Public finance and economic performance :: Empirical evidence in Indonesia

WAHYU, Endah Kusumaning, Prof. FURUKAWA Akira

2010 | Tesis | S2 Magister Ekonomika Pembangunan

This research assesses the impact of substantial fiscal decentralization in Indonesia in the recent decade to its regional economic development. Economic theory generally advocates the positive influence of local government autonomy, but if it is premature to preparation of the local authority, negative impact can occur. The research focus on three aspects of fiscal system: first, to examine the influence of local tax as a share of public finance on economic performance; second, to see which of the two kinds of intergovernmental transfer, general grants allowing for autonomous use by the locality, or specific purpose grants retaining central government intervention, would contribute more to regional economy; and third, to investigate the productive and non-productive local expenditure on regional economic performance. The data are fiscal and socioeconomic data of 29 provinces in Indonesia from 2001 to 2006. The models are derived from the standard neoclassical production function whose total factor productivity is determined endogenously. The analytical results were mostly supportive of the assumptions. Investment expenditure showed mostly significant positive impact on the economy, and specific purpose grant was mostly negative. However, local tax effect was inconclusive, reflecting limited share of local tax revenue as compared to national tax. In sum, while the Indonesian rapid decentralization achieves generally positive impact to enhance the regional economy, due to the lack of transfer of taxation, huge income gap between regions, and the inexperience of local bureaucracy, some more step-by-step decentralization approach could be considered.

Kata Kunci : Decentralization,Local tax,Intergovermental transfer,Special allocation grant (DAK)