"Indonesia Case Study" in The Role of Intergovernmental Transfers in Improving Educational Outcomes

Abstract

Reports that district-level spending in Indonesia positively affects both access to and the quality of education, but the size of the expenditure in each district largely rests on the magnitude of fiscal transfers each district receives from the central government, and their allocation proves inequitable across districts, which thus vary in their ability to achieve the education objectives desired by their citizens. A number of perverse incentives embedded in the current system of fiscal transfers encourage overspending on teachers at the expense of expenditure on other inputs, including teaching materials and capital. The spending inefficiency suggests many districts could supply more and better education, even without any additional resources. The use of performance-based grants might work to improve education outcomes, but these will likely prove difficult both to design and execute. Furthermore, performance-based funding has seen little success in other sectors. Technical reforms to the intergovernmental fiscal system remain necessary, as do local level reforms.