Abstract
This study examines the effects of fiscal decentralization on corruption by analyzing whether the degree of fiscal decentralization facilitates or mitigates the number of corruption cases in Indonesia’s local governments. The research utilizes a panel data model and a system Generalized Method of Moments (GMM) estimator to assess the degree of fiscal decentralization on corruption in 19 provinces for the period between 2004 and 2014. The estimation results reveal that the degree of fiscal decentralization, both expenditure and tax revenue sides, drives a growing number of corruption cases in local governments. A lack of human capital capacity, low transparency and accountability, and a higher dependency on intergovernmental grants from the central government may worsen the adverse effects of corruption. Our results suggest that a more heterogeneous population and higher political stability mitigate the adverse effects of corruption. Furthermore, this is the first corruption study in Indonesia to create corruption measures from the number of corruption cases investigated by the Indonesia Corruption Eradication Commission as well as extensive, provincial-level government financial data. As a result of using these different datasets, this research advances existing empirical studies and makes policy recommendations for the local governments in Indonesia.
Highlights
Corruption has been severe in Indonesia since the era of former President Suharto during the period 1967–1998 (Vial and Hanoteau 2010)
The data uses the number of corruption cases investigated by Komisi Pemberantasan Korupsi (KPK) and measures fiscal decentralization by using the provincial budget realization dataset obtained from the Indonesia Ministry of Finance
We examine the effects of the degree of fiscal decentralization in Indonesia at the provincial level and advance the existing empirical studies using an objective corruption measure: the number of corruption cases investigated by KPK
Summary
Corruption has been severe in Indonesia since the era of former President Suharto during the period 1967–1998 (Vial and Hanoteau 2010). The increasing number of corruption cases in regional governments has generated a national discourse concerning why corruption continues to grow at a subnational level. The misconception of the purpose of intergovernmental grants at the local level is that they are thought to breed corruption in most local governments Another problem that hinders the goals of decentralization is the lack of monitoring and auditing of institutions at the regional level. The availability of extensive datasets allows this study to answer two research questions: (1) whether the degree of fiscal decentralization facilitates an increasing number of corruption cases and (2) whether financial independence from tax revenue can encourage regional governments to be more responsible and accountable, mitigating corruption. The paper is organized into the four following sections: Section 2 describes the literature review, providing a range of existing research in a similar area; Section 3 explains the data and methodology utilized in the estimation; Section 4 elaborates the empirical results and discussion; and Section 5 offers some recommendations and remarks for future research
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