Is Fiscal Decentralization Conflict Abating? Routine Violence and District Level Government in Java, Indonesia

Abstract

Utilizing a newly created data set the authors examine the relationship between routine/everyday violence and fiscal decentralization in 98 districts of the Indonesian island of Java. By examining possible relationships between fiscal decentralization and routine violence, this paper fills a gap in the literature where the analysis of the relation between fiscal decentralization and violence is relatively scant. Routine violence, which is different from both civil war and ethno-communal conflict, centres around group brawls, popular justice or vigilante violence. Despite the uniform implementation of fiscal decentralization, subnational entities exhibit varying experiences with decentralization, but a common consequence is the increased size of local government. Fiscal decentralization, and the increased size of local government, can alleviate pent-up frustrations with a centralized state, as local government expenditure is seen to satisfy the needs of communities with which people identify more closely. The authors also find that the greater the share of locally generated revenues, the lower the number of violent incidents; but this capacity to generate more local revenues mainly lies in richer districts. Therefore, richer districts are likely to have a lower incidence of violence.

Notes

We are grateful to the European Union-funded MICROCON project for financial support. We also wish to thank two anonymous referees of this journal, and Michael Grimm and Koen Vlassenroot for helpful comments on earlier versions of this paper.

¹ Examples are Barron et al. (2004), Justino (2005), Mancini (2008) and Tadjoeddin & Murshed (2007).

² For various types of decentralization in developing and transition economies, see Bardhan (2002) and Bardhan & Mookherjee (2006).

³ Authors' calculations based on data presented in World Bank (2007), Table C.8, p. 160.

⁴ The 98 districts are based on the situation prevailing prior to decentralization. After decentralization, six new districts were formed. This study sticks to the pre-decentralization classification.

⁵ In a cross-country statistical analysis, Brancati (2006) found that political decentralization is a useful device for reducing both ethnic conflict and secessionism, but the effect is undermined by the growth or emergence of regional parties. She found that the impact of fiscal decentralization is statistically insignificant. It has to be borne in mind that her study is across several countries, and our analysis is focused on Java in Indonesia, statistically a much more homogenous case. Whereas she looks at secessionism and ethnic conflict in a cross-country setting, our study focuses on the routine everyday violence at subnational context within a single country.

⁶ A pure public good is defined as being non-rival and non-excludable. One citizen's consumption does not detract from the ability of another's to benefit from the public good; moreover, its total provision is unrelated to individual ability to pay for it because there is no way to exclude individuals from its consumption if they cannot pay for it.

⁷ Richer regions may have a greater ability to alleviate poverty, but may be unwilling to do so for the poor in distant parts of the country with whom they do not always identify.

⁸ In the vacuum created by the absence of a social contract, elites may have the incentive to form private armies in an attempt to capture more—akin to the so-called “greed hypothesis” of civil war. The less fortunate join the private armies of the more fortunate in the hope of getting some share in the loot. On the surface, routine violence or street brawls may appear as crime or general lawlessness, but behind them may lie the work of more organized and powerful forces in society. The less fortunate can also engage in predatory behaviour, which can be explained by something like the so-called “grievance hypothesis” of civil war. For a review of greed and grievance hypotheses, see Murshed & Tadjoeddin (2009).

⁹ Among others, see Saideman et al. (2002), Brancati (2006), Tranchant (2007, 2008) and Bakke & Wibbels (2006).

¹⁰ “Holding together” federation is one of three processes of federalism identified by Stepan (1999). The other two are: (1) independent states may “come together” by ceding or pooling sovereign powers in certain domains for the sake of benefits otherwise unattainable, such as security or economic prosperity; and (2) federations that are “put together” by a strong centre such as the former Soviet Union.

¹¹ For more details on count data regression, one may consult Cameron & Trivedi (1998) and StataCorp (2005). Count data regressions are common in certain types of empirical research, such as criminology.

¹² For detailed explanations on the data set, see Varshney et al., (2008). Jakarta and Yogyakarta are excluded, but the remaining provinces cover 90% of Java's population.

¹³ It should be pointed out that all conflict data, including the highly regarded PRIO-Uppsala data set on conflict, are collected from a variety of anecdotal sources comprising the media, human rights groups and the Red Cross. At the country level, as another example, a database on Hindu–Muslim riots in India 1950–95, based on THE TIMES of India, was put together by Steven Wilkinson and Ashutosh Varshney; see Wilkinson (2004) and Varshney (2002).

¹⁴ The 14 provinces are Riau, Jakarta, Banten, West Java, Central Java, East Java, Central Kalimantan, West Kalimantan, South Sulawesi, Central Sulawesi, East Nusatenggara, West Nusatenggara, Maluku and North Maluku. It is estimated that the 14 provinces account for 96.4% of total deaths in non-separatist violence in Indonesia (see Varshney et al., 2008).

¹⁵ Similar data were also gathered in the subsequent PODES survey in 2005.

¹⁶ One of the authors (Zulfan Tadjoeddin) was the coordinator for the construction of the UNSFIR database.

¹⁷ Between 1999 and the first 3 years of fiscal decentralization (2001–03), on average in real terms at national level, central government transfers (including the revenue sharing of natural resource rents) to district governments increased by 138%. At the same time, total district-own revenues also increased by 182%, because district governments become more active in collecting their own local revenues due to decentralization. However, the role of district-own revenues in the overall district government revenues is still small: 13% in the period of 2001–03 and 11% in 1999 (Source: authors' calculation based on data presented in World Bank (2007), table C.8, p. 160).

¹⁸ This is to capture any improvements made in the second and third years of the implementation of fiscal decentralization after the rather chaotic situation in the first year.

¹⁹ The real revenue and expenditure figures were obtained by using the GDP deflator at the district level.

²⁰ Another paper, Tadjoeddin & Murshed (2007), instruments for the growth rate, because of potential reversal causality with our conflict variable, but here we do not do so because per capita income, its square and growth rates act only as control variables for our fiscal decentralization independent variables.

²¹ We use the simple average value of RGDP growth and per capita RGDP for 2001–03, and for population, we use figures for 2001.

²² Available online at: www.djpk.depkeu.go.id.

²³ The origin of increased local district government budgets can be attributed to two sources. First, there is a truly incremental increase in (fresh) money spent at the local level. This is very apparent in the case of local revenue derived from the sharing of natural resource rents as experienced by a few resource-rich regions, such as Aceh, Riau, East Kalimantan and Papua. However, new fresh transfers from the centre are also possible depending on the different needs of localities. In addition, local district governments have also become more active in collecting new sources of local revenues. Second is the shift in spending from central to district governments due to the transfer of responsibilities in areas such as health, education and infrastructure—in fact many such expenditures were made at the local level before decentralization, but were centrally managed. In resource-poor Java, the second component is much more dominant than the first. However, we were not able to separate them due to data paucity. The allocations of incremental revenues are determined according to the fiscal balance law for resource rents, and according to the nationally designed formula for the general allocation fund (transfer). However, there is still some limited room for manoeuvre available to patronage networks between local and national elites; for example, it has been reported that local executives tried to lobby relevant national elites in order to secure more allocation of certain budgetary items, such as disaster mitigation funds.

²⁴ Pooled Poisson models (a1) and (b1) have the over-dispersion problem. Total revenue to RGDP ratio retains its significance in the NB estimation (column (a2)), while locally generated revenue to total revenue retains its significance in column (b3).

²⁵ Likelihood-ratio tests are performed to check the appropriateness of the panel estimation (random effects) model against the pooled variant. Detailed results are available from the authors.

²⁶ One might think of the possibility of an endogeneity problem between routine violence and locally generated revenue because lower levels of violence might create an enabling local condition to increase local revenues. However, such a possibility can be ignored because routine violence is a low-intensity and commonly occurring phenomenon in Javanese society, which hardly affects local economic conditions. It is episodic violence that can badly damage the local economy.

²⁷ Income positively correlates (0.4) with the size of locally generated revenue (as a percentage of total revenue); see Appendix C2.

²⁸ One way of investigating the joint effect of the size of locally generated revenue and income is to introduce an interaction term between them. The sign of this interaction term is positive, meaning that the violence-reducing effect of locally generated revenue is offset by income (see Appendix E). This might be due to the inverted U-curve relationship between violence and income, where the positive sign of the interaction term is driven mainly by the upward part of the inverted U-curve. Therefore, the offsetting effect is most likely to be temporary. Once income reaches a threshold level, we can expect violence to decline, as found in Tadjoeddin & Murshed (2007).