Regional Competitiveness in Indonesia: The Incentives of Fiscal Decentralization on State Efficiency and Economic Growth




Tirtosuharto, Darius

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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



Regional competiveness, Economic growth, Fiscal decentralization, Institutional development, Public capital expenditure, Indonesia