A recent academic study has found that dividing local governments, a process known as “fragmentation,” can negatively impact economic growth. The research focused on Indonesia between 2000 and 2014, a period when the number of districts in the country increased by 50%.
University of Alabama Assistant Professor of Economics Traviss Cassidy and Tejaswi Velayudhan are co-authors of “Government Fragmentation and Economic Growth,” which was published in the Review of Economics and Statistics, and analyzed the effects of these district splits on local economies. They discovered that, in the short term, fragmentation led to a decrease in district Gross Domestic Product (GDP), even though these new districts received more funds from the central government. The decline was noticeable in newly created “child” districts that established new administrative centers and governments.
“With the extra money, it should have boosted GDP,” Cassidy said. “Instead, we see the opposite. Not only does GDP go down, but it goes down a lot relative to how much you would expect GDP to go up with just the fiscal multiplier effect. So, we try to figure out what’s going on.”
Researchers analyzed the impact of district splits and found that GDP fell in both newly created “child” districts and the original “parent” districts. The study controlled for factors like ethnic diversity, urbanization, and education levels, confirming that the economic downturn was directly linked to the increase in local governments.
Key reasons for this decline include:
Weaker bureaucracy – New districts had less experienced civil servants/politicians, slowing down government efficiency.
Higher administrative costs – Money was spent on government operations rather than economic development.
Loss of economies of scale – Smaller districts struggled to provide services as efficiently as larger ones.
The study raises questions about whether the negative effects will continue in the long run. While early data suggests that GDP continued to decline for at least five to six years after a district split, researchers believe this trend may eventually reverse. As government workers gain experience and recruitment improves, the impact on GDP could stabilize. However, a lot depends on whether spending on new district administrations stays high or tapers off.
Indonesia’s experience reflects a broader global trend of government fragmentation. Many countries are experimenting with decentralization, hoping to improve governance and economic outcomes. This study suggests that while decentralization has potential benefits, poorly planned fragmentation can disrupt economic growth.