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How corruption diminishes the

effectiveness of public spending on
education in Indonesia
Daniel Suryadarma

Australian National University

Published online: 14 Mar 2012.

To cite this article: Daniel Suryadarma (2012) How corruption diminishes the effectiveness of public
spending on education in Indonesia, Bulletin of Indonesian Economic Studies, 48:1, 85-100, DOI:
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ational Universitys Indonesia Project and the Australian Government Department of Foreign Affairs and Trade, to the Bulletin of Indonesian Economic Studies in 2014 and 2

Bulletin of Indonesian Economic Studies, Vol. 48, No. 1, 2012: 85100

HOW CORRUPTION DIMINISHES THE EFFECTIVENESS

OF PUBLIC SPENDING ON EDUCATION IN INDONESIA
Daniel Suryadarma
Australian National University
This paper takes advantage of a regional corruption measure to assess the impact of
corruption on the effectiveness of public spending in the education sector in Indonesia, one of the most corrupt countries in the world. Two sets of outcomes are considered: school enrolment rates and school performance in national examinations.
Public spending appears to have a negligible effect on school enrolment in highly
corrupt regions, but a statistically significant, positive and relatively large effect in
less corrupt regions. In contrast, public spending has no significant effect on school
performance. The main lesson from this paper is that pouring more public funds
into the education system is unlikely to bring about improvement unless it is accompanied by efforts to improve governance in the sector.

Keywords: corruption, public spending, education

INTRODUCTION
Countries can gain numerous benefits from having a highly educated population.
Over many years, researchers have argued that higher human capital is associated,
among other things, with higher economic growth (Hanushek and Kimko 2000);
lower infant mortality rates (Jamison, Jamison and Hanushek 2007); higher levels
of democracy (Barro 1999); and higher support for free speech (Dee 2004). Studies
whose results contradict those just mentioned also exist. For example, Acemoglu
et al. (2005) question the finding of a positive relationship between education and
democracy; Bils and Klenow (2000) discuss reverse causality issues in the association between schooling and growth; and Pritchett (2001) finds no association
between human capital improvement and worker productivity. Nevertheless,
encouraged by the findings of positive associations, developing countries have
*

I am grateful to Ari Perdana and Elif Yavuz for sharing their knowledge of the Indonesian education sector and to Muhammad Purnagunawan for providing input during the
early stages of this research. I also thank Lina Marliani for assisting with district coding,
and Daan Pattinasarany and Wenefrida Widyanti for sharing their expertise on Indonesian
data sets. Nanda Rembulan Nurdianto provided excellent research assistance. Finally, I am
grateful to Paul Chen, Arya Gaduh, Andrew Leigh, Asep Suryahadi, Chikako Yamauchi,
the BIES editor and seminar participants at the 4th Australasian Development Economics
Workshop in Canberra, the 11th East Asian Economic Association International Convention
in Manila, and the 2008 Economics and Democracy Conference in Canberra for comments
and suggestions.
ISSN 0007-4918 print/ISSN 1472-7234 online/12/010085-16
http://dx.doi.org/10.1080/00074918.2012.654485

2012 Indonesia Project ANU

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Daniel Suryadarma

been allocating substantial public resources to developing and improving their

education systems. Examining 23 developing countries, the World Bank (2007)
finds that public education makes up 827% of total government spending.
Yet there seems to be relatively little association between this substantial
expenditure and education outcomes. Harbison and Hanushek (1992) examine
12 studies in developing countries and find that six of them report a statistically
insignificant association. Similarly, Anand and Ravallion (1993) demonstrate that
per capita public spending on education in a country has no statistically significant effect on the countrys literacy rate. In the same vein, Rajkumar and Swaroop
(2008), using a pooled data set of 91 developed and developing countries, discover that the relationship between public spending on education and the education failure (or drop-out) rate is small and statistically insignificant. In contrast,
Gupta, Verhoeven and Tiongson (2002) find that increased public spending in
education and health is associated with better outcomes in those spheres.
In an attempt to explain this phenomenon, several studies claim that the quality of governance plays a large role, because in highly corrupt countries schools
receive only a small proportion of the intended budget allocation. For example,
Reinikka and Svensson (2004) track a school grant program in Uganda and find
that, on average, schools receive only 13% of the funds allocated, with local politicians siphoning off the rest. Therefore, one explanation for the lack of association
between public spending and education outcomes may lie in how much of the
budget allocation actually arrives in the schools.
Several studies find a significant and strong correlation between public spending and education outcomes once governance is taken into account. Using a Ugandan government effort to reduce corruption as a source of variation, Bjrkman
(2006) finds that a higher share of the grant reaches the schools in less corrupt than
in more corrupt regions, and that the primary level exit examination scores of
students in the less corrupt regions are 0.4 standard deviations higher than those
of students in the more corrupt regions. Similarly, Rajkumar and Swaroop (2008)
find that a percentage point increase in the ratio of public education spending to
GDP lowers the education failure rate by 0.7% in countries with good governance,
but has no discernible effect in countries with weak governance.
This paper investigates the relationship between public spending on education and education outcomes in Indonesia, and examines how corruption affects
that relationship. For several reasons, Indonesia makes an especially interesting
case study of the influence of corruption on the effects of public spending. First,
although it is considered one of the most corrupt countries in the world, belonging in the bottom 10% in all major cross-country data sets that measure corruption, quantitative research on corruption in Indonesia has begun only relatively
recently.1 Second, Indonesia adopted a decentralised education system in 2001,
under which local governments manage the major activities of the sector and
1 According to Svensson (2005), the three most widely used cross-country corruption data
sets are the World Banks Control of Corruption Index; Transparency Internationals Corruption Perception Index (CPI); and the Political Risk Services International Country Risk
Guide. Lambsdorff (2006) lists almost every corruption measure currently available. Quantitative studies of corruption and governance in Indonesia include Sumarto, Arifianto and
Suryahadi (2003); Olken (2006a, 2006b, 2007); Kristiansen and Ramli (2006); Olken and
Barron (2007); and Asia Foundation (2008).

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How corruption diminishes the effectiveness of public spending on education

87

are responsible for most of its expenditure.2 There is sufficient variation in the
amount of public spending allocated to education by local governments to permit an empirical analysis of the effect of such spending on school enrolment and
education outcomes.
There are several reasons for focusing on the education sector, even though it
is argued that corruption is lower in education than in other sectors (Mauro 1998;
Fisman and Gatti 2002; Hunt 2006). First, many studies have shown that education is one of the most effective avenues through which developing countries
can improve living standards. Second, a substantial proportion of public spending is allocated to this sector, making it important to measure the effectiveness of
education spending before providing policy recommendations for improving its
effectiveness. Third, given that most parents wish to see their school age children
enrolled in school, it is difficult for parents to resist requests for corrupt payments
if these occur (Deininger and Mpuga 2005). Finally, there is indeed evidence of corruption taking place in the Indonesian education system (Kristiansen and Pratikno
2006), even though there is no exact measurement of how large this is or of its effect
on education outcomes. In one recent study, Widyanti and Suryahadi (2008) find
that 9% of respondent households claim to know of cases of bribery in schools.
This paper provides information on how Indonesias education system has
been financed since decentralisation, and reviews the evidence on corruption in
the education sector. It then describes the econometric specification and data used
to explore relationships between public education spending and education outcomes, and the influence of corruption on those relationships. It also outlines possible biases in this study. After presenting the estimation results, the paper offers
some policy interpretations of them.
PUBLIC SPENDING ON EDUCATION
This section discusses the role of local governments and the central government
in public spending on primary and secondary education following decentralisation.3 Indonesia has two main types of schools, distinguished by their curricula:
regular schools and madrasah (Islamic schools). Both school types include public
and private schools. In terms of the number of schools and of students enrolled,
regular schools are far more important than madrasah.
Regular schools use a core curriculum designed by the central governments
Ministry of National Education. Local governments administer public regular
schools, while non-profit organisations can own and operate private regular
schools.4 In contrast, the madrasah use a curriculum that is based on Islamic
teaching and is designed by the central governments Ministry of Religious

2 The top three tiers of government in Indonesia are the central, provincial and local. Local governments may be either districts (kabupaten) or municipalities (kota). A noteworthy
feature of Indonesias decentralisation is that most functions of government were devolved
to local governments, bypassing the provinces.
3 Unlike the primary and secondary levels, the tertiary level of education remains centralised.
4 Law 20/2003 on the National Education System stipulates that private school operators
must be non-profit organisations.

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Daniel Suryadarma

Affairs. The ministry also administers public madrasah, while Islamic organisations are allowed to operate private madrasah. Both regular and madrasah school
students in the 9th and 12th grades are required to sit for the national exit examinations.5
After decentralisation in 2001, local governments became responsible for
paying teacher salaries and maintaining the facilities of regular public schools,
while the central government continued to provide a good proportion of the
funds needed for building new schools. World Bank (2007) calculates that local
government spending accounted for 70% of total public spending on education in 2004. Supporting these figures, Kristiansen and Pratikno (2006) find that
central government spending on education fell from 17% of total government
spending in 1997 (four years before decentralisation) to just 5% in 2004 (three
years after decentralisation). Of the participants in the latter authors focus
group discussions, 81% believed that school quality had improved following
decentralisation. The study by Widyanti and Suryahadi (2008) found that 76%
of respondents considered that education services were generally better in 2006
than in 2004.
In their qualitative research on the effects of decentralisation on the education
system, Kristiansen and Pratikno (2006) find that both public and private spending per student was much higher after decentralisation, with private spending
increasing 5.8, 4.2 and 3.3 times between 1998 and 2004 for primary, junior secondary and senior secondary schools, respectively. Although the authors do not
indicate whether these increases are nominal or real, they are certainly substantial,
much higher than the average inflation rate between those years. Public spending
on education, meanwhile, roughly doubled in real terms between 1993 and 2005
(figure 1). The increase in public spending occurred for two reasons. First, parties and candidates in local government election campaigns saw it as imperative
to promise free education (Kristiansen and Pratikno 2006). Second, the national
parliament passed a law in 2003 that requires spending on education to account
for 20% of total spending for both local and central governments.6
EVIDENCE ON CORRUPTION IN THE EDUCATION SECTOR
Much of the evidence on the extent of corruption in the education sector is anecdotal, owing to the difficulty of collecting systematic information on this subject.
In a survey of corruption in education in 17 countries, Chapman (2002) finds that
more than half of respondents in Indonesia believed there was widespread corruption in the education sector. A quarter of respondents reported having been
asked for bribes by education professionals.
Other forms of corruption include embezzlement of education program funds.
One program affected is School Operational Assistance (Bantuan Operasional
Sekolah, BOS), the central governments flagship education-based anti-poverty
program. It transfers special funds to schools for the purchase of additional teach5 In Indonesia, primary school runs from grade 1 to grade 6, junior secondary school covers grades 7 to 9, and senior secondary school is from grades 10 to 12.
6 World Bank (2007) discusses at length the problems associated with the 20% rule and
their consequences.

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How corruption diminishes the effectiveness of public spending on education

89

FIGURE 1 Real Public Education Spending (Central and Local) per Student
(Rp 000, 2001 prices)
1,400
1,200
1,000
800
600
400
200
0
1993

1995

1997

1999

2001

2003

2005

Sources: Lanjouw et al. (2001) to 1998; World Bank (2007) from 2001; and authors calculations from
Susenas.

ing materials or the provision of fee relief to allow children from poor families to
stay at school. Newspapers have reported a number of cases of regional education
officials taking a cut from the BOS transfer. Moreover, a recent audit by the state
audit agency found embezzlement of BOS funds in six out of 10 schools (Jakarta
Post, 27/12/2010). If embezzlement occurs in the national governments flagship
program, then it is highly plausible that it also occurs in local governments public
spending on education.
Another form of corruption known to occur in Indonesia is high teacher
absence. In a survey of six developing countries, Chaudhury et al. (2006) find
that almost one-fifth of teachers in Indonesia are absent without notice, while
continuing to receive their salary. Since teacher salaries are included in public spending on education, teacher absence reduces the effectiveness of such
spending.
Because no measure of corruption in Indonesias education sector is available,
the measure of corruption used in our analysis is not specific to education, but
is a more general measure of corruption in Indonesia. It is explained in the next
section.
ECONOMETRIC SPECIFICATION, DATA AND ESTIMATION ISSUES
The reduced form econometric specification used to measure the relationship
between public spending and education outcomes is shown in equation 1.
Sit + 2 = 0 + 1 log( pubit ) + 2 log( privit ) + 3 povit + t + it

(1)

where Sit +2 is the education outcome of region i at time t+2; pubit and privit are
public and private education spending per student in the region at time t; povit
is the poverty headcount rate of the region at time t; t is a year dummy; and it

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Daniel Suryadarma

is the residual.7 The poverty rate is included to control for regional variance in
economic development, which may be correlated with the level of public spending and the dependent variables. The purpose of using spending data from time
t and linking them to outcomes in time t+2 is to take into account the likely lag in
the effect of public spending on outcomes.
The paper measures the effect of public spending on two sets of outcomes. The
first is net enrolment rates at junior and senior secondary levels. The net enrolment rate is the proportion of children in a specific school age group who are
enrolled at that particular level. For example, the junior secondary net enrolment
rate is the proportion of all 1315-year-old children who are currently enrolled at
the junior secondary level. These rates are calculated using Susenas, the National
Socio-Economic Survey conducted by Statistics Indonesia, the central statistics
agency. Susenas is an annually administered household survey, and is representative at the district/municipality level. In any given year, Susenas samples around
200,000 households consisting of 800,000 individuals. This paper uses data from
Susenas 2004 and 2006.
The second set of outcomes is the performance of junior secondary school
students in the 2004 and 2007 national examinations.8 The examination tests 9th
grade students in mathematics and English and Indonesian language.9 The Ministry of National Education (MONE) designs the national examination, and scores
are comparable across regions. The pass rates of each region are calculated using
MONEs formula. The data are inclusive of all schools in each region regular
schools and madrasah, both public and private.
To calculate the amount of public spending per student, this study used 2002
and 2004 local government level education expenditure realisation data compiled by the World Bank.10 The private education spending data are calculated by
dividing Susenas 2002 and 2004 data on household spending on education in each
region by the number of students enrolled in that region.11 Finally, poverty rates
in each region are calculated from Susenas 2002 and 2004 data, using the poverty
lines calculated by Pradhan et al. (2001). These lines are based on the consumption
of 2,000 kilocalories per day, and are comparable across regions.

7 Several of the cross-country studies mentioned in the introduction use GDP per capita
as an explanatory variable, possibly to proxy for welfare and private education spending.
Since this paper uses both poverty rates and actual private spending data, there is no need
to include GDP in the present analysis. In results not shown, controlling for GDP per capita
does not change the conclusions of the paper.
8 The senior secondary national examination results are not publicly available.
9 Only the results of the mathematics examination are presented here. The results for the
English and Indonesian language examinations are qualitatively similar.
10 It is not possible to calculate the exact amount of central government spending on education for each region, so central spending is excluded from the data. In any case, most
central government education spending is directed to the tertiary level (World Bank 2007).
11 It is not possible to distinguish education spending according to its use, for example, for
tuition fees, transport to school or book purchases. Nor is there any information on the proportion of students who attend school in a region different from their region of residence.

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How corruption diminishes the effectiveness of public spending on education

91

In order to investigate how corruption influences the effect of public spending

on educational outcomes, the study extends the model used in equation 1 so as to
follow the model used by Rajkumar and Swaroop (2008), as shown in equation 2.
Sit + 2 = 0 + 1 log( pubit ) + 2 log( privit ) + 3 povit + 4 corruptit
+5 corruptit log( pubit ) + t + it

(2)

where corruptit is the Corruption Perception Index (CPI) of region i at time t.

The data source for corruption is the CPI data for municipalities published by
Transparency International Indonesia (TII) in 2007 and 2009 (Karyadi et al. 2007;
Simanjuntak 2009). The data are based on surveys of business practitioners in
2006 and 2008, designed according to Transparency Internationals cross-country
CPI construction methodology. The weakness of subjective (perceptions) data is
well documented (Bertrand and Mullainathan 2001), but no objective local government level data on corruption in Indonesia exist. There may also be some concern about using a measure of corruption collected from business practitioners
as a proxy for corruption in the education sector, but again there are no corruption data specific to the education sector. However, under the assumption that
any measurement error is not correlated with the observed CPI, the estimated
coefficients will still be consistent. In order to check for robustness, column 3 in
tables 2 and 3 uses a categorical dummy for the CPI, equal to one if the region is
in the least corrupt half of the CPI distribution. This additional variable may help
reduce any measurement error.
Given that Transparency International defines corruption as the misuse of
public position for private gain, the CPI reflects the views of businesses in each
region about corruption in public sector agencies. The index ranges from zero to
10, with higher values indicating less corruption. While the CPI is designed to
allow the ranking of regions according to their CPI scores, Transparency International provides no information as to whether it can be considered as a cardinal
measure of corruption. However, as Svensson (2005) notes, researchers typically
treat the scores as cardinal measures.
Although TII has been conducting the biennial survey since 2004, this paper
uses the 2006 and 2008 surveys. This is because TII visited only 21 regions in 2004.
The 2006 survey covered 32 regions, 22 of which were revisited in 2008.12 Ideally,
a longitudinal data set of at least three time periods should be constructed, given
the availability of CPI data (2004, 2006, 2008 and 2010). However, the four data
sets used in this paper cover different periods. At the time this research was conducted, public spending data were available only up to 2004, while the national
examination results were publicly available only up to 2007. Therefore, only two
periods of data could be constructed, where the independent variables were from
2002 and 2004 (except for the CPI, which uses data from 2006 and 2008), and the
dependent variables were from 2004 and 2006 (except for the national examination data which were from 2007).

12 For the 10 regions that were not revisited in 2008, I use the 2006 CPI. As discussed below, this approach is justified by the relative time-invariance of the CPI.

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Choice of estimation method

The two econometric models above can be estimated using a pooled ordinary
least squares (Pooled OLS) or a panel fixed-effects (Panel FE) method. The choice
of methodology depends on several considerations. Two sources of bias in the
analysis are possible: reverse causality between public spending and education
outcomes; and omitted variable bias stemming from the fact that the small sample
size precludes the use of many control variables in the estimation.13 Provided that
reverse causality and omitted variable bias are time-invariant, a Panel FE method
would remove those biases from the results.
The disadvantage of using a Panel FE method, however, is that it relies solely
on within-region variation. Thus variables whose within-region variation is only
a small proportion of total variation are likely to have insufficient variation to be
able to generate meaningful results. Unfortunately, the CPI is one such variable.
The within-region variation in the CPI is only 29.9% of total variation, implying
that this is largely a time-invariant variable. Given this observation, estimating a
Panel FE on equation 2 may effectively remove any possible influence that corruption has on the relationship between public spending and education outcomes.
For these reasons, equations 1 and 2 are estimated using a Pooled OLS method.14 Summary statistics of the dependent and independent variables are provided in table 1.
CORRUPTION, PUBLIC SPENDING AND SCHOOL ENROLMENT
Results of the analysis of the impact of higher public spending on net enrolment
rates at junior and senior secondary levels are shown in table 2, panels A and
B.15 In each panel, column 1 shows the estimation results of equation 1, while
columns 2 and 3 show estimation results for equation 2. As explained above, two
different measures of the CPI are used: the index itself (column 2) and a dummy
variable that is equal to one if the region is in the top half of the CPI distribution,
indicating a region with relatively low corruption (column 3). Columns 2 and 3
show whether corruption influences the relationship between public spending
and outcomes.
In column 1 of table 2, the estimates in the first row of each panel show that
the effect of public spending on junior and senior secondary net enrolment rates is

13 While there is some possibility of omitted variable bias, this paper has the advantage of
using a within-country data set. The sample displays very little variation in respect of the
control variables that need to be taken into account in cross-country studies, such as political institutions, education financing systems, the extent of decentralisation, and levels of
female education. In any case, most of the control variables are statistically insignificant in
the cross-country studies. Rajkumar and Swaroop (2008), for example, use six control variables, and only one, a dummy for East Asian countries, is statistically significant.
14 The key findings about the effect of corruption on education are robust when the model
is estimated using the Panel FE method, which implies that time-invariant unobserved
heterogeneity is not a significant source of bias.
15 Ideally, the public and private spending data should be separated into junior and senior
secondary categories. However, the way education spending is presented in the official
documents rules out this possibility.

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How corruption diminishes the effectiveness of public spending on education

93

TABLE 1 Summary Statistics of Education Outcomes and Independent Variables

Mean

SD a

Net enrolment rate

Junior secondary
Senior secondary

0.73
0.57

0.10
0.13

0.36
0.19

0.87
0.78

National examination results, junior secondary b

Average mathematics score
Pass rate

6.01
0.94

1.12
0.06

4.40
0.59

8.46
1.00

Independent variables
Poverty rate c
Public education spending per student (Rp million)
Private education spending per student (Rp million)
Corruption Perception Index (CPI) b

0.06
1.20
1.12
4.66

0.09
0.57
0.59
0.81

0.00
0.11
0.22
2.97

0.57
2.75
2.82
6.61

Minimum Maximum

a SD = standard deviation.
b The national examination score and the CPI range from zero to 10.
c The poverty lines used to calculate poverty rates apply the methodology developed by Pradhan et

al. (2001), which is based on 2,000 kilocalories/day, and has the property of being comparable across
regions. The mean poverty rate for the 32 sample regions is less than half that for all of Indonesia
(which comprises 450 local government regions), so the sample is not necessarily representative of all
of Indonesia.

small and statistically insignificant. The larger point estimate, 0.042 (panel B, column 1, row 1), indicates that a doubling of public spending per student would lead
to an increase in the senior secondary net enrolment rate of only 4.2 percentage
points, or less than 10% proportionally from the mean of 0.57 shown in table 1. This
corroborates the finding in both the cross-country and the country-specific studies
mentioned in the introduction that public spending has little effect on education
outcomes.
However, when the analysis takes into account how corruption influences the
relationship between public spending and enrolments, the estimates in table 2
show that the negative impact of public spending in highly corrupt regions (those
whose CPI is near zero) eventually becomes positive as the level of corruption
declines.16 For example, a region whose CPI is one standard deviation about 0.81
points (table 1) higher than the average is able to achieve a 4.7 percentage-point
higher junior secondary net enrolment rate with the same amount of increased
public spending as a region with an average CPI.17
16 For a region whose CPI is zero, the effect of public spending on enrolments is represented in the first row of column 2 in each panel, for example 0.237 in table 2, panel A.
17 If everything else is held constant, the marginal effect of doubling public spending in a
region with an average CPI (4.66) is 0.237 + (4.66 0.058) = 0.033, that is, row 1 + (average
CPI x row 5) of column 2, panel A. Meanwhile, the marginal effect of the same amount of
public spending in a region with a CPI of 5.47 (one standard deviation 0.81 higher than
the average) is 0.237 + (5.47 0.058) = 0.080. The difference is 0.080 0.033 = 0.047, or 4.7
percentage points.

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Daniel Suryadarma

TABLE 2 Corruption, Public Spending and School Enrolment a

Pooled OLS Models

Panel A: Junior secondary net enrolment rate

log (Public spending per student)
log (Private spending per student)
Poverty rate
Corruption Perception Index (CPI)

(1)

(2)

(3)

0.019
(0.023)
0.053*
(0.028)
0.582***
(0.141)

0.237*
(0.124)
0.040
(0.027)
0.659***
(0.152)
0.037***
(0.012)
0.058**
(0.026)

0.002
(0.023)
0.041*
(0.024)
0.618***
(0.141)

CPI x log (public spending)

Less corrupt region dummy
Less corrupt region dummy x log (public spending)
Constant
Year dummy
Observations
R-squared

0.766***
(0.015)
Yes
61
0.564

Total effect of doubling public spending in regions with

average CPI
Total effect of doubling public spending in regions whose
CPI is one standard deviation above the average
Total effect of doubling public spending in less corrupt
regions
Panel B: Senior secondary net enrolment rate
log (Public spending per student)
log (Private spending per student)
Poverty rate
CPI

0.938***
(0.056)
Yes
61
0.607
0.033
0.080

0.070
0.042
(0.037)
0.095**
(0.039)
0.528***
(0.165)

CPI x log (Public spending)

Less corrupt region dummy

0.515***
(0.194)
0.078**
(0.035)
0.575***
(0.183)
0.043*
(0.022)
0.122***
(0.042)

Less corrupt region dummy x log (public spending)

Constant
Year dummy
Observations
R-squared
Total effect of doubling public spending in regions with
average CPI
Total effect of doubling public spending in regions whose
CPI is one standard deviation above the average
Total effect of doubling public spending in less corrupt
regions

0.035*
(0.021)
0.072*
(0.039)
0.775***
(0.020)
Yes
61
0.607

0.628***
(0.021)
Yes
61
0.474

0.817***
(0.109)
Yes
61
0.546

0.013
(0.032)
0.085***
(0.031)
0.508***
(0.175)

0.018
(0.034)
0.164***
(0.047)
0.613***
(0.034)
Yes
61
0.562

0.053
0.152
0.151

a See text for an explanation of columns (1), (2) and (3). *** = 1% significance, ** = 5% significance, * = 10%

significance. Standard errors are in parentheses, and clustered at the region level. The Corruption Perception
Index ranges from 0 (most corrupt) to 10 (least corrupt). The less corrupt region dummy = 1 if the region
belongs among the 50% least corrupt regions.

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How corruption diminishes the effectiveness of public spending on education

95

The results for the alternative (dummy variable) measure, included to reduce
measurement error, show that for regions in the top half of the CPI distribution
(that is, those with lower than average corruption), doubling public spending on
education would result in a 7 percentage-point increase (0.07; panel A, column 3,
last row) in the junior secondary net enrolment rate, although the effect is only
weakly statistically significant. In contrast, the effect of public spending on the
junior secondary net enrolment rate in regions in the bottom half of the CPI distribution is basically zero.18
A similar pattern, but with stronger effect, is found with the senior secondary net enrolment rate (columns 2 and 3, panel B). The parameter estimates in
column 2 show that a CPI that is one standard deviation higher than the average
generates an additional 9.9 percentage points in the senior secondary net enrolment rate for the same amount of increased public spending.19 This is a large
additional effect of public spending on outcomes, because the average senior secondary net enrolment rate in the sample is 57% (table 1). Moreover, column 3
of panel B shows a similar result to that for junior secondary enrolment: public
spending on education has no discernible impact on senior secondary enrolment
in more corrupt regions. In contrast, a doubling of public spending per student
in less corrupt regions would increase the senior secondary net enrolment rate by
15.1 percentage points (0.151; panel B, column 3, last row).
Overall, the results in columns 2 and 3 of both panels in table 2 show that
increasing public education spending affects enrolment levels positively provided the area in question has a sufficiently low corruption level. Therefore, it
appears that the apparent lack of a relationship between higher public spending
and school enrolment may be a consequence of corruption within the education
sector.
CORRUPTION, PUBLIC SPENDING AND SCHOOL PERFORMANCE
This section examines the same questions about education spending and corruption in relation to the second set of outcomes: performance in national mathematics examinations and the national examination pass rate at junior secondary
level. Since scores in the national examinations are comparable across regions, the
results in this section could be considered as an indication of the effect of public
spending on school quality, and of how corruption affects this relationship.
Table 3 provides the estimation results. Qualitatively, the results in column 1
of both panels A and B are similar to those in table 2, where the estimated effects
of public spending on outcomes are precisely zero. This corroborates the findings of a cross-country study on the determinants of mathematics and science
achievement, which shows that higher spending on education is not associated
18 The results for regions in the bottom half of the CPI distribution are shown in the first
row of column 3 in each panel.
19 As with junior secondary enrolment (panel A), if everything else is held constant, the
marginal effect of doubling public spending in a region with an average CPI (4.66) is 0.515
+ (4.66 0.122) = 0.053, that is, row 1 + (average CPI x row 5) of column 2, panel B. Meanwhile, the marginal effect of the same amount of public spending in a region with a CPI of
5.47 (one standard deviation 0.81 higher than the average) is 0.515 + (5.47 0.122) =
0.152. The difference is 0.152 0.053 = 0.099, or 9.9 percentage points.

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96

Daniel Suryadarma

TABLE 3 Corruption, Public Spending and School Performance a

Pooled OLS Models

Panel A: log (Average mathematics score)

log (Public spending per student)
log (Private spending per student)
Poverty rate
Corruption Perception Index (CPI)

(1)

(2)

(3)

0.016
(0.024)
0.026
(0.028)
0.672***
(0.160)

0.055
(0.285)
0.033
(0.025)
0.587***
(0.156)
0.023
(0.022)
0.013
(0.064)

0.010
(0.030)
0.031
(0.027)
0.618***
(0.167)

CPI x log (public spending)

Less corrupt region dummy
Less corrupt region dummy x log (public spending)
Constant
Year dummy
Observations
R-squared

1.722***
(0.019)
Yes
62
0.673

Total effect of doubling public spending in regions with

average CPI
Total effect of doubling public spending in regions whose
CPI is one standard deviation above the average
Total effect of doubling public spending in less corrupt
regions
Panel B: Examination pass rate
log (Public spending per student)
log (Private spending per student)
Poverty rate
CPI

1.608***
(0.110)
Yes
62
0.685
0.005
0.016

0.043
0.002
(0.009)
0.001
(0.012)
0.327***
(0.095)

CPI x log (Public spending)

Less corrupt region dummy

0.034
(0.091)
0.004
(0.010)
0.264***
(0.077)
0.018
(0.015)
0.005
(0.020)

Less corrupt region dummy x log (public spending)

Constant
Year dummy
Observations
R-squared
Total effect of doubling public spending in regions with
average CPI
Total effect of doubling public spending in regions whose
CPI is one standard deviation above the average
Total effect of doubling public spending in less corrupt
regions
a See table 2, note a.

0.023
(0.033)
0.053
(0.061)
1.702***
(0.028)
Yes
62
0.682

0.969***
(0.009)
Yes
59
0.212

0.882***
(0.073)
Yes
59
0.251

0.014
(0.017)
0.001
(0.012)
0.300***
(0.090)

0.012
(0.017)
0.024
(0.021)
0.960***
(0.014)
Yes
59
0.226

0.010
0.007
0.001

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How corruption diminishes the effectiveness of public spending on education

97

with higher achievement (Hanushek and Kimko 2000). Glewwe and Kremer
(2006) also find that merely increasing resources while keeping delivery methods
constant does not improve test scores.
In column 2 of table 3, the results in both panels show that lower corruption
as indicated by a higher CPI does not significantly increase the effect of public spending on school performance. Column 3 of both panels shows that public
spending in less corrupt regions has no significant effect on school quality. These
findings contrast with the finding of Bjrkman (2006) in Uganda, that grants to
schools had a significant positive effect on examination performance.
A possible explanation for corruptions lack of effect on the relationship
between public spending and school performance may lie in the results reported
in the previous section, which showed that public spending has a positive effect
on school enrolment only in less corrupt regions. If those results imply that a
relatively large proportion of low-performing students are encouraged to enrol
in junior secondary schools in response to increased public spending, that trend
may counteract any gain in average performance that might be expected from
additional public spending in these less corrupt regions. This proposition is tested
by controlling for school enrolment levels. The estimation results are provided in
appendix table 1. They are qualitatively similar to the results in table 3, suggesting
that this explanation is not supported by the data.
CONCLUSION
This paper takes a first step towards understanding how corruption in the education sector affects the performance of Indonesias education system. Against the
backdrop of the substantial resources spent upon education and the likely importance of the latter to any countrys economic prosperity, the study measures the
effect of public spending on school net enrolment rates and school performance in
national examinations. It then examines whether corruption has a role in explaining the effectiveness of public spending.
Higher public spending is found to be associated with higher enrolment rates
only in less corrupt regions. Therefore, while increasing public spending may be
a necessary condition for improving school enrolment in Indonesia, it is not sufficient. Stakeholders must conduct a rigorous effort to combat corruption in the
education sector in order for the higher spending to yield a positive effect on
school enrolment.
In contrast, public spending is shown to have no statistically significant relationship with school quality, as indicated by students examination performance.
This does not mean that public spending should be reduced; instead, the results
indicate that allocating more funds to the education sector will not improve
school quality unless this is accompanied by other policies, such as improving
the curriculum and recruiting higher-quality teachers. Some of these policies do
require more funding, but they need much more than just funds in order to succeed. Given the findings in this paper, one policy response that needs to be made
is to conduct a stronger campaign against corruption, since this would generate
increased school enrolments for any given level of public spending on education.

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98

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Daniel Suryadarma

APPENDIX TABLE 1 Corruption, Public Spending and School Performance:

Controlling for School Enrolment a
Pooled OLS Models

Panel A: log (Average mathematics score)

log (Public spending per student)
log (Private spending per student)
Poverty rate
Corruption Perception Index (CPI)

(1)

(2)

(3)

0.021
(0.026)
0.044
(0.031)
0.844***
(0.306)

0.123
(0.300)
0.045
(0.029)
0.774**
(0.314)
0.012
(0.023)
0.030
(0.068)

0.009
(0.032)
0.046
(0.030)
0.833***
(0.313)

CPI x log (Public spending)

Less corrupt region dummy
Less corrupt region dummy x log (public spending)
Junior secondary net enrolment rate
Constant
Year dummy
Observations
R-squared
Panel B: Examination pass rate
log (Public spending per student)
log (Private spending per student)
Poverty rate
CPI

0.297
(0.321)
1.950***
(0.255)
Yes
61
0.682

0.283
(0.331)
1.876***
(0.308)
Yes
61
0.692

0.001
(0.010)
0.003
(0.012)
0.392**
(0.190)

0.048
(0.102)
0.006
(0.012)
0.316*
(0.172)
0.016
(0.013)
0.009
(0.022)

CPI x log (Public spending)

Less corrupt region dummy

Less corrupt region dummy x log (public spending)
Junior secondary net enrolment rate
Constant
Year dummy
Observations
R-squared
a See table 2, note a.

0.109
(0.194)
1.052***
(0.151)
Yes
58
0.223

0.082
(0.189)
0.952***
(0.143)
Yes
58
0.260

0.010
(0.033)
0.078
(0.067)
0.348
(0.345)
1.972***
(0.272)
Yes
61
0.694

0.014
(0.017)
0.005
(0.013)
0.376**
(0.190)

0.009
(0.016)
0.033
(0.031)
0.126
(0.212)
1.055***
(0.161)
Yes
58
0.241