Abstract:
This dissertation examines the implementation of decentralization in Indonesia and
measures the incentives of fiscal decentralization on state efficiency and economic
growth. Efficiency of state governments in utilizing fiscal resources to support private
sector development and accelerate economic growth is consistent with the concept of
regional competitiveness. The main goal of this dissertation is to expand existing
empirical and theoretical frameworks on fiscal decentralization and economic growth that
have traditionally excluded efficiency factors of sub national governments. This
dissertation also aims to fill gaps in the way state efficiency is measured as an extension
of institutional quality of public sector.
Following a two-stage empirical methodology, the efficiency of Indonesia’s 26 states
government expenditure over a 10-year period (1996-2005) is constructed using Data
Envelopment Analysis (DEA) and a Tobit panel data model is used to analyze the
determinants of state efficiency. In the second stage, panel data analysis is employed to
analyze the impact of fiscal decentralization and state government efficiency on regional
growth.
This dissertation found that the degree of fiscal decentralization has a positive association
with economic growth if there are insignificant imbalances between regions following a
disproportionate growth in labor force and population. To a certain degree, regional
imbalances, which are a crucial issue in many developing countries, are one of the
disincentives in a decentralized system.
Another finding is that although decentralization provides a greater incentive structure for
states to become more efficient, this does not always lead to robust growth due to the
extent of misallocation of fiscal resources and lack of investment in productive spending.
Of several factors that potentially determine state efficiency, the degree of fiscal
decentralization, ratio of productive spending, operating costs and revenue independence
are significant and these factors differ between leading and lagging states.
Keywords: Regional Competitiveness, Economic Growth, Decentralization, Institutional
Development, Public Expenditure, Capital Investments, Indonesia
