Munich Personal RePEc Archive

Does Soft Corruption Make Grease or Sand for Development? Evidence from Road's Special Allocation Fund for Indonesian Districts

Nasrudin, Rus'an (2015): Does Soft Corruption Make Grease or Sand for Development? Evidence from Road's Special Allocation Fund for Indonesian Districts.

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Abstract

Under a question whether corruption acts as grease or sand for development, this paper estimates the effect of special allocation fund (SAF) or DAK in road sector to infrastructure provision (road) at the district level in Indonesia. The political fragmentation and its political earmarking, defined as the effective number of central parliamentary members from a district are used as an instrumental variable (IV) for the amount of SAF in each district combined with a difference-in-difference measure for the rural road. Such empirical strategy is adopted to tackle three endogeneity problems: selection bias, measurement error and reverse causality between SAF allocation and rural road. First I find that the influence of political earmark is statistically significant than the formula-based approach. Second, under the influence of political earmarking, the IV result shows that the SAF allocation does not affect a rural-road provision in Indonesia in the early implementation of fiscal decentralisation. It seems that allocation based on the block grant or general allocation fund is having more clear effect in the presence of earmarking of special allocation fund. %A billion IDR the allocation is associated with 7 pp. increase in rural with asphalt road. The result challenges the sand hypothesis in the context of decentralising public fund in road sector in Indonesia in the early implementation of decentralisation period.

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