Bigger Government, Slower Growth? A Panel Analysis of Indonesian Provinces
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Government Size, Fiscal Decentralization, Transfer Ratio, Fiscal Capacity, Economic Growth, Difference-GMM
Abstract
Research Originality – Most studies examining the relationship between fiscal conditions, government size, and growth have been conducted in a piecemeal manner and have focused on national cases. This study fills that gap by comprehensively analyzing the impact of these fiscal variables on economic growth within the framework of the Armey curve theory.
Research Objectives – This study aims to analyze the effect of government size on economic growth at the provincial level in Indonesia.
Research Methods – This study analyzed the data using a Two-Step Difference GMM as the main estimator. The data were pooled at the provincial level across 33 provinces, covering the years 2014–2024. This study used government size, transfer ratio, and fiscal capacity as independent variables, with economic growth as the dependent variable.
Empirical Result – The baseline shows significant persistence in provincial economic growth, while government size, transfer ratio, and fiscal capacity do not exhibit a statistically significant linear effect on growth. However, the quadratic specification produces a positive coefficient for the squared term, which is significant at the 10% level. It is provides suggestive evidence of an inverted U relationship consistent with the Armey Curve.
Implications – The findings suggest that the growth implications of provinces government size in Indonesia are better understood as nonlinear rather than uniformly positive or negative. Fiscal expansion may be associated with stronger growth at relatively low levels of government size, whereas further expansion beyond the estimated turning point may generate diminishing or adverse growth effects.
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