Democratisation Under Diversity: Theory and Evidence from Indonesian Communities

57 Pages Posted: 1 Feb 2021 Last revised: 19 May 2022

See all articles by Sarmistha Pal

Sarmistha Pal

University of Surrey; IZA Institute of Labor Economics

Anirban Mitra

University of Kent

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Abstract

We study the effect of ethnic diversity on local public spending following fiscal decentralisation in a setting where local institutions are salient. Specifically, the latter affects coordination costs and thereby cooperative behaviour across the constituent ethnic groups. Our theory highlights the role of the local elite in lobbying for policies which favour them in a decentralised setting. The differences in preferences over public good allocations along with the salience of coordination costs across ethnic groups are relevant in determining the equilibrium lobbying behaviour. This results in ethnic diversity having a detrimental effect on local developmental spending which is aggravated by increased levels of coordination costs. We test these predictions using Indonesian community-level data. Utilising the 1997 and 2007 Indonesian Family Life Survey (IFLS) rounds, we are able to construct various measures of ethnic diversity. We exploit an institutional feature of Indonesian communities - namely, the observance of traditional "Adat" laws to proxy coordination costs across ethnic groups. Overall, we find that ethnic diversity depresses local development spending post-decentralisation at the community level particularly where Adat laws (which promote an ethic of mutual co-operation) are not followed. The opposite obtains for spending on non-developmental items, all of which is consistent with our theory.

Keywords: decentralisation, ethnic diversity, lobbying, local development, political economy

JEL Classification: D72, D74, H40

Suggested Citation

Pal, Sarmistha and Mitra, Anirban, Democratisation Under Diversity: Theory and Evidence from Indonesian Communities. IZA Discussion Paper No. 14073, Available at SSRN: https://ssrn.com/abstract=3775978

Sarmistha Pal (Contact Author)

University of Surrey ( email )

Stag Hill
Guildford, England GU2 7XH
United Kingdom
01483 683995 (Phone)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Anirban Mitra

University of Kent ( email )

CT2 7NP
United Kingdom

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