Unraveling the Welfare Effects of Administrative and Political Decentralization in Indonesia

Abstract Decentralization of power has brought sweeping changes to governance systems of many developing countries over the past few decades. During 1997-2007 the World Bank has given $22 billion to its client countries to facilitate this process. However, the empirical evidence on the effects of decentralization on welfare outcomes has been both limited and ambiguous. Additionally, empirical comparison of different types of decentralization – namely administrative, political and fiscal – is missing. In this paper, I analyze and compare welfare effects under district-level administrative and political decentralization in Indonesia. My identification strategy exploits an interesting natural experiment where the two types of decentralization were temporally spread over two sub-periods between 2000 and 2008. A differences-in-differences estimation strategy with individual panel fixed effects implies that focusing only on political or administrative decentralization could be misleading and confounding. Specifically, there is a joint effect from the combination of political and administrative decentralization that has been neglected in the existing studies. Households/villages facing both types of decentralization display significantly stronger welfare effects than those facing only political or administrative or no decentralization at all.