The political economy of local governance: findings from an Indonesian field study

Why do some local governments perform well, while others perform badly? The rapid shift from centralised–authoritarian to decentralised–democratic rule in Indonesia has been accompanied by a large variation in sub-national government policies across districts. Based on eight district case studies comprising 1,000 business surveys and 120 in-depth interviews, this paper argues that demand-side pressures from local firms, associations and district councils are less significant than supply-side pressures from local government leaders in explaining variations in taxation, licensing and corruption practices. In Indonesia's early transition to democratic decentralisation, societal pressures have been constrained by collective action problems and perverse political incentives. Local government leaders, on the other hand, have strong powers and new incentives for policy reform. In response to the good governance debate, this study's findings suggest that government leadership is an important, often under-estimated, policy determinant that can compensate for (or aggravate) weak societal checks in transitioning economies.