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Decentralization and Economic Performance in Indonesia

  • Thomas B. Pepinsky and Maria M. Wihardja

Indonesia's 1999 decentralization law gave local governments in Indonesia an unprecedented opportunity to adopt prodevelopment policies. In this article, we study whether decentralization has in fact generated improved economic performance in Indonesia. Using a synthetic case control methodology, we argue that Indonesian decentralization has had no discernable effect on the country's national-level economic performance. To explain why not, we use subnational data to probe two political economy mechanisms—interjurisdictional competition and democratic accountability—that underlie all theories linking decentralization to better economic outcomes. Our findings suggest that extreme heterogeneity in endowments, factor immobility, and the endogenous deterioration of local governance institutions can each undermine the supposed development-enhancing promises of decentralized government in emerging economies such as Indonesia.

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Journal of East Asian Studies
  • ISSN: 1598-2408
  • EISSN: 2234-6643
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