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ALMA Research Series - To the ones in need or the ones you need? The Political Economy of Central Discretionary Grants: Empirical Evidence from Indonesia

Gerrit J. Gonschorek, Günther G. Schulze and Bambang Suharnoko Sjahrir

Institute for Economic Research

Department of International Economic Policy

University of Freiburg, Germany

April 2017

Abstract

We analyze the allocation of discretionary grants from the central government to local governments in Indonesia. Using OLS and Fixed Effects models on an unbalanced panel data set for more than 400 Indonesian districts covering the period 2004-2013, we investigate whether the allocation of the grants are determined by the need of a district, by political alignment of the central government with the local district heads, or by reelction motives of the incumbent president. We find that grants are not determined by needs of characteristics in the direction we would expect and that political considerations matter significantly. Districts with low support for the president received significantly more than the core supporting districts. This effect is limited to the first term of the president. In the second term, after which reelection is impossible, political considerationswere largely absent. Thispattern is consistent with the view that the incumbent president considers discretionary grants as an instrument to increase reelection probabilities. Unlike the evidence for most countries, we find no effect for political party alignment with local district heads. Our results are robust to the inclusion of a number of other variables capturing competing motives.