The core research question to be addressed in this project is ‘To what extent does the quality of economic governance at the district level enhance the economic performance of Indonesia’s decentralised districts?’
Several empirical studies have confirmed the connection between better governance and improved economic performance. However, to date, almost all of these studies have used a cross-country approach to try and explain the extent to which national governance affects national economic performance.
The wave of decentralisation over the last few decades means that many countries have sub-national regions with significant administrative, fiscal and sometimes political autonomy. Nowhere in the Asia Pacific is this truer than in Indonesia, which has decentralised political, administrative and significant fiscal autonomy to over 480 districts. However, the economic performance of Indonesia’s districts since decentralisation in 2001 has varied dramatically.
There is anecdotal evidence that the policies pursued by sub-national authorities have an important bearing on the quality of the local investment climate and consequently the economic performance of the region. However, measuring whether this is true and, if so, how important local economic governance is, is usually impossible because of the lack of suitable data at the sub-national level.
However, the Asia Foundation, in conjunction with a national Indonesian NGO, Regional Autonomy Watch (KPPOD), have recently produced a remarkable dataset which measures the quality of local economic governance in 243 districts across the country. The data is based on a statistically representative random sample of over 12,000 firms and 729 business associations throughout these districts. This dataset provides a unique opportunity to test empirically the hypothesis that better local governance in Indonesia positively affects local economic performance.
The key gap that this research will address is that, despite huge efforts to build the capacity of local governments and several years of debate about the costs and benefits of decentralisation, we still do not have clear empirical evidence about whether improving the quality of local economic governance does, in fact, tend to result in improved economic performance.
The likely benefits from this research will include: a better understanding of which aspects of local economic governance matter most for economic performance and a quantification of how much they matter relative to other factors, helping policymakers and donors focus on those aspects most likely to yield significant gains in terms of growth and poverty reduction in lagging regions; and a greater awareness and use by civil society groups of the Economic Governance Index as a tool to put pressure on local leaders for governance reforms.
Related Resources
See the YouTube video where Neil McCulloch contributes to the Asia Foundation’s Economic Governance Index which surveys local government regulations across a single country, and assesses their impact on local business growth.
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