Does the 2001 Fiscal Decentralization promote regional convergence?: A Spatial Panel Econometrics Approach on Indonesia’s Java-Bali Districts, 2001-2013

Abstraksi

This paper studies the potential growth enhancing effect of the 2001 fiscal decentralization across districts in Java and Bali using a spatial panel approach for the period of 2001-2013. The model specification includes covariates that capture both revenue and expenditure sides of the districts’ government, reflecting the districts’ fiscal profile and spending behavior. This paper carefully employs model selection strategy across many spatial models. such as: SAL vs. SEM as well as some recent developments that propose global vs. local spillovers models. Many studies about the growth impact or inequality reducing effect of the decentralization do not take into account the horizontal interactions, such as imitation effects. Spatial panel as an empirical strategy used in this paper will address formally such inter-territorial interactions and to control for omitted variable biases. Spatial dependence and spatial heterogeneity of the sample are in fact of main themes of this article. Therefore, this paper focuses on about 120 districts in Java-Bali, where spatial interactions are arguably the largest. Other reason is that various studies on the relationship between growth and cohesion-growth policy, such as: Ertur et al. (2006), Dall’erba et al. (2008), and Ramajo et al. (2008) that use European NUTS 2 as spatial unit, suggest the need for a spatially explicit model. In essence, the spatial panel econometrics specifications adopt Arbia (2005) who also follows the tradition of Barro and Sala-i-Martin’s convergence framework. The covariates include economic, fiscal, infrastructure, and demographic and social indicators.