Does Government Fragmentation and Fiscal Decentralization Constrain Leviathan? New evidence from experience in Indonesia
Abstract
Since the reform era 1999, Indonesia has made a regional proliferation policy and widespread fiscal decentralization policy. Based on the Leviathan hypothesis, the two policies should create a competitive climate and increase the efficiency of government spending. This study aims to analyze the Leviathan hypothesis in Indonesia's regional proliferation policy and fiscal decentralization. The study uses panel data regression from 32 provinces during the 2002-2020 period. The study finds that the Leviathan hypothesis does not apply to Indonesia's regional proliferation and fiscal decentralization policies. Fiscal decentralization and government fragmentation apparently cannot constrain local government size. They have a significant positive effect on increasing it. The results of this study imply that to obtain tangible benefits from regional expansion, a thorough understanding of regional economic potential is needed, as well as the need to improve the quality of human resources to utilize regional potentials optimally.
References
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Cantarero, D., & Perez, P. (2012). Decentralization and regional government size in Spain. Portuguese Economic Journal, 11(3), 211–237. https://doi.org/10.1007/s10258-012-0085-4
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Choudhury, A., & Sahu, S. (2023). Reconciling the mixed evidence in the fiscal decentralization- government size nexus using panel quantile regression. Economic Modelling, 125(106347).
Crowley, G. R., & Sobel, R. S. (2011). Does fiscal decentralization constrain Leviathan? New evidence from local property tax competition. Public Choice, 149, 5–30. https://doi.org/10.1007/s11127-011-9826-7
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Golem, S., & Malešević Perović, L. (2014). An empirical analysis of the relationship between fiscal decentralization and the size of government. Finance a Uver - Czech Journal of Economics and Finance, 64(1), 30–58.
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Goodman, C. B. (2015). Local Government Fragmentation and the Local Public Sector: A Panel Data Analysis. Public Finance Review, 43(1), 82–107. https://doi.org/10.1177/1091142113515048
Grassmueck, G., & Shields, M. (2010). Does government fragmentation enhance or hinder metropolitan economic growth? Papers in Regional Science, 89(3), 641–657. https://doi.org/10.1111/j.1435-5957.2010.00278.x
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Hendrick, R. M., Jimenez, B. S., & Lal, K. (2011). Does Local Government Fragmentation Reduce Local Spending? Urban Affairs Review, 47(4), 467–510. https://doi.org/10.1177/1078087411400379
Jaweng, R. E. (2014). Pemekaran dan Daerah Otonom Baru; Bayi Prematur Yang Tumbuh Abnormal. Analisis CSIS, Vol. 43(1), 43–63.
Jin, J., & Zou, H. (2002). How does fiscal decentralization affect aggregate, national, and subnational government size? Journal of Urban Economics, 52(2), 270–293. https://doi.org/10.1016/S0094-1190(02)00004-9
Joulfaian David, M. M. L. (1990). Government Size and Decentralization: Evidence from Disaggregated Data. Southern Economic Journal, 56(10), 94–102.
Maličká, L. (2016). Determinants of leviathan in the European countries. Journal of Applied EconomicSciences, 11(1).
Marlow, M. L. (1988). Fiscal decentralization and government size. Public Choice, 56(3), 259–269.https://doi.org/10.1007/BF00130275
Nelson, A. C., & Foster, K. A. (1999). Metropolitan Governance Structure and Income Growth. 21(3), 309–324.
Nelson M. (1986). An empirical analysis of state and local tax structure in the context of the Leviathan model of government. Public Choice, 49(3), 283–294. https://doi.org/10.1007/BF00127344
Niazi, T. H. (2012). Decentralization. In Diagnosing the Indonesia economy ; toward inclusive and green growth. Asian Development Bank.
Oates, W. E. (1985). Searching for Leviathan: An Empirical Study. The American Economic Review, 75(4), 748–757.
Oates, W. E. (1999). An Essay on Fiscal Federalism. Journal of Economic Literature, 37(3), 1120–1149. https://doi.org/10.1257/jel.37.3.1120 Partnership, U. T. &. (2012). Desain Penataan Daerah di Provinsi Kalimantan Barat Tahun 2012 – 2025.
Persson, T., & Tabellini, G. (2004). Constitutions and Economic Policy. Journal of Economic Perspectives, 18(1), 75–98. https://doi.org/10.1257/089533004773563449
Qiao, M., Ding, S., & Liu, Y. (2019). Fiscal decentralization and government size: The role of democracy. European Journal of Political Economy, 59(November 2018), 316–330. https://doi.org/10.1016/j.ejpoleco.2019.04.002
Rodden, J. (2003). Reviving Leviathan: Fiscal Federalism and the Growth of Government. International Organization, 57, 695–729. https://doi.org/10.1017/S0020818303574021
Ronald J Oakerson & Park. (1989). Local Government Constitutions: A Different View of Metropolitan Government. American Review of Public Administration, 19(4), 279–294.
Schneider, M. (1986). Fragmentation and the growth of local government. Public Choice, 48(3), 255– 263. https://doi.org/10.1007/BF00051622
Shadbegian. (1999). Fiscal Federalism, Collusion, and Government Size: Evidence from the States. Public Finance Review, 27(1), 262–281.
Sow, M., & Razafimahefa, I. F. (2015). Fiscal Decentralization and the Efficiency of Public Service Delivery. 30.
Spencer Banzhaf, H., & Walsh, R. P. (2008). Do people vote with their feet? An empirical test of tiebout’s mechanism. American Economic Review, 98(3), 843–863. https://doi.org/10.1257/aer.98.3.843
Thanh, S.D., Canh, N. P. (2019). Local Governance: Impacts of Fiscal Decentralization on Government Size and Spending Composition in Vietnam. Asian Economic Journal, 33(4), 311–340.
Tiebout M Charles. (1956). A PURE THEORY OF LOCAL EXPENDITURES. The Journal of Political Economy, Vol. 64, N(No. 5, (oct, 1956)), 416–424.
Vazquez, J. M. (2011). Mengelola Tekanan Pemekaran. In Desentralisasi Fiskal Di Indonesia Satu
Dekade Setelah Ledakan Besar. Direktorat Jenderal Perimbangan Keuangan, Kementerian
Keuangan Republik Indonesia.
Vries, M. S. De. (2013). Consolidation in local government An international comparison of arguments and practices. 0–14.
Zulyanto, A., Remi, Sutyastie Sumitro Muljarijadi, B., & Purnagunawan, R. M. (2019). The Effect of Government Fragmentation and Fiscal Decentralization on Economic Growth in Indonesia. DLSU Business & Economics Review, 28(3), 91–103. https://doi.org/10.5281/zenodo.3270548#.XSGotjzatbA.mendele.
Badan Pusat Statistik. (2022). Statistik Keuangan Pemerintah Kabupaten/Kota 2020-2021 Financial Statistic Of Regency/Municipality Goverment Sumatera, Jawa.
Bappenas. (2008). Studi Evaluasi Dampak Pemekaran Daerah. In Jakarta: UNDP.
Bish, R. L. (2001). Local Government Amalgamations. In The Urban Paper (Issue 150, pp. 43–67). https://doi.org/10.1007/978-981-16-4332-3_4
Boyne, G. A. (1992). Local Government Structure and Perfor- Mance : Lessons From America ? 70, 333–358.
Brennan, G., & Buchanan, J. (1980). The power to tax. In The Collected Works of James Buchanan (Vol.9).
Callanan, M., Murphy, R., & Quinlivan, A. (2014). The risks of intuition: Size, costs and economies ofscale in local government. Economic and Social Review, 45(3), 371–403.
Campbell, R. J. (2004). Leviathan and fiscal illusion in local government overlapping jurisdictions. Public Choice, 120(3/4), 301–329. https://doi.org/10.1023/B:PUCH.0000044290.95428.29
Cantarero, D., & Perez, P. (2012). Decentralization and regional government size in Spain. Portuguese Economic Journal, 11(3), 211–237. https://doi.org/10.1007/s10258-012-0085-4
Cassette, A., & Paty, S. (2010). Fiscal decentralization and the size of government: a European country empirical analysis. Public Choice, 143(1–2), 173–189. https://doi.org/10.1007/s11127-009-9496- x
Choudhury, A., & Sahu, S. (2022). Revisiting the nexus between fiscal decentralization and government size - The role of ethnic fragmentation. European Journal of Political Economy, 75(C). https://doi.org/DOI: 10.1016/j.ejpoleco.2022.102193
Choudhury, A., & Sahu, S. (2023). Reconciling the mixed evidence in the fiscal decentralization- government size nexus using panel quantile regression. Economic Modelling, 125(106347).
Crowley, G. R., & Sobel, R. S. (2011). Does fiscal decentralization constrain Leviathan? New evidence from local property tax competition. Public Choice, 149, 5–30. https://doi.org/10.1007/s11127-011-9826-7
Dirjen Otda Kemendagri. (2011). Laporan Hasil Evaluasi Daerah Otonom Hasil Pemekaran (EDOHP) 2011.
Dolan, D. E. (1990). Local Government Fragmentation: Does It Drive Up the Cost of Government? Urban Affairs Quarterly, 26(1), 28–45.
Dowding, K., & Mergoupis, T. (2003). Fragmentation, fiscal mobility, and efficiency. Journal of Politics, 65(4), 1190–1207. https://doi.org/10.1111/1468-2508.t01-1 00132
Firman, T. (2009). Decentralization Reform and Local-Government Proliferation in Indonesia: Towards a Fragmentation of Regional Development. Review of Urban & Regional Development Studies,21(2–3), 143–157. https://doi.org/10.1111/j.1467-940X.2010.00165.x
Golem, S. (2010). Fiscal Decentralisation And The Size Of Government: A Review Of The Empirical Literature. Theory and Practice, 53–69.
Golem, S., & Malešević Perović, L. (2014). An empirical analysis of the relationship between fiscal decentralization and the size of government. Finance a Uver - Czech Journal of Economics and Finance, 64(1), 30–58.
Gómez-Reino, J. L., & Martinez-Vazquez, J. (2013). An international perspective on the determinants of local government fragmentation. The Challenge of Local Government Size: Theoretical Perspectives, International Experience and Policy Reform, 8–55. https://doi.org/10.4337/9781782544302.00006
Goodman, C. B. (2015). Local Government Fragmentation and the Local Public Sector: A Panel Data Analysis. Public Finance Review, 43(1), 82–107. https://doi.org/10.1177/1091142113515048
Grassmueck, G., & Shields, M. (2010). Does government fragmentation enhance or hinder metropolitan economic growth? Papers in Regional Science, 89(3), 641–657. https://doi.org/10.1111/j.1435-5957.2010.00278.x
Grossman, P. (1989). Fiscal decentralization and government size: An extension. Public Choice, 62(1). https://doi.org/10.1007/BF00168014
Harbowo, K. Y. R. & N. (2022). DPR Kaji Pemekaran Daerah Dibuka Lagi. https://www.kompas.id/baca/polhuk/2022/09/14/dpr-kaji-pemekaran-daerah-dibuka-lagi
Hendrick, R. M., Jimenez, B. S., & Lal, K. (2011). Does Local Government Fragmentation Reduce Local Spending? Urban Affairs Review, 47(4), 467–510. https://doi.org/10.1177/1078087411400379
Jaweng, R. E. (2014). Pemekaran dan Daerah Otonom Baru; Bayi Prematur Yang Tumbuh Abnormal. Analisis CSIS, Vol. 43(1), 43–63.
Jin, J., & Zou, H. (2002). How does fiscal decentralization affect aggregate, national, and subnational government size? Journal of Urban Economics, 52(2), 270–293. https://doi.org/10.1016/S0094-1190(02)00004-9
Joulfaian David, M. M. L. (1990). Government Size and Decentralization: Evidence from Disaggregated Data. Southern Economic Journal, 56(10), 94–102.
Maličká, L. (2016). Determinants of leviathan in the European countries. Journal of Applied EconomicSciences, 11(1).
Marlow, M. L. (1988). Fiscal decentralization and government size. Public Choice, 56(3), 259–269.https://doi.org/10.1007/BF00130275
Nelson, A. C., & Foster, K. A. (1999). Metropolitan Governance Structure and Income Growth. 21(3), 309–324.
Nelson M. (1986). An empirical analysis of state and local tax structure in the context of the Leviathan model of government. Public Choice, 49(3), 283–294. https://doi.org/10.1007/BF00127344
Niazi, T. H. (2012). Decentralization. In Diagnosing the Indonesia economy ; toward inclusive and green growth. Asian Development Bank.
Oates, W. E. (1985). Searching for Leviathan: An Empirical Study. The American Economic Review, 75(4), 748–757.
Oates, W. E. (1999). An Essay on Fiscal Federalism. Journal of Economic Literature, 37(3), 1120–1149. https://doi.org/10.1257/jel.37.3.1120 Partnership, U. T. &. (2012). Desain Penataan Daerah di Provinsi Kalimantan Barat Tahun 2012 – 2025.
Persson, T., & Tabellini, G. (2004). Constitutions and Economic Policy. Journal of Economic Perspectives, 18(1), 75–98. https://doi.org/10.1257/089533004773563449
Qiao, M., Ding, S., & Liu, Y. (2019). Fiscal decentralization and government size: The role of democracy. European Journal of Political Economy, 59(November 2018), 316–330. https://doi.org/10.1016/j.ejpoleco.2019.04.002
Rodden, J. (2003). Reviving Leviathan: Fiscal Federalism and the Growth of Government. International Organization, 57, 695–729. https://doi.org/10.1017/S0020818303574021
Ronald J Oakerson & Park. (1989). Local Government Constitutions: A Different View of Metropolitan Government. American Review of Public Administration, 19(4), 279–294.
Schneider, M. (1986). Fragmentation and the growth of local government. Public Choice, 48(3), 255– 263. https://doi.org/10.1007/BF00051622
Shadbegian. (1999). Fiscal Federalism, Collusion, and Government Size: Evidence from the States. Public Finance Review, 27(1), 262–281.
Sow, M., & Razafimahefa, I. F. (2015). Fiscal Decentralization and the Efficiency of Public Service Delivery. 30.
Spencer Banzhaf, H., & Walsh, R. P. (2008). Do people vote with their feet? An empirical test of tiebout’s mechanism. American Economic Review, 98(3), 843–863. https://doi.org/10.1257/aer.98.3.843
Thanh, S.D., Canh, N. P. (2019). Local Governance: Impacts of Fiscal Decentralization on Government Size and Spending Composition in Vietnam. Asian Economic Journal, 33(4), 311–340.
Tiebout M Charles. (1956). A PURE THEORY OF LOCAL EXPENDITURES. The Journal of Political Economy, Vol. 64, N(No. 5, (oct, 1956)), 416–424.
Vazquez, J. M. (2011). Mengelola Tekanan Pemekaran. In Desentralisasi Fiskal Di Indonesia Satu
Dekade Setelah Ledakan Besar. Direktorat Jenderal Perimbangan Keuangan, Kementerian
Keuangan Republik Indonesia.
Vries, M. S. De. (2013). Consolidation in local government An international comparison of arguments and practices. 0–14.
Zulyanto, A., Remi, Sutyastie Sumitro Muljarijadi, B., & Purnagunawan, R. M. (2019). The Effect of Government Fragmentation and Fiscal Decentralization on Economic Growth in Indonesia. DLSU Business & Economics Review, 28(3), 91–103. https://doi.org/10.5281/zenodo.3270548#.XSGotjzatbA.mendele.
Published
2024-03-31
How to Cite
ZULYANTO, Aan; BADRIAH, Lilis Siti.
Does Government Fragmentation and Fiscal Decentralization Constrain Leviathan? New evidence from experience in Indonesia.
Eko-Regional: Jurnal Pembangunan Ekonomi Wilayah, [S.l.], v. 19, n. 1, p. 32-41, mar. 2024.
ISSN 2620-8849.
Available at: <https://jos.unsoed.ac.id/index.php/er/article/view/16849>. Date accessed: 21 july 2025.
doi: https://doi.org/10.32424/er.v19i1.16849.
Section
Articles
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