Decentralization and Financial Local Governments Performance: How Does Fiscal Autonomy Affect Spending, Economic Growth, and Poverty in East Java Indonesia?

Abstract

Generally, fiscal policy is implemented through tax instruments (T) and governmental spending (G). This research aims at investigating and analysing the impact of the implementation of fiscal decentralization on the local economic growth and poverty in East Java. This study uses panel data across regencies and cities of East Java Province in the period of 2010-2015, and employs Path Analysis to directly and indirectly identify the effect of local financial performance on economic growth and poverty. The results indicate that there is a significant effect of local financial performance on economic growth and poverty with different directional relation. Furthermore, fiscal policy in Indonesia is designed within the framework of pro growth and pro poor, but the limitations of fiscal room and high inequality become obstacles. Using the pro poor growth index (PPGI) approach, the results show that economic growth benefits the poor at different levels in each regencies and cities.

Keywords: Local financial performance, capital expenditure, economic growth, poverty, inequality, pro poor growth

DOI: 10.7176/JPID/51-04

Publication date: November 30^th 2019