Formula-based transfers, which tie public funds to local development indicators, are often seen as a way to reduce special-interest politics. However, limited empirical evidence suggests the opposite. Existing studies on this issue do not compare formula-based transfers to discretionary counterfactuals like non-formula-based institutional transfer designs. This analysis provides a unique opportunity to compare these two transfer designs within the same country, allowing for an investigation of special interests in public funds allocations while maintaining the political system, observation period, and government officials involved.
  • Chapter Six summarizes the findings of the book on public fund allocations in Indonesia and its relevance for other fiscally decentralized countries. The study found that officials with discretionary scope in public fund allocations were more likely to manipulate transfers based on personal motivations. Limiting government officials’ discretion reduced transfer manipulations. The study also highlighted the benefits of democratization reforms but warned against risks if fiscal decentralization design allowed discretion by a small group of elected officials. Overall, the results clearly show that an intergovernmental transfer system’s institutional design shapes government officials’ underlying incentives.

This post by Gerrit J. Gonschorek (former Consultant on Intergovernmental Fiscal Relations, Governance Global Practice Team, The World Bank, Jakarta Office, Indonesia, now working for the German Federal Ministry of Finance), originally appeared on the Taylor & Francis Group website.

The book The Political Economy of Redistribution in Indonesia Political Patronage and Favoritism in Intergovernmental Fiscal Transfer Allocations is based on the authors’ Ph.D. Dissertation at the University of Freiburg, Germany, between 2014 and 2021.  All findings, interpretations, and conclusions expressed do not necessarily reflect the views of the World Bank, the executive directors of the World Bank, or the governments they represent.