Fiscal Decentralization and Income Inequality: A Prediction Using the SEM Model

Juliansyah Roy; Adi Wijaya; Dio Caisar Darma; Erwin Kurniawan A

doi:10.14414/jebav.v24i3.2681

Authors

Juliansyah Roy Department of Economics, Faculty of Economics and Business, Mulawarman University http://orcid.org/0000-0002-1984-9747
Adi Wijaya Department of Economics, Faculty of Economics and Business, Mulawarman University http://orcid.org/0000-0002-0479-2899
Dio Caisar Darma Department of Management, Sekolah Tinggi Ilmu Ekonomi Samarinda http://orcid.org/0000-0002-3287-7670
Erwin Kurniawan A Department of Economics, Faculty of Economics and Business, Mulawarman University http://orcid.org/0000-0003-3785-0140

DOI:

https://doi.org/10.14414/jebav.v24i3.2681

Keywords:

Fiscal decentralization, Income inequality, Indonesia, Regional economic development

Abstract

Economic development in a region is not only measured by the fiscal dimension andthe economic growth but also based on the income distribution. This study aims toanalyze the effect of fiscal decentralization on investment, economic growth, economicÂ structure, employment opportunities, and income inequality between districts/citiesÂ in East Kalimantan Province, Indonesia. This study uses panel data (2013-2019) ofÂ the amalgamation of seven districts and three cities in East Kalimantan Province,Â analyzed using the Structural Equation Model (SEM). The findings show thatÂ regional tax plays a crucial role in enhancing regional investment, economic growth,Â and employment opportunities. It is also important for reducing the economicÂ structure imbalance and income inequality. Profit-sharing funds improve regionalÂ investment, economic growth, and employment opportunities. At the same time,Â special allocation increases employment opportunities and economic structureÂ imbalance. Furthermore, regional retribution increases employment opportunitiesÂ and reduces the economic structure imbalance, but it harms regional economicÂ growth. The practical implications offer solutions to the realization of local revenueÂ sources for economic development and alleviation of social problems, such asÂ employment opportunities and inequality in welfare.

References

Akai, N., & Sakata, M. (2004). Fiscal Decentralization Contributes to Economic Growth: Evidence from State-Level Cross-Section Data for the United States. Journal of Urban Economics 52(1), 93-108. https://doi.org/10.1016/S0094-1190(02)00018-9

Aslan, A., Darma, D. C., & Wijaya, A. (2019). Have Village Funds Impact Growth Economy and Poverty Rate?. International Journal of Scientific & Technology Research, 8(10), 2601-2605. http://www.ijstr.org/final-print/oct2019/Have-Village-Funds-Impact-Growth-Economy-And-Poverty-Rate.pdf

Bahl, R. W., & Linn, J. (1992). Urban Public Finance in Developing Countries. Oxford University Press, New York.

Boadiwaa, Y. A. (2007). The Effect of Fiscal Decentralization on Economic Growth in U.S. Countries. Thesis. Graduate School of The Ohio State University, U.S.

Breton, A. (1996). Competitive governments: An economic theory of politics and public finance. Cambridge Universi-ty Press, UK.

Bruess, F., & Eller, M. (2004). Fiscal Decentralisation and Economic Growth: There Really a Link?. Journal for Institutional Comparisons, 2(1), 3-9. http://fritz.breuss.wifo.ac.at/Breuss_Eller_CESifo_DICE_Report_2%281%29_2004.PDF

Darma, D. C. (2019). Determinants of the Gross Regional Domestic Product of East Kalimantan Province: Macroeconomic Variable Review. Review of Integrative Business and Economics Research, 9(1), 232-241. https://sibresearch.org/uploads/3/4/0/9/34097180/riber_9-s1_19_b19-056_232-241.pdf

Davoodi, H., & Zou, H-F. (1998). Fiscal Decentralization and Economic Growth: A Cross-Country Study. Journal of Urban Economics, 43(2), 244-257. https://doi.org/10.1006/juec.1997.2042

Deininger, K., & Olinto, P. (2000). Asset distribution, inequality, and growth. Policy Research Working Paper Series, No 2375. The World Bank, Washington, DC. https://doi.org/10.1596/1813-9450-2375

Dirgantoro, A. M., Mangkuprawira, S., Siregar, H., & Sinaga, B. (2009). Dampak kebijakan desentralisasi fiskal terhadap transformasi ekonomi di Provinsi Jawa Barat. Jurnal Organisasi dan Manajemen, 5(1), 1-9. https://jurnal.ut.ac.id/index.php/jom/article/view/205

Ezcurra, R., & Pascual, P. (2008). Fiscal Decentralization and Regional Disparities: Evidence from Several European Union Countries. Environment and Planning A: Economy and Space, 40(5), 1185â€“1201. https://doi.org/10.1068/a39195

Ferdinand, A. T., & Batu, K. L. (2013). MAIsCap-marketing architectural isolating capability as antecedents for success of new product development. Journal of Economics Business and Accountancy Ventura, 16(3), 487-502. https://doi.org/10.14414/jebav.v16i3.227

Gujarati, D. N. (2004). Basic Econometrics, Fourth Edition. The McGraw-Hill Companies, New York.

Harun, P. (2016). Structure changes, the contribution of sectors, income per capita Indonesia in 1990 â€“ 2014. Journal of Economics, Business, and Accountancy Ventura, 19(3), 293â€“304. https://doi.org/10.14414/jebav.v19i3.758

Jin, H., Qian, Y., & Weingast, B. R. (2005). Regional Decentralization and Fiscal Incentives: Federalism, Chi-nese Style. Journal of Public Economics, 89, 1719-1742. https://doi.org/10.1016/j.jpubeco.2004.11.008

Jin, J., & Zou, H-F. (2005). Fiscal decentralization, revenue and expenditure assignments, and growth in China. Journal of Asian Economics 16(6), 1047-1064. https://doi.org/10.1016/j.asieco.2005.10.006

Kanbur, R., & Zhang, X. (2005). Fifty Years of Regional Inequality in China: a Journey Through Central Planning, Reform, and Openness. Review of Development Economics, 9(1), 87-106. https://doi.org/10.1111/j.1467-9361.2005.00265.x

Kim, E., Hong, S. W., & Ha, S. J. (2003). Impacts of National Development and Decentralization Policies on Regional Income Disparity in Korea. The Annals of Regional Science, 37(1), 79-91. https://doi.org/10.1007/s001680200111

LeÃŸmann, C. (2006). Fiscal Decentralization and Regional Disparity: A Panel Data Approach for OECD Countries. Working Paper Series No. 25. Leibniz Institute for Economic Research at the University of Munich, Germany.

Litvack, J., Ahmad, J. K., & Bird, R. M. (1998). Rethinking Decentralization in Developing Countries. The World Bank, Washington, DC. https://www.researchgate.net/publication/247405058_Rethinking_Decentralisation_in_Developing_Countries

Oates, W. E. (2008). On The Evolution of Fiscal Federalism: Theory and Institutions. National Tax Journal, 61(2), 313-334. https://doi.org/10.17310/ntj.2008.2.08

Paddu, A. H. (2010). Pengaruh Desentralisasi Fiskal Terhadap Pertumbuhan Ekonomi dan Ketimpangan Regional di Indonesia. Dissertation. Hasanuddin University, Makassar.

Pasichnyi, M., Kaneva, T., Ruban, M., & Nepytaliuk, A. (2019). The impact of fiscal decentralization on eco-nomic development. Investment Management and Financial Innovations, 16(3), 29-39. https://doi.org/10.21511/imfi.16(3).2019.04

Piketty, T. (1999). Can fiscal redistribution undo skill-biased technical change?: Evidence from the French experience. European Economic Review, 43(4â€“6), 839-851. https://doi.org/10.1016/S0014-2921(98)00098-1

Soehadi, A. W., & Ardianto, E. (2019). The role of participation in memorable tourism experience: a com-parative case of Cap Go Meh festival and Linggarjati festival in Indonesia. Journal of Economics, Business, and Accountancy Ventura, 22(1), 99-114. https://doi.org/10.14414/jebav.v22i1.1657

Tameno, N. (2010). Analisis Desentralisasi Fiskal Terhadap Kemampuan Keuangan Daerah dan Perubahan Struktur Ekonomi di Kota Kupang. Thesis. Fakultas Ekonomi Universitas Brawijaya Malang, Malang.

Thiessen, U. (2003). Fiscal Decentralisation and Economic Growth in Highâ€Income OECD Countries. Fiscal Studies, 24(3), 237-274. https://doi.org/10.1111/j.1475-5890.2003.tb00084.x

Weingast, B. R. (1995). The Economic Role of Political Institutions: Market-Preserving Federalism and Eco-nomic Development. Journal of Law Economics and Organization 11(1), 1-31. https://doi.org/10.1093/oxfordjournals.jleo.a036861

Wijaya, A., Roy, J., & Darma, D. C. (2019). Why Fiscal Dynamics Occur in Samarinda City ?. Jurnal Ekonomi dan Studi Pembangunan, 11(2), 158-176. https://doi.org/10.17977/um002v11i22019p158

Wijaya, A., Darma, D. C., & Pusriadi, T. (2020). How Contribute and the Growth of Regional Original Income? A Typology Empirical. International Journal of Academic Research in Accounting, Finance and Management Sciences, 10(2), 140-156. https://doi.org/10.6007/IJARAFMS/v10-i2/7404

Wijaya, A., Ilmi, Z., & Darma, D. C. (2020). Economic Performance: Leading Sector, Economic Structure and Competitiveness of Export Commodities. Journal of Business, Economics and Environmental Studies, 10(3), 23-33. https://doi.org/10.13106/jbees.2020.vol10.no3.23

Wijayanti, T. C., & Darma, D. C. (2019). The role of investment and government expenditure on grdp and human development in East Kalimantan. International Journal of Scientific & Technology Research, 8(9), 1232-1237. http://www.ijstr.org/final-print/sep2019/The-Role-Of-Investment-And-Government-Expenditure-On-Grdp-And-Human-Development-In-East-Kalimantan.pdf

Woller, G., & Phillips, K. (1998). Fiscal decentralisation and IDC economic growth: An empirical investiga-tion. Journal of Development, 34(4), 139-148. https://doi.org/10.1080/00220389808422532

Xie, D., Zou, H-F., & Davoodi, H. (1999). Fiscal Decentralization and Economic Growth in the United States. Journal of Urban Economics, 45(2), 228-239. https://doi.org/10.1006/juec.1998.2095

Zhang, X. (2006). Fiscal Decentralization and Political Centralization in China - Implications for Regional Inequality. IFPRI DSGD Discussion Paper No. 21. International Food Policy Research Institute (IFPRI), Washington, DC. https://doi.org/10.2139/ssrn.774206

Zhang, T., & Zou, H-F. (1998). Fiscal decentralization, public spending, and economic growth in China. Journal of Public Economics, 67(2), 221-240. https://doi.org/10.1016/S0047-2727(97)00057-1

Zulyanto, A. (2012). Pengaruh desentralisasi fiskal terhadap pertumbuhan ekonomi di Provinsi Bengkulu. ECOsains, 1(1), 1-17. http://ejournal.unp.ac.id/index.php/ekosains/article/view/3465/2879