The Influence of Local Government Spending and Village Funds on Inclusive Economic Development in Indonesia
Article Sidebar
Main Article Content
Abstract
Research originality — This study is the first to analyze how government fiscal instruments, specifically the local government spending, have a different role in pillars of inclusive economic development. In addition, the study examines whether village funds, which are the lowest-level of fiscal instrument, play a strategic role in creating inclusivity in regional economic development. It provides a synthesis of knowledge on the role of government fiscal policy in promoting inclusive economic development.
Research objectives — This study provides an overview of the empirical findings on how local government spendings and village funds affect the realization of inclusive economic development.
Research methods — The study utilized data from the inclusive economic development index (inclusive index), regional spending based on economic, education, and health functions, and village funds at the provincial level from 2015 to 2021. The study used panel data with multivariate regression analysis.
Empirical results — The study found that expenditure for education and road strengthened the inclusive index. Economic and health expenditures showed a partial impact on inclusive economic development. Economic expenditure was found to strengthen the economic growth pillar, but it reduced the equity and poverty pillar. The finding underlines that economic expenditure seems to be pro-growth, but not pro-poor. Another finding is that the village funds supported the pillar of equity and poverty.
Implications — The implication of this study is the improvement of the quality of government spending, especially educational expenditure, which has been proven to have a significant impact on the inclusive index. Another implication is the possibility that the quality of economic expenditure is improved because it is not fully pro-poor.
Article Details
This work is licensed under a Creative Commons Attribution 4.0 International License.
Copyright notice can be accessed here
References
Adeleye, N., Osabuohien, E., & Bowale, E. (2017). The role of institutions in the finance-inequality nexus in Sub-Saharan Africa. Journal of Contextual Economics, 137(1–2), 173–192. https://doi.org/10.3790/jce.137.1-2.173
Afriliana & Wahyudi. (2022). Analysis of inclusive economic growth: A comparative study between provinces in Indonesia. Journal Of Development Economic and Social Studies Volume, 1. https://doi.org/10.21776/jdess.2022.01.1.5
Ali, I., & Son, H. H. (2007). Measuring inclusive growth. Asian development review, 24(01), 11-31.
Ambya, A. (2020). How government spending on public sector affects the economic growth? Jejak, 13(1), 218–229. https://doi.org/10.15294/jejak.v13i1.21943
Ardina, S. (2022). The effect of fiscal decentralization, fiscal capacity and regional spending on inclusive economic growth (Doctoral dissertation, State University of Malang).
Arfiansyah, M. A. (2020). The impact of village funds in poverty alleviation in Central Java. Journal of Lisyabab, 1(1), 91-106.
Arrfah, A. P., & Syafri. (2022). The Impact of Local Government Spending on Inclusive Economic Development in Central Sulawesi Province. Artha Info Journal Vol.6, No.2, (2022), pp.159-166.
ASEAN. (2023). ASEAN economic outlook 2023
https://www.aseanbriefing.com/news/asean-economic-outlook-2023/
Ashari, N. (2013). Implementation of village fund allocation in Kelinjau Village, Muara Ancong District, East Kutai Regency. Journal of Government Science, 1, 1135-1144. Retreived from: https://ejournal.ip.fisip-unmul.ac.id/site/?p=778#.
Azwardi, A., & Sukanto, S. (2014). The effectiveness of village fund allocation (ADD) and poverty in South Sumatra Province. Journal of Development Economics, 12(1), 29-41.
Central Statistics Agency. (2021). Percentage of Poor Population. https://bps.go.id/pressrelease/2021/07/15/1843/persentase-penduduk-miskin-maret-2021-turun-menjadi-10-14-persen.html
Central Statistics Agency. (2024). Government Finance, Fiscal and Public Sector Statistics. https://www.bps.go.id/id/statistics-table?subject=534
Balakrishnan, R., Steinberg, C., & Syed, M. (2013). The elusive quest for inclusive growth: growth, poverty, and inequality in Asia. IMF Working Paper 13/152; June 1, 2013.
Benos, N., & Zotou, S. (2014) Education and economic growth: A meta-regression analysis. World Development, 64, 669-689.
https://doi.org/10.1016/j.worlddev.2014.06.034
Bukhari, E. (2021). The influence of village funds in alleviating poverty among villagers. Journal of Scientific Studies, 21(2). 219-228. http://ejurnal.ubharajaya.ac.id/index.php/JKI
Claus, I., Martinez-Vazquez, J., & Vulovic, V. (2012). Government fiscal policies and redistribution in Asian countries. ADB Economics Working Paper Series Government Fiscal Policies and Redistribution in Asian Countries Economics Printed on Recycled Paper Printed in the Philippines (Issue 310). www.adb.org/
Coady, D., & Geng, N. (2015). From Expenditure consolidation to expenditure efficiency: Addressing public expenditure pressures in Lithuania. IMF Working Paper
Coman (Nuţă), A. C., Lupu, D., & Nuţă, F. M. (2022). The impact of public education spending on economic growth in Central and Eastern Europe. An ARDL approach with structural break. Economic Research-Ekonomska Istrazivanja. https://doi.org/10.1080/1331677X.2022.2086147
Danladi, J. D., & Olarinde, O. (2015). Government expenditure and its implication for economic growth: Evidence from Nigeria. Journal of Economics and Sustainable Development. 6(18). 142-150. https://www.researchgate.net/publication/335653831
Dartanto, T. (2013). Why is growth less inclusive in Indonesia? Institute for Economic and Social Research (LPEM), Faculty of Economics and Business, University of Indonesia.
Dewi, R. S., & Irama, O. N. I. N. (2018). The effect of village fund allocation on poverty. Journal of Accounting and Business: Journal of Accounting Study Program, 4(2), 11. https://doi.org/10.31289/jab.v4i2.1513
Durlauf, S. N., Kourtellos, A., & Minkin, A. (2001). The local Solow growth model. European Economic Review, 45(4-6), 928-940.
Echekoba, F.N., & Chinelo, A.I. (2017). The impact of government expenditure on Nigeria economic growth: A further disaggregated approach. NG-Journal of Social Development, 6(3). 34-49.
Estrada, G., Lee, S., & Park, D. (2014). Fiscal policy for inclusive growth: An overview. ADB Economics Working Paper Series, 423
Fan, S., & Chan-Kang, C. (2005). Road development, economic growth, and poverty reduction in China (Vol. 12). Intl Food Policy Res Inst.
Fitrianasari, R.N. (2021). Analysis of the impact of globalization, fiscal policy, and human capital on inclusive economic growth: A case study with panel data in 9 districts/cities in East Kalimantan Province.
Ghosh, S. (2020). Impact of economic growth volatility on income inequality: ASEAN experience. Quality & Quantity, 54(3), 807-850.
Goshen, Z., & Levit, D. (2022). Agents of inequality: common ownership and the decline of the American worker. Duke Law Journal, 72(1). https://files.epi.org/2012/ib342-unions-inequality-
Harris, S. E. (1956). Taxes and the economy. Current History, 31(182), 206-211.
Hausmann, R., Espinoza, L., & Santos, M. A. (2017). Shifting gears: A growth diagnostic of Panama. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2880654
Hur, S. K. (2014). Government spending and inclusive growth in developing Asia. (Economics Working Paper No. 415). www.adb.org
Hyman, D. N. (2010). Public finance. a contemporary application of theory to policy 10th edition Cengage learning. North Karolina, State University, USA.
International Monetary Fund. (2015). IMF survey: Closing efficiency gaps means big gains for public investments.
Jati, W. R. (2015). Demographic bonus as an engine of economic growth: Window of opportunity or disaster window In Indonesia. Population, 23(1), 1-19.
Johansson, Å. (2016). Public finance, economic growth and inequality: A survey of the evidence. OECD Economics Department Working Papers. https://doi.org/10.1787/094bdaa5-en
Kolawole, B. O. (2016). Government spending and inclusive-growth relationship in Nigeria: An empirical investigation. Zagreb International Review of Economics and Business, 19(2), 33–56. https://doi.org/10.1515/zireb-2016-0007
Lopez, R., Thomas, V., & Wang, Y. (2008). The quality of growth: Fiscal policies for better results. Lopez, Ramon, Vinod Thomas, Yan Wang.
Long, T. J., & Pasaribu, E. (2019). Spatial analysis of the determinants of inclusive growth of districts/cities in Central Java Province in 2017. National Seminar on Official Statistics (Vol. 2019, No. 1, pp. 416-423)
Ma'ruf, Y. P. (2013). The effect of road infrastructure investment on regional economic growth in the southern coastal district of West Sumatra province. USU Journal of Civil Engineering, 2(3).
Mangkoesoebroto, G. (2002). Public economy. Yogyakarta: BPFE
Marquez-Ramos, L., & Mourelle, E. (2019). Education and economic growth: an empirical analysis of nonlinearities. Applied Economic Analysis, 27(79), 21–45. https://doi.org/10.1108/AEA-06-2019-0005
Meier, G. M., & Rauch, J. E. (2005). Leading issues in economics development, (8th Edition), Oxford University Press, New Delhi.
Meiriza, M. S., Marpaung, D. T., Limbong, N., & Tarigan, S. W. B. (2023). Neoclassical economic analysis of economic development according to Robert Solow and Trevor Swan. Econodynamics: Journal of Dynamic Economics, 5(4).
Musgrave, R. A., & Musgrave, P. B. (1984). Public finance in theory and practice. New York: McGraw-Hill Book Company.
Permana, F. Y. (2020). Analysis of the Influence of Village Funds, Farmers' Exchange Rate and Farm Workers' Wages on Rural Poverty in Eastern Indonesia in 2015-2019 (Bachelor's thesis, Faculty of Economics and Business, UIN Jakarta).
Prabowo, D. H., Maski, G., & Santoso, D. B. (2022). Fostering inclusive growth in Indonesia: evidence from panel regression analysis. Journal of International Conference Proceedings, 5(2), 139–149. https://doi.org/10.32535/jicp.v5i2.1680
Prasetyo, R. B., & Firdaus, M. (2009). The influence of infrastructure on regional economic growth in Indonesia. Journal of Economics and Development Policy, 2(2), 222-236.
Pratiwi, I. E., & Ismal, R. (2017). Analysis of the impact of fiscal policy and monetary policy end targets on inclusive growth in Indonesia, Malaysia, Qatar and Saudi Arabia. Middle East and Islamic Studies, 4(1), 73–91.
Primawan, M. I. (2020). Analysis of the Influence of Government Spending on Inclusive Economic Growth in Indonesia (Case Study of 33 Provinces in Indonesia) (Doctoral dissertation, Universitas Brawijaya).
Purwanti, S., & Rahmawati, F. (2021). The effect of government spending and the open unemployment rate (TPT) on Indonesia's inclusive economic growth. Ecoplan, 4(1), 32-44. https://doi.org/10.20527/ecoplan.v4i1.231
Putra, H. S. (2018). The influence of village funds on poverty in Aceh. Journal of Policy Analysts, 2(2).
Ramadhan, R. R., & Setiadi, Y. (2019). The influence of physical capital and human resources on the inclusive index in Indonesia. Journal of Development Economics, 17(2), 109–124. https://doi.org/10.29259/jep.v17i2.9797
Ramos, R. A., Ranieri, R., & Lammes, J. W. (2013). Mapping inclusive growth. International Policy Centre for Inclusive Growth (IPC-IG)
Rimawan, M., & Aryani, F. (2019). The effect of village fund allocation on economic growth, human development index and poverty in Bima Regency. Scientific Journal of Accounting and Humanities, 9(3), 287-295.
Rini, D. L., & Tambunan, T. T. H. (2021). Inclusive economic growth of Indonesia and its determinants-recent evidence with provincial data. Asian J. Interdiscip. Res, 4, 85-100.
Sihombing, R. P., & Purwanti, D., (2022). Do village funds and APBD revenues affect the inclusive economic development index in Indonesia? Perspective: Journal of Economics & Management of Bina Sarana Informatics University, 20(2). 182-187. https://doi.org/10.31294/jp.v17i2
Sani, S. R., Fitri, C. D., Amri, K., Muliadi, M., & Ikhsan, I. (2022). The impact of the covid-19 pandemic on unemployment, poverty and income inequality: Evidence from panel data in Indonesia. Economist: Journal of Economics and Business, 6(1), 107-115.
Safitri, M. I. D., Ananda, C. F., & Prasetyia, F, (2021). Analysis of the impact of local government spending on inclusive economic growth in East Java. Indonesian Treasury Review: Journal of Treasury, State Finance and Public Policy, 6(2), 85-96.
Sari, I. M., & Abdullah, M. F. (2017). Economic analysis of village fund policy on village poverty in Tulungagung district. Journal of Development Economics, 15(1), 34-49.
Saputra, M. E., Zulham, T., & Srinita, S. (2025). The effect of Aceh government spending policy on inclusive growth: Income per capita as a mediating variable. Grimsa Journal of Business and Economics Studies, 2(1), 1-14.
Sigit, T. A., & Kosasih, A. (2020). The effect of village funds on poverty: a district/city level study in Indonesia. Indonesian Treasury Review: Journal of Treasury, State Finance and Public Policy, 5(2), 105-119.
Simanjuntak, K. M. (2015). Implementation of government decentralization policies in Indonesia. Journal of Bina Praja, 7(2), 111-130.
Sumarto, S., & De Silva, I. (2013). Poverty-growth-inequality triangle: The case of Indonesia. TNP2k Working Paper
Suriani, S., & Keusuma, C. N. (2015). The influence of basic infrastructure development on economic growth in Indonesia. Ecoscience: Scientific Journal of Economics and Development, 4(1), 1. https://doi.org/10.24036/ecosains.10962757.00
Susilowati, N. I., Susilowati, D., & Hadi, S. (2017). The effect of village fund allocation, village funds, capital expenditure, and gross regional domestic product on district/city poverty in East Java. Journal of Economics JIE, 1(4). 514-526. https://doi.org/10.22219/jie.v1i4.6288
Taruno, H. T. (2019). Public spending and poverty reduction in Indonesia: The effects of economic growth and public spending on poverty reduction in Indonesia 2009-2018. The Indonesian Journal of Planning and Development, 4(2), 49–56.
Torrisi, G. (2009). Public infrastructure: Definition, classification and measurement issues. Journal: Economics, Management, and Financial Markets, 4(3). 100-124.
Traore, M. (2019). Fiscal policy, income inequality and inclusive growth in developing countries (Doctoral dissertation, Université Clermont Auvergne [2017-2020]; Université Félix Houphouët-Boigny (Abidjan, Côte d'Ivoire)).
United Nations Development Programme. (2017). UNDP's strategy for inclusive and sustainable growth. https://www.undp.org/publications/undps-strategy-inclusive-and-sustainable-growth
United Nations Development Programme. (2022). Inequality and social security in the Asia-Pacific region. https://www.undp.org/sites/g/files/zskgke326/files/2022-02/UNDP-RBAP-Inequality-and-Social-Security-in-Asia-Pacific-2022.pdf
Vujanovic, P. (2015). Policies for inclusive and sustainable growth in Indonesia. https://doi.org/10.1787/5jrxqbh40r35-en
Wahyudi, W. (2020). The relationship between government spending and economic growth revisited. International Journal of Economics and Financial Issues, 10(6), 84.
Wardhana, A., Kharisma, B., & Noven, S. A. (2020). Population dynamics and economic growth in Indonesia. Economic Studies Bulletin, 25(1).
Wibowo, B. (2019). Impact of spillover and fiscal policy on the achievement of inclusive growth between provinces in Indonesia (Doctoral dissertation, Bogor Agricultural University (IPB)).
Wirfiana, N. (2021). Analysis of inclusive growth and poverty in Indonesia. Thesis-S1 thesis, HASANUDDIN UNIVERSITY
Zulfiqar, K. (2018). Fiscal policy for inclusive growth. Pakistan Economic and Social Review, 56(1), 21-46.