Local governance and corruption: Evidence from Indonesia

Abstract

This paper examines the impact of local governance on corruption in the context of Indonesia after the decentralization policy which has been implemented following the institutional reforms after the economic damage and political crisis at the end of 1990s. More specifically, we investigate whether poor governance leads to higher non-compliance cases of local government, which can be considered as a proxy for corruption and rent seeking behaviors as a whole. We use data for 446 regions at the municipal/ district level over the 2008-2010 period. Controlling for some regional factors, we confirm that poor governance leads to higher non-compliant cases either number of cases or their amount. No difference effect is found between financially distress and non-distress regions. Our findings also reveal that there is no empirical evidence on the effect of corruption on economic growth. The Indonesian economy has continued to grow in recent years, during and after the global financial crisis, as huge domestic consumption props up growth even though corruption might have reduced private and local government investments. Promoting good local governance should be continued in many aspects as good governance mechanism, especially building a strong internal control system, could minimize the possibility of local officers in such regions engaging in corrupt behavior.