Resource Windfalls and Local Government Behavior: Evidence from a Policy Reform in Indonesia

51 Pages Posted: 18 Nov 2015

See all articles by Ola Olsson

Ola Olsson

University of Gothenburg

Michele Valsecchi

University of Gothenburg - School of Business, Economics and Law

Date Written: November 2, 2015

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 effect from the reform stands in contrast to the negative effects emphasized in the resource curse literature.

Suggested Citation

Olsson, Ola and Valsecchi, Michele, Resource Windfalls and Local Government Behavior: Evidence from a Policy Reform in Indonesia (November 2, 2015). Available at SSRN: https://ssrn.com/abstract=2685721 or http://dx.doi.org/10.2139/ssrn.2685721

Ola Olsson (Contact Author)

University of Gothenburg ( email )

Vasagatan 1
Goteborg, 405 30
Sweden

HOME PAGE: http://https://sites.google.com/site/econolaols/home

Michele Valsecchi

University of Gothenburg - School of Business, Economics and Law ( email )

Vasagatan 1
Goteborg, 40530
Sweden

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