Political accountability, fiscal conditions and local government performance—cross‐sectional evidence from Indonesia

Abstract Why are some local governments more successful than others in managing resources and delivering services? And even more vitally, how can malfunctioning governments be reformed so that they perform their responsibilities more effectively? This article contributes to our understanding of theses overarching questions by exploring the interactions between political institutions and public sector performance in the context of decentralisation and local governance. It shows–both theoretically and empirically–that performance outcomes are determined by the extent to which people can hold their governments accountable through political institutions. The basic hypothesis underlying this research is that political accountability, either by encouraging sanctions upon non‐compliant public agents or simply by reducing the informational gap regarding government activities, will create forceful incentives for elected officials and civil servants to reduce opportunistic behaviour and improve performance. Using a cross‐sectional regression the hypothesis is empirically tested against evidence from newly empowered local governments in Indonesia. The empirical findings broadly support our hypotheses. Improved public services on the ground, both in terms of quantity and quality, require informed and well functioning decision‐making processes that allocate resources to priority areas that meet the demand of the broader community. Copyright © 2008 John Wiley & Sons, Ltd.