IZA DP No. 5286: Fiscal Decentralization and Development: How Crucial is Local Politics?
Does fiscal decentralization in a politically decentralized less developed country help strengthen democratic institutions at the grass root level? And is the impact of such decentralization on local politics important in determining local development? Our study on Indonesia suggests that fiscal decentralization enhanced free and fair local elections, though the incidence of elite capture, and the consequent breakdown of local democracy, was also present in significant proportions. Fiscal decentralization promoted development mostly in communities which transited out from elite capture to embrace free and fair elections. This was followed by communities that experienced the emergence of elite capture. Communities that continued to remain under either elite capture or free and fair elections did the worst. These findings suggest that while the emergence of elite capture exists, it may not necessarily be the most harmful. Instead, and surprisingly so, stability of local polity hurts development the most.