THE IMPACT OF FISCAL DECENTRALIZATION ON ECONOMIC VARIABLES: EVIDENCE FROM INDONESIA’S PROVINCES

english

Abstract

The objective of this paper is to identify the effect of fiscal decentralization on economic growth in Indonesia’s provinces. We try to build an empirical modeling method to figure out the desired objective. Since Indonesia had implemented the fiscal decentralization to boost the regional economy, Central Government required for cash transfer to local government to help their local economic growth more rapidly. In this paper, we want to find out the effect of the cash transfer, and the spillover effect between regions for particular years to the Regional GDP, Income Disparity, and Tax Revenue of Central Government. We use panel data set of 33 provinces for the period 2007-2016. The cash transfer is introduced into the regression as an independent variable to measure the effect of fiscal decentralization to the three variables on interest. We find that revenue sharing on tax has a positive effect on Regional GDP including spillover effect from neighbors and Tax Revenue of Central Government while revenue sharing on natural resources is found to be negative. Meanwhile, the insignificant contribution of fiscal decentralization is found to the Income Disparity.