Government Expenditure as Determinants of Economic Growth and Income Inequality of Inter-Province of the Islands in Indonesia

Abstract

Indonesia is an archipelago, consisting of 13.466 islands, and grouped into 34 provinces. Each province has a government expenditure and economic growth, thus causing variations of government expenditure and economic growth among provinces. This matter may rise the income inequality between provinces in the island, as measured by the coefficient of variation.This study aims to clarify the effect of variations in government expenditure to economic growth and the income inequality among provinces in Indonesia islands. The secondary data used came from Statistics Indonesia, for period 2007 - 2012 (6 years), with 36 observations. Pooled panel data is used to estimate the equation with a common effect, using Path Analysis Recursive Model. Variation in government expenditure acts as exogenous variables. Variation in economic growth is the endogenous variable as well as the mediating variable. Variations in government expenditure and economic growth are expressed by the coefficient of variation. Income inequality among the provinces that acts as the last endogenous variable, is shown by Williamson Index. The results showed that variation in government expenditure has very small and negative effect, but insignificant to variation in economic growth. The results also show that the variation of economic growth has small and negative effect, but insignificant to the income inequality. Furthermore, variation in government expenditure has a significant positive effect on the income inequality. This shows that the variation in government expenditure is a determinant of increasing income inequality among provinces in the island. The results of this study did not find any existence of indirect effect of variation in government expenditure through the variation of economic growth on the income inequality among provinces in the Indonesia islands. It is suggested to the government that variation of government expenditure among the provinces in the island to be reduced or minimized, so that the income inequality between provinces in the Indonesia islands are more convergent.

Keywords: Economic growth, Government expenditure, Income inequality