Government Fragmentation and Economic Growth

Cassidy, Traviss and Velayudhan, Tejaswi (2023): Government Fragmentation and Economic Growth.

Abstract

How does the fragmentation of local governments affect economic activity? We examine this question in the context of a major period of government proliferation in Indonesia in which the number of districts increased by 50 percent from 2000 to 2014. Exploiting idiosyncratic variation in the timing of district splits, we find that fragmentation reduces district GDP in the short run---despite large increases in central transfers. The downsides of fragmentation due to economies of scale and the lower bureaucratic capacity of new governments outweigh the potential upsides due to increased accountability. The GDP decline is larger in "child" districts that acquire a new capital and government. Furthermore, splitting districts focus their spending on administration and show no improvement in the areas of public good provision, red tape, and corruption.

• Item Type: MPRA Paper
• Language: English
• Keywords: Economic growth, local governments, economies of scale, rent-seeking
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D73 - Bureaucracy ; Administrative Processes in Public Organizations ; Corruption; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H77 - Intergovernmental Relations ; Federalism ; Secession; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O43 - Institutions and Growth; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence

References

Abeberese, Ama Baafra, Prabhat Barnwal, RitamChaurey, and PriyaMukherjee, “Democracy and Firm Productivity: Evidence from Indonesia,” The Review of Economics and Statistics, 2023, pp. 1–10.

Abrahams, Alexei, ChristopherOram, and Nancy Lozano-Gracia, “Deblurring DMSP nighttime lights: A newmethod using Gaussian filters and frequencies of illumination,” Remote Sensing of Environment, June 2018, 210, 242–258.

Ackerberg, Daniel A., Kevin Caves, and Garth Frazer, “Identification Properties of Recent Production Function Estimators,” Econometrica, 2015, 83 (6), 2411–2451.

Agrawal, David R.,William H. Hoyt, and John D.Wilson, “Local Policy Choice: Theory and Empirics,” Journal of Economic Literature, 2022, 60 (4), 1378–1455.

Alesina, A. and E. Spolaore, “On the Number and Size of Nations,” The Quarterly Journal of Economics, November 1997, 112 (4), 1027–1056.

Alesina, Alberto, Caterina Gennaioli, and Stefania Lovo, “Public Goods and Ethnic Diversity: Evidence from Deforestation in Indonesia,” Economica, January 2019, 86 (341), 32–66.

Arikan, G. Gulsun, “Fiscal Decentralization: A Remedy for Corruption?,” International Tax and Public Finance, 2004, 11 (2), 175–195.

Athey, Susan and StefanWager, “Estimating Treatment Effects with Causal Forests: An Application,” February 2019. arXiv:1902.07409 [stat].

Badan Perencanaan Pembangunan Nasional (BAPPENAS), Studi Evaluasi Pemekaran Daerah, Jakarta: United Nations Development Program, BAPPENAS, 2007.

Bai, Jie, Seema Jayachandran, Edmund J.Malesky, and Benjamin A. Olken, “FirmGrowth and Corruption: Empirical Evidence from Vietnam,” Economic Journal, 2019, 129, 651–677.

Bardhan, Pranab and Dilip Mookherjee, “Capture and Governance at Local and National Levels,” American Economic Review,May 2000, 90 (2), 135–139.

Bazzi, Samuel andMatthew Gudgeon, “The Political Boundaries of Ethnic Divisions,” American Economic Journal: Applied Economics, January 2021, 13 (1), 235–266.

Benabou, Roland, “Workings of a City: Location, Education, and Production,” The Quarterly Journal of Economics, August 1993, 108 (3), 619–652.

----, “Equity and Efficiency in Human Capital Investment: The Local Connection,” The Review of Economic Studies, April 1996, 63 (2), 237–264.

Besley, Timothy and Anne Case, “Incumbent Behavior: Vote-Seeking, Tax-Setting, and Yardstick Competition,” The American Economic Review, 1995, 85 (1), 25–45.

----, Robin Burgess, Adnan Khan, and Guo Xu, “Bureaucracy and Development,” Annual Review of Economics, August 2022, 14 (1), 397–424.

Blom-Hansen, Jens, Kurt Houlberg, Søren Serritzlew, and Daniel Treisman, “Jurisdiction Size and Local Government Policy Expenditure: Assessing the Effect ofMunicipal Amalgamation,” American Political Science Review, November 2016, 110 (4), 812–831.

Bluhm, Richard and Melanie Krause, “Top lights: Bright cities and their contribution to economic development,” Journal of Development Economics, June 2022, 157, 102880.

Boffa, Federico, Amedeo Piolatto, and Giacomo A. M. Ponzetto, “Political Centralization and Government Accountability *,” The Quarterly Journal of Economics, February 2016, 131 (1), 381–422.

Borusyak, Kirill, Xavier Jaravel, and Jann Spiess, “Revisiting Event Study Designs: Robust and Efficient Estimation,” Technical Report 2021.

Brennan, Geoffrey and James M. Buchanan, The Power to Tax: Analytic Foundations of a Fiscal Constitution, Cambridge: Cambridge University Press, 1980.

Breuille, Marie-Laure and Skerdilajda Zanaj, “Mergers in Fiscal Federalism,” Journal of Public Economics, 2013, 105, 11–22.

Brueckner, Jan K., “Fiscal Federalism and Capital Accumulation,” Journal of Public Economic Theory, April 1999, 1 (2), 205–224.

----, “Fiscal federalism and economic growth,” Journal of Public Economics, November 2006, 90 (10-11), 2107–2120.

Burgess, Robin,Matthew Hansen, Benjamin A. Olken, Peter Potapov, and Stefanie Sieber, “The Political Economy ofDeforestation in the Tropics,” TheQuarterly Journal of Economics, 2012, 127 (4), 1707–1754.

Callaway, Brantly and Pedro H.C. Sant’Anna, “Difference-in-Differences with multiple time periods,” Journal of Econometrics, 2021, Forthcoming.

Cassidy, Traviss, “Revenue Persistence and Public Service Delivery,”Working Paper 2023.

Chaudhary, Latika and Lakshmi Iyer, “The Importance of Being Local: Administrative Decentralization and Human Development,” Technical Report 2022.

Chen, Xi andWilliamD.Nordhaus, “Using luminosity data as a proxy for economic statistics,” Proceedings of the National Academy of Sciences,May 2011, 108 (21), 8589–8594.

Chernozhukov, Victor,Mert Demirer, Esther Duflo, and Iván Fernández-Val, “GenericMachine Learning Inference onHeterogeneous Treatment Effects in Randomized Experiments, with an Application to Immunization in India,” Technical Report w24678, National Bureau of Economic Research, Cambridge, MA February 2023.

Chodorow-Reich, Gabriel, “Geographic Cross-Sectional Fiscal SpendingMultipliers: What Have We Learned?,” American Economic Journal: Economic Policy,May 2019, 11 (2), 1–34.

Cohen, Isabelle, “The Costs of Splitting: Administrative Unit Proliferation and Economic Growth in Uganda,” SSRN Electronic Journal, 2022.

Corbi, Raphael, Elias Papaioannou, and Paolo Surico, “Regional TransferMultipliers,” The Review of Economic Studies, October 2019, 86 (5), 1901–1934.

Correia, Sergio, Paulo Guimarães, and Thomas Zylkin, “ppmlhdfe: Fast Poisson Estimation with High-Dimensional Fixed Effects,” The Stata Journal: Promoting communications on statistics and Stata,March 2020, 20 (1), 95–115. arXiv:1903.01690 [econ]. ----, ----, and ----, “Verifying the existence of maximum likelihood estimates for generalized linear models,” June 2021. arXiv:1903.01633 [econ].

Dahis, Ricardo and Christiane Szerman, “Decentralizing Development: Evidence from Government Splits,”Working Paper 2023.

de Andrade Lima, Ricardo Carvalho and Raul daMota Silveira Neto, “Secession ofMunicipalities and Economies of Scale: Evidence from Brazil,” Journal of Regional Science, 2018, 58 (1), 159–180.

de Chaisemartin, Clément and Xavier D’Haultfoeuille, “Two-Way Fixed Effects Estimators with Heterogeneous Treatment Effects,” American Economic Review, September 2020, 110 (9), 2964–2996.

Elvidge, Christopher D., Kimberly E. Baugh, Mikhail Zhizhin, and Feng-Chi Hsu, “Why VIIRS data are superior to DMSP for mapping nighttime lights,” Proceedings of the Asia- Pacific Advanced Network, June 2013, 35 (0), 62.

Erlingsson, Gissur, Eva Mörk, and Jonas Klarin, “Does SizeMatter? Evidence fromMunicipality Break-Ups,”Working Paper 9042, CESifo 2021.

Fisman, Raymond and Roberta Gatti, “Decentralization and corruption: evidence across countries,” Journal of Public Economics, 2002, 83, 325–345.

Fitrani, Fitria, Bert Hofman, and Kai Kaiser, “Unity in Diversity? The Creation of New Local Governments in a Decentralizing Indonesia,” Bulletin of Indonesian Economic Studies, 2005, 41 (1), 57–79.

Gadenne, Lucie andMonica Singhal, “Decentralization in Developing Economies,” Annual Review of Economics, August 2014, 6 (1), 581–604.

Gend´zwiłł, Adam, Anna Kurniewicz, and Paweł Swianiewicz, “The impact of municipal territorial reforms on the economic performance of local governments. A systematic review of quasi-experimental studies,” Space and Polity, January 2021, 25 (1), 37–56.

Gibson, John, SusanOlivia, Geua Boe-Gibson, and Chao Li, “Which night lights data should we use in economics, and where?,” Journal of Development Economics,March 2021, 149, 102602.

Goodman-Bacon, Andrew, “Difference-in-differences with variation in treatment timing,” Journal of Econometrics, 2021, Forthcoming.

Grossman, Guy and Janet I. Lewis, “Administrative Unit Proliferation,” American Political Science Review, February 2014, 108 (1), 196–217.

----, Jan H. Pierskalla, and Emma Boswell Dean, “Government Fragmentation and Public Goods Provision,” The Journal of Politics, July 2017, 79 (3), 823–840.

Guo, Qingwang, Chang Liu, and Guangrong Ma, “How large is the local fiscal multiplier? Evidence from Chinese counties,” Journal of Comparative Economics, May 2016, 44 (2), 343–352.

Hatfield, John William, “Federalism, taxation, and economic growth,” Journal of Urban Economics,May 2015, 87, 114–125. and Katrina Kosec, “Federal competition and economic growth,” Journal of Public Economics, January 2013, 97, 144–159.

Henderson, J. Vernon, Adam Storeygard, and David NWeil, “Measuring Economic Growth from Outer Space,” American Economic Review, April 2012, 102 (2), 994–1028.

Henderson, Vernon J. and Ari Kuncoro, “Corruption in Indonesia,”Working Paper 2006. and , “Corruption and Local Democratization in Indonesia: The Role of Islamic Parties,” Journal of Development Economics, 2011, 94 (2), 164–180.

Hoyt,WilliamH., “Property taxation, Nash equilibrium, and market power,” Journal ofUrban Economics, July 1991, 30 (1), 123–131.

InternationalMonetary Fund,Macro Policy Lessons for a Sound Design of Fiscal Decentralization, Washington, D.C.: InternationalMonetary Fund, 2009.

Kraay, Aart, “How large is the Government SpendingMultiplier? Evidence fromWorld Bank Lending,” The Quarterly Journal of Economics,May 2012, 127 (2), 829–887. ----, “Government Spending Multipliers in Developing Countries: Evidence from Lending by Official Creditors,” American Economic Journal: Macroeconomics, October 2014, 6 (4), 170–208.

Kresch, Evan Plous, “The Buck Stops Where? Federalism, Uncertainty, and Investment in the BrazilianWater and Sanitation Sector,” American Economic Journal: Economic Policy, August 2020, 12 (3), 374–401.

Lewis, Blane D., “Does local government proliferation improve public service delivery? Evidence from Indonesia,” Journal of Urban Affairs, November 2017, 39 (8), 1047–1065.

Lipscomb,Molly and AhmedMushfiqMobarak, “Decentralization and Pollution Spillovers: Evidence from the Re-drawing of County Borders in Brazil,” The Reviewof Economic Studies, January 2017, 84 (1), 464–502.

Magontier, Pierre, Albert Solé-Ollé, and Elisabet Viladecans-Marsal, “The Political Economy of Coastal Development,” Discussion Paper DP15780, Centre for Economic Policy Research 2022.

Malesky, Edmund J., Cuong Viet Nguyen, and Anh Tran, “The Impact of Recentralization on Public Services: A Difference-in-Differences Analysis of the Abolition of Elected Councils in Vietnam,” American Political Science Review, February 2014, 108 (1), 144–168.

Manjón,Miguel and JuanMañez, “Production Function Estimation in Stata Using the Ackerberg– Caves–FrazerMethod,” The Stata Journal: Promoting communications on statistics and Stata, December 2016, 16 (4), 900–916.

Minnesota Population Center, “Integrated Public UseMicrodata Series, International: Version 7.3 [dataset],” Technical Report,Minneapolis, MN: IPUMS 2020.

Mukherjee, Priya, “Dataset on Local Governments in Indonesia,” Dataset 2023.

Narasimhan, Veda and JeffreyWeaver, “Polity size and local government performance: evidence from India,”Working Paper 2022.

Oates, Wallace E., Fiscal federalism The Harbrace series in business and economics, New York: Harcourt Brace Jovanovich, 1972.

----, “Fiscal Decentralization and Economic Development,” National Tax Journal, 1993, 46 (2), 237–243.

Pierskalla, Jan H., “Splitting the Difference? The Politics of District Creation in Indonesia,” Comparative Politics, January 2016, 48 (2), 249–268.

----, Adam Lauretig, Andrew S. Rosenberg, and Audrey Sacks, “Democratization and Representative Bureaucracy: An Analysis of Promotion Patterns in Indonesia’s Civil Service, 1980–2015,” American Journal of Political Science, April 2021, 65 (2), 261–277.

Reingewertz, Yaniv, “DoMunicipal AmalgamationsWork? Evidence fromMunicipalities in Israel,” Journal of Urban Economics, 2012, 72 (2), 240–251. Republic of Indonesia, “Law No. 22/1999 Concerning Regional Administration,” 1999.

----, “Law No. 25/1999 Concerning the Fiscal Balance Between Central and Regional Governments,” 1999.

----, “Government Regulation No. 129/2000 Concerning Requirements for Formation and Criteria for Expansion, Elimination, and Consolidation of Regions,” 2000.

----, “Law No. 33/2004 Concerning Fiscal Balance Between the Central Government and the Regional Governments,” 2004.

----, “Government Regulation No. 78/2007 Concerning Procedures for Formation, Elimination, and Consolidation of Regions,” 2007.

----, “Law No. 6/2014 Concerning Villages,” 2014.

Rodden, Jonathan, “Comparative Federalism and Decentralization: OnMeaning andMeasurement,” Comparative Politics, July 2004, 36 (4), 481.

Serrato, Juan Carlos Suárez and PhilippeWingender, “Estimating Local FiscalMultipliers,” Technical Report w22425, National Bureau of Economic Research, Cambridge, MA July 2016.

Shah, Anwar, Riatu Qibthiyyah, and Astrid Dita, General Purpose Central-Provincial-Local Transfers (DAU) in Indonesia: From Gap Filling to Ensuring Fair Access to Essential Public Services for all Policy ResearchWorking Papers, TheWorld Bank, June 2012.

Singhania, Deepak, “Do Smaller Local Governments Bring Citizens More? Evidence from Direct Elections in Indonesia,” TheWorld Bank Economic Review, 2022, 36 (3), 774–799.

Stansel, Dean, “Local decentralization and local economic growth: A cross-sectional examination of US metropolitan areas,” Journal of Urban Economics, January 2005, 57 (1), 55–72.

Sun, Liyang and Sarah Abraham, “Estimating dynamic treatment effects in event studies with heterogeneous treatment effects,” Journal of Econometrics, December 2021, 225 (2), 175–199.

Swianiewicz, Paweł, “If Territorial Fragmentation is a Problem, is Amalgamation a Solution? An East European Perspective,” Local Government Studies, April 2010, 36 (2), 183–203.

Tempo, “Tjahjo Kumolo: Ada 246 Usulan Pembentukan Daerah Baru,” Tempo, 2017.

Tiebout, Charles M., “A Pure Theory of Local Expenditures,” Journal of Political Economy, 1956, 64 (5), 416–424.

United Nations, “Law on Regional Administration No. 22/1999 (English Translation),” Technical Report LEX-FAOC042653, Food and Agriculture Organization of the United Nations 1999.

----, International Guidelines on Decentralization and Access to Basic Services for All, Nairobi: UN-HABITAT, 2009.

von Haldenwang, Christian, “The Political Cost of Local RevenueMobilisation: Decentralisation of the Property Tax in Indonesia,” Public Finance and Management, 2017, 17 (2), 124–151.

Wager, Stefan and Susan Athey, “Estimation and Inference of Heterogeneous Treatment Effects using Random Forests,” Journal of the American Statistical Association, July 2018, 113 (523), 1228–1242.

Wooldridge, Jeffrey M., “Distribution-Free Estimation of SomeNonlinear PanelDataModels,” Journal of Econometrics,May 1999, 90 (1), 77–97.

----, “Two-Way Fixed Effects, the Two-WayMundlak Regression, and Difference-in-Differences Estimators,” Technical Report 2021.

----, “Simple Approaches to Nonlinear Difference-in-Differences with Panel Data,”Working Paper 2023.

World Bank,World Development Report 1999/2000: Entering the 21st Century: The Changing Development Landscape,World Bank, 1999.

----, Decentralizing Indonesia: A Regional Public Expenditure Review Overview Report, Jakarta: World Bank, 2003.

----, Spending for Development: Making theMost of Indonesia’s New Opportunities, TheWorld Bank, 2007.

----, “Village Capacity inMaintaining Infrastructure,” Technical Report 2010.

Zhang, Tinglin, Bindong Sun, Yinyin Cai, and RuiWang, “Government fragmentation and economic growth in China’s cities,” Urban Studies, July 2019, 56 (9), 1850–1864.