The Impact of Fiscal Decentralization toward Regional Inequalities in Eastern Region of Indonesia

Abstract

This research aims to reveal whether fiscal decentralization is able to reduce regional inequality at Eastern Region of Indonesia. This research also endeavors to detect other variables (such as population growth, education participation level, open-unemployment rate, and investment rate) as the control variables that may affect regional inequality.

The estimation result using panel data from 16 provinces during 2001-2010 in Eastern Region of Indonesia confirms that (1) fiscal decentralization is not able to reduce regional inequality, (2) population growth, education participation level, and investment rate have an effect to reduce regional inequality, and (3) in long term, economic performance tend to be better in the Eastern Region of Indonesia due to the change on the economic structure from traditional pattern to modern pattern. This condition is reflected on the Kuznets’ Inverted-U hypothesis confirmation.

Keywords: fiscal decentralization, regional inequality, change on the economy structure pattern.