Subnational favoritism in development grant allocations: Empirical evidence from decentralized Indonesia

Abstract

Abstract Are public grant allocations biased toward the birth districts of governors, and, if so, what explains this favoritism? The allocation of budget authority to local government officials is a common trend around the developing world, but it is often criticized for transferring favoritism from the center to lower government levels. Using a unique panel data set of 410 Indonesian districts for the period 2005–2013, I exploit the discretionary nature of a government grant and data from a large amount of asynchronous local direct elections to investigate whether the birthplace of the provincial governor determines fund allocation to the district level. I show that birth districts of incumbent governors receive significantly larger shares of discretionary grants compared with the other districts within a province. I find that local favoritism is driven by governors with political history in the district office of their birth district and is limited by local electoral accountability. Classical pork-barrel politics, however, as reelection motives or formal political party ties to the district administration, do not explain local favoritism. These results illustrate the importance of non-discretionary institutional grant design and local democratization reforms in Indonesia’s political system. The country is a young democracy characterized by low ideological cleavages, little party loyalty, and the prevalence of money politics in its decentralized fiscal system. These features characterize a number of developing countries, yet contrast sharply to the established democracies for which subnational favoritism has been analyzed.