Fiscal Decentralisation’s Effect on Indonesia Economic Growth

Syawal Zakaria; Farida Mony; Ilham Habibi Zakaria; Jusup Sahupala; Junaidi Junaidi

doi:10.4067/S0718-88702025000200101

Authors

Syawal Zakaria Universitas Darussallam
Farida Mony Universitas Darussalam Ambon, Indonesia
Ilham Habibi Zakaria Universitas Sahid Jakarta, Indonesia
Jusup Sahupala Universitas Darussalam Ambon, Indonesia
Junaidi Junaidi Universitas Muhammadiyah Palopo

DOI:

https://doi.org/10.4067/S0718-88702025000200101

Keywords:

Fiscal policy, fiscal decentralization, economic growth

Abstract

This study tries to assess how fiscal decentralization which measured by income, expenditure, population increase, human development, regional investment, open trade influencing local government GDP. Using panel data covering Indonesia’s districts from 2013 to 2023. Fixed-effect method was used to confirm financial decentralization on economic growth on Indonesian districts. Fiscal decentralized as one of the local government budget sources have a positive and significant effect on region economic growth. Furthermore, local government expenditure has strong correlation to local people human resources development, investment, and open trade. The central and local government should process of shifting the budget and expenditure effectively. As regulator, central government need to offer regulation the transfer system design and surveilance the budget distribution. This study contributes to economic and government literature by investigate the role of fiscal decentralisation on Indonesia’s district economic growth based on economic and social indicatior.

Downloads

Download data is not yet available.

References

Ahmed, N., Hamid, Z., Rehman, K. U., Senkus, P., Khan, N. A., Wysokińska-Senkus, A., & Hadryjańska, B. (2023). Environmental regulation, fiscal decentralization, and agricultural carbon intensity: A challenge to ecological sustainability policies in the United States. Sustainability, 15(6), Article 5145. https://doi.org/10.3390/su15065145

Akai, N., & Sakata, M. (2002). Fiscal decentralization contributes to economic growth: Evidence from state-level cross-section data for the United States. Journal of Urban Economics, 52(1), 93–108. https://doi.org/10.1016/S0094-1190(02)00018-9

Alfada, A. (2019). Does fiscal decentralization encourage corruption in local governments? Evidence from Indonesia. Journal of Risk and Financial Management, 12(3), Article 118. https://doi.org/10.3390/jrfm12030118

Anwar, S. M., Junaidi, J., Salju, S., Wicaksono, R., & Mispiyanti, M. (2020). Islamic bank contribution to Indonesian economic growth. International Journal of Islamic and Middle Eastern Finance and Management, 13(3), 519–532. https://doi.org/10.1108/IMEFM-02-2018-0071

Arends, H. (2020). The dangers of fiscal decentralization and public service delivery: A review of arguments. Politische Vierteljahresschrift, 61(3), 599–622. https://doi.org/10.1007/s11615-020-00233-7

Aritenang, A. F., & Chandramidi, A. N. (2023). The spatial effects of fiscal decentralization on regional convergence: The case of regions in Indonesia. GeoJournal, 88(2), 2011–2030. https://doi.org/10.1007/s10708-022-10724-2

Aslim, E. G., & Neyapti, B. (2017). Optimal fiscal decentralization: Redistribution and welfare implications. Economic Modelling, 61, 224–234. https://doi.org/10.1016/j.econmod.2016.12.008

Barro, R. J. (1990). Government spending in a simple model of endogenous growth. Journal of Political Economy, 98(5), 103–125. https://doi.org/10.1086/261726

Beck, T., Demirgüç-Kunt, A., & Levine, R. (2007). Finance, inequality and the poor. Journal of Economic Growth, 12(1), 27–49. https://www.jstor.org/stable/40216113. https://doi.org/10.1007/s10887-007-9010-6

Bird, R. M., & Slack, E. (2014). Local taxes and local expenditures in developing countries: Strengthening the Wicksellian connection. Public Administration and Development, 34(5), 359–369. https://doi.org/10.1002/pad.1695

Chugunov, I., & Pasichnyi, M. (2018). Fiscal stimuli and consolidation in emerging market economies. Investment Management and Financial Innovations, 15(4), 113–122. https://doi.org/10.21511/imfi.15(4).2018.09

Davoodi, H., & Zou, H. F. (1998). Fiscal decentralization and economic growth: A cross-country study. Journal of Urban Economics, 43(2), 244–257. https://doi.org/10.1006/juec.1997.2042

Gemmell, N., Kneller, R., & Sanz, I. (2013). Fiscal decentralization and economic growth: Spending versus revenue decentralization. Economic Inquiry, 51(4), 1915–1931. https://doi.org/10.1111/j.17295.2012.00508.x

Ginting, A. M., Hamzah, M. Z., & Sofilda, E. (2019). The impact of fiscal decentralization on economic growth in Indonesia. Economic Journal of Emerging Markets, 11(2), 152–160. https://doi.org/10.20885/ejem.vol11.iss2.art3

Hung, N. T., & Thanh, S. D. (2022). Fiscal decentralization, economic growth, and human development: Empirical evidence. Cogent Economics & Finance, 10(1), 1–17. https://doi.org/10.1080/23322039.2022.2109279

Isiksal, A. Z. (2023). The role of natural resources in financial expansion: Evidence from Central Asia. Financial Innovation, 9(1), Article 78. https://doi.org/10.1186/s40854-023-00482-6

Jin, Y., & Rider, M. (2022). Does fiscal decentralization promote economic growth? An empirical approach to the study of China and India. Journal of Public Budgeting, Accounting & Financial Management, 34(6), 146–167. https://doi.org/10.1108/JPBAFM-11-2019-0174

Junaidi, J. (2024). Islamic banks' contribution to Indonesia districts' economic growth and poverty alleviation. Journal of Economics, Finance and Administrative Science, 29(58), 294–308. https://doi.org/10.1108/JEFAS-06-2021-0097

Koroton, V., Kaneva, T., Levaieva, L., & Kucherenko, S. (2020). The impact of fiscal decentralization on economic growth in Central and Eastern Europe. European Journal of Sustainable Development, 9(3), 215–227. https://doi.org/10.14207/ejsd.2020.v9n3p215

Kurkela, K., Kork, A., Jäntti, A., & Paananen, H. (2024). Citizen participation as an organisational challenge in local government. International Journal of Public Sector Management, 37(1), 124–140. https://doi.org/10.1108/IJPSM-08-2022-0179

Levine, R., & Renelt, D. (1992). A sensitivity analysis of cross-country growth regressions. The American Economic Review, 82(4), 942–963. https://www.jstor.org/stable/2117352

Lewis, B. D. (2023). Indonesia's new fiscal decentralization law: A critical assessment. Bulletin of Indonesian Economic Studies, 59(1), 1–18. https://doi.org/10.1080/00074918.2023.2180838

Martinez-Vazquez, J., Lago-Peñas, S., & Sacchi, A. (2017). The impact of fiscal decentralization: A survey. Journal of Economic Surveys, 31(4), 1095–1129. https://doi.org/10.1111/joes.12182

Martinez-Vazquez, J., & McNab, R. M. (2003). Fiscal decentralization and economic growth. World Development, 31(9), 1597–1616. https://doi.org/10.1016/S0305-750X(03)00109-8

Nguyen, P. D., Vo, D. H., Ho, C. M., & Vo, A. T. (2019). Fiscal decentralisation and economic growth across provinces: New evidence from Vietnam using a novel measurement and approach. Journal of Risk and Financial Management, 12(3), Article 143. https://doi.org/10.3390/jrfm12030143

Nugroho, Y., & Sujarwanto, S. (2021). Institutions, outputs and outcomes. Journal of Southeast Asian Economics, 38(3), 296–319. https://www.jstor.org/stable/27096080

Oates, W. E. (1999). An essay on fiscal federalism. Journal of Economic Literature, 37(3), 1120–1149. https://doi.org/10.1257/jel.37.3.1120

Omar, M. A., & Inaba, K. (2020). Does financial inclusion reduce poverty and income inequality in developing countries? A panel data analysis. Economic Structures, 9(1), Article 37. https://doi.org/10.1186/s40008-020-00214-4

Pasichnyi, M. (2017). Empirical study of the fiscal policy impact on economic growth. Problems and Perspectives in Management, 15(3), 316–322. https://doi.org/10.21511/ppm.15(3-2).2017.01

Qiao, G., Yang, D., Ahmad, M., & Ahmed, Z. (2022). Modeling for insights: Does fiscal decentralization impede ecological footprint? International Journal of Environmental Research and Public Health, 19(16), Article 10146. https://doi.org/10.3390/ijerph191610146

Rodriguez-Pose, A., & Krøijer, A. (2009). Fiscal decentralization and economic growth in Central and Eastern Europe. Growth and Change, 40, 387–417. https://doi.org/10.1111/j.14682257.2009.00488.x

Rose-Ackerman, S. (1999). Corruption and government: Causes, consequences, and reform. Cambridge University Press. https://doi.org/10.1017/cbo9781139175098

Seifert, J., & Li, H. (2015). Indonesia's fiscal decentralization and its effect on provincial public finances. Public Finance and Management, 15(2), 108–129. https://doi.org/10.1177/152397211501500202

Shoesmith, D., Franklin, N., & Hidayat, R. (2020). Decentralised governance in Indonesia's disadvantaged regions: A critique of the underperforming model of local governance in Eastern Indonesia. Journal of Current Southeast Asian Affairs, 39(3), 359–380. https://doi.org/10.1177/1868103420963140

Siburian, M. E. (2022). The link between fiscal decentralization and poverty – Evidence from Indonesia. Journal of Asian Economics, 81, Article 101493. https://doi.org/10.1016/j.asieco.2022.101493

Slavinskaite, N. (2017). Fiscal decentralization in Central and Eastern Europe. Global Journal of Business, Economics and Management: Current Issues, 7(1), 69–79. https://doi.org/10.18844/gjbem.v7i1.1236

Sofilda, F., Hamzah, M. Z., & Kusairi, S. (2023). Analysis of fiscal decentralisation, human development, and regional economic growth in Indonesia. Cogent Economics and Finance, 11(1), 1–15. https://doi.org/10.1080/23322039.2023.2220520

Solow, R. M. (1956). A contribution to the theory of economic growth. The Quarterly Journal of Economics, 70(1), 65–94. https://doi.org/10.2307/1884513

Tang, S. Y. (2021). Rethinking local and regional governance in China: An institutional design and development perspective. Urban Governance, 1(1), 51–58. https://doi.org/10.1016/j.ugj.2021.11.002

Wang, B., & Deng, W. (2023). Fiscal decentralization and county natural poverty: A multidimensional study based on a BP neural network. Sustainability, 15(18), Article 13567. https://doi.org/10.3390/su151813567

Yushkov, A. (2015). Fiscal decentralization and regional economic growth: Theory, empirics, and the Russian experience. Russian Journal of Economics, 1(4), 404–418. https://doi.org/10.1016/j.ruje.2016.02.004