The ‘Big Bang’ Program and its Economic Consequences
Edited by James Alm, Jorge Martinez-Vazquez and Sri Mulyani Indrawati
Chapter 9: How Should Revenues from Natural Resources be Shared in Indonesia?
Roy Bahl and Bayar Tumennasan INTRODUCTION The share of ‘mining and quarrying’ in GDP is quite large in a number of countries, above 10 percent in 29 of 100 countries for which we could ﬁnd data and accounting for more than one-ﬁfth of GDP in 13 countries.1 The share in Indonesia is especially large. At 10.1 percent, Indonesia’s share is about ﬁve times higher than the international median. Of the countries in the East Asian region, only Mongolia and Papua New Guinea are more heavily dependent on natural resources than is Indonesia. As we document later, we ﬁnd that countries with larger mining shares tend to delegate more spending power to local governments. One possible explanation for this is that the pressures to devolve some of the rents extracted from the natural resource sector are irresistible. Based on our cross-section evidence, we can say that if the mining share of GDP is higher in one country than another by 100 percent (i.e. it is 20 percent versus 10 percent of GDP), the expected local government expenditure share will be higher by 13 percent. However, based on its mining share, per capita GDP, population and land area, Indonesia’s local government expenditure share in the 1990s was 14.4 points below the expected level.2 The ‘Big Bang’ decentralization of 2001 brought Indonesia close to the expected level, but the share of local government expenditure remains lower than in similarly situated countries. The arguments for sharing natural resource revenues with regions are often...
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