What Does It Take to Mitigate Corruption ?

There has been growing evidence that substantive public resources are lost to corruption in developing countries. This paper investigates pre-existing local conditions associated with the size of public money lost between the government’s disbursement and receipt by beneficiaries, using Indonesia’s poverty alleviation program, IDT. The results show that overall corruption was higher in districts with history of public credit program receipt, and lower in districts with organized local governments. Exploiting the panel nature of the data on missing funds, we further show changes in the degree of corruption. While districts which initially had higher exposure to newspaper and a higher share of foreigners experienced increased corruption towards the end of the program period, places with organized local government saw a lower degree of corruption in the last year of the period. A possible explanation for these findings might be that monitoring by residents works in the initial stages of program implementation, while the capabilities of local government matters relatively more when such civil monitoring dissipates.