This paper examines how the introduction of the Fiscal Decentralization (FD) at the turn of the Century
that o§ered greater freedom in local governance a§ected grassroots politics and local development
in Indonesia. We Önd that socio-culturally homogenous communities are more likely to experience a
change in the way they select local leaders at the time of the introduction of FD and we identify multiple
political transitions in this respect. We then compare local development outcomes of various politically
treated communities (relative to those that did not experience any change) before and after FD to
identify the causal e§ect of FD on local development: FD positively a§ected local development when
it also induced community level political change (yielding new democracies and oligarchies). Moreover,
this positive impact of change on local development was maximum when it gave rise to new grassroots
democracy. We argue that change in grassroots politics at the critical juncture of the nationís history
was key in fostering local development as it signalled community resolve for development and forced
local political leadership to be more pro-people. But as costs of bringing about such changes is smaller
with sociocultural homogeneity, such communities are more likely to engineer political change to reap
the beneÖts of FD.