chapter ii literature review -...
TRANSCRIPT
CHAPTER II
LITERATURE REVIEW
11 Decentralization Theory and Central and Regional Finance
111 Definition and Concept of Decentralization
Before decentralization during the colonialism the system of government
was held by the volksraad in this institution various policies for the public and
local kingdoms in Indonesia are determined by the central government This
centralized Dutch colonial era was intended as a concentration of power by the
VOC over Indonesia Centralization in the old order era was caused by Indonesia
being just independent so there was still little human resource capacity to carry
out the life of the state uneven education has caused management of production
land to be held by several people from the center in addition centralization was
carried out to reduce rebellion in the region due to the extent of Indonesia
Decentralization in Indonesia basically has been implemented since 1974
under Law No51974 under the Soeharto regime but still maintained the control
of central government based on concentration assumptions for the
implementation of economic development the development of Indonesian
political stability and development together but the fact is that inequality of
development is uneven the rights of minority rights are ignored power is built
with patterns of political recruitment recruitment of office positions based on the
closest people (Mara 2016) After the 1997 economic crises the central
government decreed a new decentralization scheme through Law No221999 The
6
7
new law focuses on the regional government through improving administration
and political decentralization particularly at the regency and municipal level and
Law No251999 focuses on fiscal balance between the central government and
the regional government
The implementation of this fiscal decentralization began on January 1
2001 These two laws gave rise to several issues which were then fixed by the
government through the passing of Law No 322004 and Law No 332004 about
the financial balance of central and local government and then again by Law No
232014 about regional government
In Law No 232014 decentralization is the delivery of government affairs
by the central government to autonomous regions based on the autonomy
principles The principle of autonomy is the basic principle of the implementation
of regional government based on regional autonomy
Decentralization is a tool to achieve one of the goals of the state especially
in order to provide better public services and create a more democratic public
decision-making process Decentralization can be realized with the transfer of
authority to the lower levels of government for spending the authority to collect
taxes the formation of the Council elected by the people the appointment of
regional heads elected by the people and the assistance in the form of transfer
from the central government Decentralization is not easy to define because it
involves diverse forms and dimensions especially with regard to fiscal political
administrative government systems and social and economic development
8
In general the benefits and the weakness of fiscal decentralization can be
specified as follows1
1 The benefits of fiscal decentralization
An economic efficiency - the budget for public services could be more
easily adapted to local preferences with thelevel of accountability and a
high willingness to pay
Opportunities to increase tax revenue from local taxes - the local
government can levy taxes based on consumption and assets that
cannot be withdrawn by the Central Government
2 The weakness of fiscal decentralization
Low central government control to the macro economy
The difficulty of implementing policies of economic stabilization
The difficulty of implementing policies of econom1c development with
equity
A number of costs to local government rather than a benefit
In general decentralization includes political decentralization
administrative decentralization fiscal decentralization and economic or market
decentralization2
1 Bahl R (2008) ldquoThe Pillars of Fiscal Decentralizationrdquo CAF Working Paper 2 Sidik Machfud(2002) ldquo Format Hubungan Keuangan Pemerintah Pusat dan Daerah yang Mengacu pada Pencapaian Tujuan Nasional ldquoSeminar Nasional public sector score card Jakarta
9
Central-regional financial relations arrangements are based on 4 principles
(see figure 1)
(1) Affairs which are the tasks of the central government in the regions in the
context of deconcentration are financed from the APBN
(2) Affairs which are the tasks of the regional government itself in the context of
decentralization are financed from the APBD
(3) Affairs which are the tasks of the central government or upper level regional
government which are carried out in the framework of assistance tasks
financed by the APBN or provincial APBD
(4) As long as the potential of regional financial resources is insufficient the
government provides a number of contributions
Figure 1 Central-Regional Financial Relations Arrangements
Source Sidik Machfud (2002)ldquo Format Hubungan Keuangan Pemerintah Pusat dan Daerah
yang Mengacu pada Pencapaian Tujuan Nasionalrdquo seminar nasional public sector score card
Jakarta
Central and regional relations
Decentralization
government burden
APBD APBN
co-administration
Deconcentration
Central and Regional Financial Relations
Regional Loans LN amp DN Short amp long term
DAU (general allocation
DBH (revenue sharing fund)
PAD (local own revenue)
10
The implementation of fiscal decentralization will work well if supported
by the following factors
- Central government capable of supervision and enforcement
- Strong human resources at the regional government to replace the role of
the central government
- Balance and clarity in the distribution of responsibilities and authorities in
conducting regional tax and regional levies Based on Law Number 28 of
2009 concerning Regional Taxes and Regional Levies regional taxes are
divided into two types namely provincial tax and regency city tax
Provincial tax consists of motor vehicle tax motorbike name transfer fee
motor vehicle fuel tax The district city tax consists of hotel tax restaurant
tax entertainment tax advertisement tax
112 Understanding The Concept of intergovernmental transfer funds
Intergovernmental transfer funds sourced from The Indonesian National
budget (APBN) The Indonesian National budget is the annual financial plan of the
Indonesian government approved by the House of Representatives
Intergovernmental transfer funds are revenue allocated to regions to fund the
needs of the region for the implementation of decentralization
Intergovernmental transfer funds consist of
(1) Revenue sharing funds
Revenue sharing funds (DBH) are derived from certain revenues of the
APBN allocated to producing regions based on certain percentage figures with the
11
aim of reducing the inequality of financial capacity between the central and
regional governments
(2) General allocation funds
General allocation funds (DAU) are sourced from APBN revenues
allocated for the purpose of equitable inter-regional financial capacity to fund the
needs of the region in the context of the implementation of decentralization
By definition general allocation funds can be interpreted as follows (Sidik
2002)
bull One of the components of the balancing fund in the APBN whose
allocation is based on the concept of fiscal gap namely the difference
between fiscal needs and fiscal capacity
bull Instrument to overcome horizontal imbalance which is allocated with
the aim of equal distribution of financial capabilities between regions
where its use is determined entirely by the region
bull Equalization grant which functions to neutralize financial capacity
inequality with the existence of PAD tax sharing and revenue sharing
from the region
The DAU formula should be based on a simple formula easily understood
and calculated by the region if data is available The calculations made must be
logical and meet the rules of the theory and must be consistent for example
regions with large fiscal potential but small fiscal needs will get a relatively small
DAU allocation Conversely regions with small fiscal potential but large fiscal
needs will obtain a relatively large DAU DAU allocations for regions are
12
calculated using formulas fiscal gap and basic allocations fiscal gap is a financial
condition of a regional government that is related to its fiscal needs and fiscal
capacity Whereas the basic allocation is the need for regional funds to pay civil
servant salaries and infrastructure In general the basic formulations of DAU in an
area are as follows3
DAU = AD + CF
Where
DAU = General Allocation Fund
AD = Basic Allocation
CF = Fiscal Gap = Fiscal Needs - Fiscal Capacity
(3) Specific allocation funds
Specific allocation funds (DAK) are sourced from APBN revenues and
allocated to a particular region for the purpose of assisting in financing of special
activities which constitute the governmental affairs which are under the
jurisdiction of the region Development funded by DAK are directed at various
activities that are in the form of public infrastructure provision including
infrastructure in the fields of education health agriculture road bridges and
irrigation as well as procurement of other public infrastructure
Calculation of DAK allocations is based on several criteria
bull General criteria based on regional financial capacity
3 Brojonegoro B Pakpahan A T (2002)ldquoEvaluasi atas Alokasi DAU 2001 dan Permasalahannya Dana Alokasi Umum Konsep Hambatan dan Prospek di Era Otonomi Daerahrdquo LPEM-UI Jakarta
13
bull Specific criteria formulated based on legislation governing the
implementation of special autonomy and regional characteristics
bull Technical criteria prepared based on specific activity indicators that will
be funded from DAK Arrangements regarding technical criteria are
prepared by the relevant technical minister for example the education
sector was formulated by the education minister or health sector was
formulated by minister of health
12 Economic Growth and Income Disparity Among Regions
121 Economic Growth
Economic growth is defined as the expansion of the capacity to produce
goods and services of an economy or the expansion of the possibility of producing
of an economy The success of regional economic growth in order to improve the
welfare of the population can be assessed by the growth rate of gross domestic
product (GDP) The GDP is the output generated from inputs that are calculated in
prices in a base year or also known as the GDP at constant prices
The term growth can be interpreted differently by one person to another
one area with another one country with another country It is important for us to
be able to have the same definition in terms of growth Traditionally growth has
been a continuous increase in the gross domestic product or a countrys gross
domestic product For regions traditional growth meanings are focused on
increasing gross domestic product of a province district or city
14
The definition of economic growth according to several prominent
economists are as follows
(1) According to the views of the classical economists (Adam Smith David
Ricardo Thomas Robert Malthus and John Stuart Mill) as well as the
neoclassical economists (Robert Solow and Trevor Swan) there are basically
four factors affecting economic growth (1) total population (2) total stock of
capital goods (3) land area and natural wealth and (4) level of technology
used An economy is said to experience growth if the level of economic
activity is higher than what was achieved in the past4
(2) According to Kuznets economic growth is the increase in long-term capacity
of the countries concerned to provide various items to the citizen The
increase in capacity itself is determined or made possible by advances in
technology or adjustments institutional and ideologically against various
claims5
(3) M P Todaro (2000) defines economic growth as a steady process whereby
the production capacity of an economy increases over time to generate an
even greater level of national income The increase in capacity itself is
determined by technological institutional and ideological advances in the
various demands of the situation 6
4Mudrajad Kuncoro (2004) ldquoOtonomi dan Pembangunan Daerah Reformasi Perencanaan Strategi dan Peluangldquo Penerbit Erlangga Jakarta 5 Jhingan M L (2000) ldquoEkonomi Pembangunan dan Perencanaanrdquo edisi 3 Rajawali Press Jakarta 6 Todaro MP (2000) ldquoPembangunan Ekonomi di Dunia ke Tigardquo edisi 4 Penerbit Erlangga Jakarta
15
(4) According to Budiono (1999) economic growth is a process of long-term per
capita output growth that occurs when there is a tendency (per capita output
to rise) that comes from the internal process of the economy (the forces
within the economy itself) not from outside Or in other words self-
generating which means that the growth process itself produces a force or
momentum for the continuation of that growth in subsequent periods7
(5) Sadono Sukirno (2005) argues that economic growth is a change in the level
of economic activity prevailing from year to year So to estimate it units of
measurement must be held constant for comparison of national income from
year to year known as the rate of economic growth8
Furthermore Todaro (2000) stated there are three components in the
definition of economic growth namely
(1) The increase in output on an ongoing basis is a manifestation or embodiment
of what is known as economic growth while the ability to provide different
types of goods is itself a sign of economic maturity in a country
(2) The development of technology is the basis or a precondition for the
continuity of sustainable economic growth This is a condition that is
necessary but is not sufficient so in addition to the development or
advancement of technology other factors are needed
(3) In order to realize the growth potential inherent in the new technology we
need to hold a series of institutional adjustments attitudes and ideologies
7Budiono (1999) ldquoTeori Pertumbuhan Ekonomirdquo seri sinopsiedisi 1 bpfe Jogjakarta 8Sukirno S (2005) ldquoMakroekonomi teori pengantarrdquo Jakarta PT Raja Grafindo Persada
16
Technological innovation without social innovation means the potential is
there but without the complementary input then it cannot produce any results
122 Income disparity among regions
Aspects of fairness and equity can be reviewed on the basis of
interpersonal relationships but can also be reviewed by region Interpersonally it
indicates whether income among individuals or groups of community members is
fair and equitable
Meanwhile inter-regional interpersonally it shows equity that occurs
between regions both between provinces and between districtscities
(1) Distribution of income between income class (size distribution of income) or
relative income inequality
(2) Revenue sharing between urban and rural areas (urban-rural income
disparities)
(3) Regional income sharing (regional income disparities)
Thus in principle the distribution of national income reflects the uneven
and uneven distribution of a countrys development outcomes among its
inhabitants There are various criteria or benchmarks to assess the level of
distribution is as follows
(1) The Lorenz Curve
The Lorenz Curve illustrates the cumulative distribution of national
income among the layers of the population and is cumulative as well This curve
lies within a square that symbolizes the establishment of the cumulative
17
percentage of national income while the flat side represents the cumulative
percentage of the population
The Lorenz Curve shows the quantitative relationship between the
percentage of receipts (incomes of the population) and the percentage of total
revenue actually earned over a certain period The farther the Lorenz Curve
diverges from the straight diagonal line (perfect evenness) the more unequal
income distribution The Lorenz Curve is shown in the graph below
Figure 2 The Lorenz Curve
Source A practical example of a Lorenz curve by Mohammad Zulfan Tadjoeddin
(2003)
The Lorenz Curve is represented by the OBA line The income distribution
is said to be uniform if the curve of the Lorenz is a diagonal line of OA where
40 of income is received by 40 of the population and 60 of income is
received by 60 of the population So the further the Lorenz Curve is from the
Yi Income ()
Pi Population ()
18
diagonal line the more uneven the distribution of income This leads to the Gini
Index number ranging between zero and one9
(2) Gini Index
The Gini Index is a coefficient that ranges from zero to one explaining the
level of inequality of the distribution of national income The smaller (the closer
to zero) the coefficient the better or more even the distribution On the other
hand an increasingly large coefficient (approaching one) implies an increasingly
unbalanced distribution Gini Index figures can be assessed visually directly from
the Lorenz Curve the more curved the Lorenz Curve the larger the divided area
the greater the Gini Index implying an increasingly uneven income distribution
Some economists argue that the Gini Index is considered to have
weaknesses because it is less sensitive to changes in the low income group
Regardless of this the Gini Index that uses expenditure data as a proxy for income
data is considered to be still better than many ways of calculating existing income
distributions
9Tadjoeddin Mohammad Zulfan (2003)ldquo Aspiration to Inequality Regional Disparity and Centre-Regional Conflicts in Indonesia ldquoPaper disampaikan pada UNUWIDER Project Conference on Spatial Inequality in Asia United Nations University Centre Tokyo
19
Table 1 Gini Index In West Java Province from 2011 to 2016
Source BPS West Java Province 2011-2016
From the data above in Table 1 income inequality in West Java is
retailively high especially in urban areas This might be because in Bandung city
and Bogor city is a big city and this local government has not been able to
overcome the problem of income inequality so that income has not been perfectly
distributed
(3) Williamson Index
The existence of differences in natural resources between regions also
causes changes in distribution between regions The index commonly used in
CityRegency 2011 2012 2013 2014 2015 2016Bogor 041 042 038 039 042 04Sukabumi 03 035 03 032 036 033Cianjur 029 033 029 028 028 036Bandung 036 036 034 037 04 04Garut 03 034 031 033 031 035Tasikmalaya 037 033 032 029 03 03Ciamis 031 031 033 031 033 033Kuningan 033 036 033 037 034 033Cirebon 027 036 032 028 033 036Majalengka 031 039 032 034 035 036Sumedang 033 037 034 033 035 037Indramayu 028 029 028 028 029 026Subang 028 033 033 031 033 035Purwakarta 034 039 039 037 035 036Karawang 033 034 032 03 034 034Bekasi 033 036 033 033 035 031Bandung Barat 029 037 031 033 034 036Kota Bogor 039 045 041 036 047 043Kota Sukabumi 034 04 034 036 043 042Kota Bandung 041 042 042 048 044 044Kota Cirebon 038 041 038 04 041 04Kota Bekasi 037 037 035 033 041 039Kota Depok 036 04 039 037 04 04Kota Cimahi 034 037 04 039 04 042Kota Tasikmalaya 037 04 039 037 049 042Kota Banjar 037 039 034 032 042 037
Gini Ratio In West Java Province
20
distribution between these regions is the Williamson Index The formula used in
the Williamson Index is as follows
( )2
i iY Y f N
WY
minus times =sum
Where
W = Williamson Index
Y i = GRDP Capita in the city district i
Y = GRDP Capita West Java Province
fi = city district population i
N = population in West Java Province
The Williamson index obtained is located between 0 (zero) to 1 (one)
bull If the Williamson index approaches 0 then the inequality of income
distribution between regencies cities in West Java Province is low or
economic growth between regions is evenly distributed
bull If the Williamson index approaches 1 the inequality of income distribution
between regencies cities in West Java Province is high or economic growth
between regions is uneven
21
13 Empirical Review of Research on Fiscal Decentralization
131 Research on Fiscal Decentralization in Other Countries
ldquoFiscal Decentralization Contributes to Economic Growth Evidenc efrom State-
Level Cross-Section Data for The United Statesrdquo as conducted by Nobuo akai and
Masayo Sakata 2002
This study shows new evidence that fiscal decentralization effects
economic growth It used a cross-sectional method with 50 observations taking
the average 1992 to 1994 for time series and 50 states in the United States
The empirical models used to look at economic growth are
iiii zationDecentraliGSP εβαα +Χ++=∆ 10 i=1 50 (21)
Where i is the state ΔGSP I gross state production from 1992 to 1996
decentralizations show the average annual growth of the fiscal decentralization
indicator in state i and Xi is the control variable
Empirical research above shows that based on existing data fiscal
decentralization has contributed to economic growth The paper finds that fiscal
decentralization plays a key role in economic growth in the US As expected the
results also indicate that there are others affecting economic growth
132 Research on Fiscal Decentralization In Indonesia
1) Fiscal Decentralization Itrsquos Impact on Cities Growth as conducted by B
Raksaka Mahi 2001
This study used a simultaneous econometric model two stage least square
(TSLS) and regional econometric macros for (1) Evaluating intergovernmental
transfers and their impact on municipal government revenues and (2) Elaborating
22
on the implications of the transfer from government to city growth and disparity
between regions in Indonesia
The variable fiscal decentralization is measured by Revenue sharing
fund sharing funds DAU and DAK The study concluded that (a) The policy of
fiscal decentralization in Indonesia is very important for policy making in the
regions almost all standard instruments for fiscal decentralization are used by the
government (b) DBHSDA policies not only have the potential to reduce growth
rates but also increase disparities between regions (c) DBHPPh will reduce
growth (d) DAU is more promising for growth than others although the DAU
policy does not support equity among regions and (e) The combination of
existing policies in Indonesia promises growth but still cannot reduce the
occurrence of disparities between regions
2) ldquoDampak Desentralisasi Fiskal di Indonesia Terhadap Pertumbuhan
Ekonomi dan Disparitas Antar Daerah Analisa Model Makro Ekonometrik
Simultan as conducted by Teguh Dartanto 2002
This study used a simultaneous macroeconometric regional model with
two stage least square (TSLS) The Simultaneous Macro Econometric Model is
made for analyzing the fiscal decentralization impact to economic growth and
region disparity The policy simulation in this model used transfer fund from
central government such as Tax Revenue Sharing Natural Resource Revenue
Sharing and General Allocation Fund The simulation is carried out to see the
optimality of various possible existing policies The optimality is measured by
evaluating the high rate of economic growth and low disparity
23
The results of the study indicate that revenue sharing funds from natural
resources (DBHSDA) land and building tax (PBB) tax on Acquisition of land
and building (DBPHTB) and income tax (PPH) generate negative economic
growth rates General allocation funds (DAU) as an inter-regional fiscal spattering
factor a the most dominant factor in encouraging regional economic growth and
have a very big role in encouraging regional economic growth as well as being an
economic growth regulator among regions These conditions indicate a very large
dependence on the central government However when combined with the
revenue-sharing policy and general allocation funds they will result in positive
(although relatively small) growth and can reduce disparities between regions
The combination also significantly affects investment growth but does not
significantly affect the growth of consumption in the region The impact of fiscal
decentralization policy is more pronounced in the Eastern Region of Indonesia
(KTI) than in the Western Region of Indonesia (KBI) The simulation results also
indicate the dependence of local governments on transfer funds from the central
government Therefore local governments are also expected to actively seek non-
distortive sources of income
3) ldquo Dampak Transfer Pemerintah Pusat Terhadap Penurunan Ketimpangan
Pendapatan Di Indonesia rdquo as conducted by Adhitya Wardhana Bambang
Juanda Hermanto Siregar dan Kodrat Wibowo Sosiohumaniora Volume 15
no 2 Juli 2013 111 ndash 118
The method used in this study uses data panel regression with the period
2001-2010 For regional characteristics it is made as a dummy of rich regions
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
7
new law focuses on the regional government through improving administration
and political decentralization particularly at the regency and municipal level and
Law No251999 focuses on fiscal balance between the central government and
the regional government
The implementation of this fiscal decentralization began on January 1
2001 These two laws gave rise to several issues which were then fixed by the
government through the passing of Law No 322004 and Law No 332004 about
the financial balance of central and local government and then again by Law No
232014 about regional government
In Law No 232014 decentralization is the delivery of government affairs
by the central government to autonomous regions based on the autonomy
principles The principle of autonomy is the basic principle of the implementation
of regional government based on regional autonomy
Decentralization is a tool to achieve one of the goals of the state especially
in order to provide better public services and create a more democratic public
decision-making process Decentralization can be realized with the transfer of
authority to the lower levels of government for spending the authority to collect
taxes the formation of the Council elected by the people the appointment of
regional heads elected by the people and the assistance in the form of transfer
from the central government Decentralization is not easy to define because it
involves diverse forms and dimensions especially with regard to fiscal political
administrative government systems and social and economic development
8
In general the benefits and the weakness of fiscal decentralization can be
specified as follows1
1 The benefits of fiscal decentralization
An economic efficiency - the budget for public services could be more
easily adapted to local preferences with thelevel of accountability and a
high willingness to pay
Opportunities to increase tax revenue from local taxes - the local
government can levy taxes based on consumption and assets that
cannot be withdrawn by the Central Government
2 The weakness of fiscal decentralization
Low central government control to the macro economy
The difficulty of implementing policies of economic stabilization
The difficulty of implementing policies of econom1c development with
equity
A number of costs to local government rather than a benefit
In general decentralization includes political decentralization
administrative decentralization fiscal decentralization and economic or market
decentralization2
1 Bahl R (2008) ldquoThe Pillars of Fiscal Decentralizationrdquo CAF Working Paper 2 Sidik Machfud(2002) ldquo Format Hubungan Keuangan Pemerintah Pusat dan Daerah yang Mengacu pada Pencapaian Tujuan Nasional ldquoSeminar Nasional public sector score card Jakarta
9
Central-regional financial relations arrangements are based on 4 principles
(see figure 1)
(1) Affairs which are the tasks of the central government in the regions in the
context of deconcentration are financed from the APBN
(2) Affairs which are the tasks of the regional government itself in the context of
decentralization are financed from the APBD
(3) Affairs which are the tasks of the central government or upper level regional
government which are carried out in the framework of assistance tasks
financed by the APBN or provincial APBD
(4) As long as the potential of regional financial resources is insufficient the
government provides a number of contributions
Figure 1 Central-Regional Financial Relations Arrangements
Source Sidik Machfud (2002)ldquo Format Hubungan Keuangan Pemerintah Pusat dan Daerah
yang Mengacu pada Pencapaian Tujuan Nasionalrdquo seminar nasional public sector score card
Jakarta
Central and regional relations
Decentralization
government burden
APBD APBN
co-administration
Deconcentration
Central and Regional Financial Relations
Regional Loans LN amp DN Short amp long term
DAU (general allocation
DBH (revenue sharing fund)
PAD (local own revenue)
10
The implementation of fiscal decentralization will work well if supported
by the following factors
- Central government capable of supervision and enforcement
- Strong human resources at the regional government to replace the role of
the central government
- Balance and clarity in the distribution of responsibilities and authorities in
conducting regional tax and regional levies Based on Law Number 28 of
2009 concerning Regional Taxes and Regional Levies regional taxes are
divided into two types namely provincial tax and regency city tax
Provincial tax consists of motor vehicle tax motorbike name transfer fee
motor vehicle fuel tax The district city tax consists of hotel tax restaurant
tax entertainment tax advertisement tax
112 Understanding The Concept of intergovernmental transfer funds
Intergovernmental transfer funds sourced from The Indonesian National
budget (APBN) The Indonesian National budget is the annual financial plan of the
Indonesian government approved by the House of Representatives
Intergovernmental transfer funds are revenue allocated to regions to fund the
needs of the region for the implementation of decentralization
Intergovernmental transfer funds consist of
(1) Revenue sharing funds
Revenue sharing funds (DBH) are derived from certain revenues of the
APBN allocated to producing regions based on certain percentage figures with the
11
aim of reducing the inequality of financial capacity between the central and
regional governments
(2) General allocation funds
General allocation funds (DAU) are sourced from APBN revenues
allocated for the purpose of equitable inter-regional financial capacity to fund the
needs of the region in the context of the implementation of decentralization
By definition general allocation funds can be interpreted as follows (Sidik
2002)
bull One of the components of the balancing fund in the APBN whose
allocation is based on the concept of fiscal gap namely the difference
between fiscal needs and fiscal capacity
bull Instrument to overcome horizontal imbalance which is allocated with
the aim of equal distribution of financial capabilities between regions
where its use is determined entirely by the region
bull Equalization grant which functions to neutralize financial capacity
inequality with the existence of PAD tax sharing and revenue sharing
from the region
The DAU formula should be based on a simple formula easily understood
and calculated by the region if data is available The calculations made must be
logical and meet the rules of the theory and must be consistent for example
regions with large fiscal potential but small fiscal needs will get a relatively small
DAU allocation Conversely regions with small fiscal potential but large fiscal
needs will obtain a relatively large DAU DAU allocations for regions are
12
calculated using formulas fiscal gap and basic allocations fiscal gap is a financial
condition of a regional government that is related to its fiscal needs and fiscal
capacity Whereas the basic allocation is the need for regional funds to pay civil
servant salaries and infrastructure In general the basic formulations of DAU in an
area are as follows3
DAU = AD + CF
Where
DAU = General Allocation Fund
AD = Basic Allocation
CF = Fiscal Gap = Fiscal Needs - Fiscal Capacity
(3) Specific allocation funds
Specific allocation funds (DAK) are sourced from APBN revenues and
allocated to a particular region for the purpose of assisting in financing of special
activities which constitute the governmental affairs which are under the
jurisdiction of the region Development funded by DAK are directed at various
activities that are in the form of public infrastructure provision including
infrastructure in the fields of education health agriculture road bridges and
irrigation as well as procurement of other public infrastructure
Calculation of DAK allocations is based on several criteria
bull General criteria based on regional financial capacity
3 Brojonegoro B Pakpahan A T (2002)ldquoEvaluasi atas Alokasi DAU 2001 dan Permasalahannya Dana Alokasi Umum Konsep Hambatan dan Prospek di Era Otonomi Daerahrdquo LPEM-UI Jakarta
13
bull Specific criteria formulated based on legislation governing the
implementation of special autonomy and regional characteristics
bull Technical criteria prepared based on specific activity indicators that will
be funded from DAK Arrangements regarding technical criteria are
prepared by the relevant technical minister for example the education
sector was formulated by the education minister or health sector was
formulated by minister of health
12 Economic Growth and Income Disparity Among Regions
121 Economic Growth
Economic growth is defined as the expansion of the capacity to produce
goods and services of an economy or the expansion of the possibility of producing
of an economy The success of regional economic growth in order to improve the
welfare of the population can be assessed by the growth rate of gross domestic
product (GDP) The GDP is the output generated from inputs that are calculated in
prices in a base year or also known as the GDP at constant prices
The term growth can be interpreted differently by one person to another
one area with another one country with another country It is important for us to
be able to have the same definition in terms of growth Traditionally growth has
been a continuous increase in the gross domestic product or a countrys gross
domestic product For regions traditional growth meanings are focused on
increasing gross domestic product of a province district or city
14
The definition of economic growth according to several prominent
economists are as follows
(1) According to the views of the classical economists (Adam Smith David
Ricardo Thomas Robert Malthus and John Stuart Mill) as well as the
neoclassical economists (Robert Solow and Trevor Swan) there are basically
four factors affecting economic growth (1) total population (2) total stock of
capital goods (3) land area and natural wealth and (4) level of technology
used An economy is said to experience growth if the level of economic
activity is higher than what was achieved in the past4
(2) According to Kuznets economic growth is the increase in long-term capacity
of the countries concerned to provide various items to the citizen The
increase in capacity itself is determined or made possible by advances in
technology or adjustments institutional and ideologically against various
claims5
(3) M P Todaro (2000) defines economic growth as a steady process whereby
the production capacity of an economy increases over time to generate an
even greater level of national income The increase in capacity itself is
determined by technological institutional and ideological advances in the
various demands of the situation 6
4Mudrajad Kuncoro (2004) ldquoOtonomi dan Pembangunan Daerah Reformasi Perencanaan Strategi dan Peluangldquo Penerbit Erlangga Jakarta 5 Jhingan M L (2000) ldquoEkonomi Pembangunan dan Perencanaanrdquo edisi 3 Rajawali Press Jakarta 6 Todaro MP (2000) ldquoPembangunan Ekonomi di Dunia ke Tigardquo edisi 4 Penerbit Erlangga Jakarta
15
(4) According to Budiono (1999) economic growth is a process of long-term per
capita output growth that occurs when there is a tendency (per capita output
to rise) that comes from the internal process of the economy (the forces
within the economy itself) not from outside Or in other words self-
generating which means that the growth process itself produces a force or
momentum for the continuation of that growth in subsequent periods7
(5) Sadono Sukirno (2005) argues that economic growth is a change in the level
of economic activity prevailing from year to year So to estimate it units of
measurement must be held constant for comparison of national income from
year to year known as the rate of economic growth8
Furthermore Todaro (2000) stated there are three components in the
definition of economic growth namely
(1) The increase in output on an ongoing basis is a manifestation or embodiment
of what is known as economic growth while the ability to provide different
types of goods is itself a sign of economic maturity in a country
(2) The development of technology is the basis or a precondition for the
continuity of sustainable economic growth This is a condition that is
necessary but is not sufficient so in addition to the development or
advancement of technology other factors are needed
(3) In order to realize the growth potential inherent in the new technology we
need to hold a series of institutional adjustments attitudes and ideologies
7Budiono (1999) ldquoTeori Pertumbuhan Ekonomirdquo seri sinopsiedisi 1 bpfe Jogjakarta 8Sukirno S (2005) ldquoMakroekonomi teori pengantarrdquo Jakarta PT Raja Grafindo Persada
16
Technological innovation without social innovation means the potential is
there but without the complementary input then it cannot produce any results
122 Income disparity among regions
Aspects of fairness and equity can be reviewed on the basis of
interpersonal relationships but can also be reviewed by region Interpersonally it
indicates whether income among individuals or groups of community members is
fair and equitable
Meanwhile inter-regional interpersonally it shows equity that occurs
between regions both between provinces and between districtscities
(1) Distribution of income between income class (size distribution of income) or
relative income inequality
(2) Revenue sharing between urban and rural areas (urban-rural income
disparities)
(3) Regional income sharing (regional income disparities)
Thus in principle the distribution of national income reflects the uneven
and uneven distribution of a countrys development outcomes among its
inhabitants There are various criteria or benchmarks to assess the level of
distribution is as follows
(1) The Lorenz Curve
The Lorenz Curve illustrates the cumulative distribution of national
income among the layers of the population and is cumulative as well This curve
lies within a square that symbolizes the establishment of the cumulative
17
percentage of national income while the flat side represents the cumulative
percentage of the population
The Lorenz Curve shows the quantitative relationship between the
percentage of receipts (incomes of the population) and the percentage of total
revenue actually earned over a certain period The farther the Lorenz Curve
diverges from the straight diagonal line (perfect evenness) the more unequal
income distribution The Lorenz Curve is shown in the graph below
Figure 2 The Lorenz Curve
Source A practical example of a Lorenz curve by Mohammad Zulfan Tadjoeddin
(2003)
The Lorenz Curve is represented by the OBA line The income distribution
is said to be uniform if the curve of the Lorenz is a diagonal line of OA where
40 of income is received by 40 of the population and 60 of income is
received by 60 of the population So the further the Lorenz Curve is from the
Yi Income ()
Pi Population ()
18
diagonal line the more uneven the distribution of income This leads to the Gini
Index number ranging between zero and one9
(2) Gini Index
The Gini Index is a coefficient that ranges from zero to one explaining the
level of inequality of the distribution of national income The smaller (the closer
to zero) the coefficient the better or more even the distribution On the other
hand an increasingly large coefficient (approaching one) implies an increasingly
unbalanced distribution Gini Index figures can be assessed visually directly from
the Lorenz Curve the more curved the Lorenz Curve the larger the divided area
the greater the Gini Index implying an increasingly uneven income distribution
Some economists argue that the Gini Index is considered to have
weaknesses because it is less sensitive to changes in the low income group
Regardless of this the Gini Index that uses expenditure data as a proxy for income
data is considered to be still better than many ways of calculating existing income
distributions
9Tadjoeddin Mohammad Zulfan (2003)ldquo Aspiration to Inequality Regional Disparity and Centre-Regional Conflicts in Indonesia ldquoPaper disampaikan pada UNUWIDER Project Conference on Spatial Inequality in Asia United Nations University Centre Tokyo
19
Table 1 Gini Index In West Java Province from 2011 to 2016
Source BPS West Java Province 2011-2016
From the data above in Table 1 income inequality in West Java is
retailively high especially in urban areas This might be because in Bandung city
and Bogor city is a big city and this local government has not been able to
overcome the problem of income inequality so that income has not been perfectly
distributed
(3) Williamson Index
The existence of differences in natural resources between regions also
causes changes in distribution between regions The index commonly used in
CityRegency 2011 2012 2013 2014 2015 2016Bogor 041 042 038 039 042 04Sukabumi 03 035 03 032 036 033Cianjur 029 033 029 028 028 036Bandung 036 036 034 037 04 04Garut 03 034 031 033 031 035Tasikmalaya 037 033 032 029 03 03Ciamis 031 031 033 031 033 033Kuningan 033 036 033 037 034 033Cirebon 027 036 032 028 033 036Majalengka 031 039 032 034 035 036Sumedang 033 037 034 033 035 037Indramayu 028 029 028 028 029 026Subang 028 033 033 031 033 035Purwakarta 034 039 039 037 035 036Karawang 033 034 032 03 034 034Bekasi 033 036 033 033 035 031Bandung Barat 029 037 031 033 034 036Kota Bogor 039 045 041 036 047 043Kota Sukabumi 034 04 034 036 043 042Kota Bandung 041 042 042 048 044 044Kota Cirebon 038 041 038 04 041 04Kota Bekasi 037 037 035 033 041 039Kota Depok 036 04 039 037 04 04Kota Cimahi 034 037 04 039 04 042Kota Tasikmalaya 037 04 039 037 049 042Kota Banjar 037 039 034 032 042 037
Gini Ratio In West Java Province
20
distribution between these regions is the Williamson Index The formula used in
the Williamson Index is as follows
( )2
i iY Y f N
WY
minus times =sum
Where
W = Williamson Index
Y i = GRDP Capita in the city district i
Y = GRDP Capita West Java Province
fi = city district population i
N = population in West Java Province
The Williamson index obtained is located between 0 (zero) to 1 (one)
bull If the Williamson index approaches 0 then the inequality of income
distribution between regencies cities in West Java Province is low or
economic growth between regions is evenly distributed
bull If the Williamson index approaches 1 the inequality of income distribution
between regencies cities in West Java Province is high or economic growth
between regions is uneven
21
13 Empirical Review of Research on Fiscal Decentralization
131 Research on Fiscal Decentralization in Other Countries
ldquoFiscal Decentralization Contributes to Economic Growth Evidenc efrom State-
Level Cross-Section Data for The United Statesrdquo as conducted by Nobuo akai and
Masayo Sakata 2002
This study shows new evidence that fiscal decentralization effects
economic growth It used a cross-sectional method with 50 observations taking
the average 1992 to 1994 for time series and 50 states in the United States
The empirical models used to look at economic growth are
iiii zationDecentraliGSP εβαα +Χ++=∆ 10 i=1 50 (21)
Where i is the state ΔGSP I gross state production from 1992 to 1996
decentralizations show the average annual growth of the fiscal decentralization
indicator in state i and Xi is the control variable
Empirical research above shows that based on existing data fiscal
decentralization has contributed to economic growth The paper finds that fiscal
decentralization plays a key role in economic growth in the US As expected the
results also indicate that there are others affecting economic growth
132 Research on Fiscal Decentralization In Indonesia
1) Fiscal Decentralization Itrsquos Impact on Cities Growth as conducted by B
Raksaka Mahi 2001
This study used a simultaneous econometric model two stage least square
(TSLS) and regional econometric macros for (1) Evaluating intergovernmental
transfers and their impact on municipal government revenues and (2) Elaborating
22
on the implications of the transfer from government to city growth and disparity
between regions in Indonesia
The variable fiscal decentralization is measured by Revenue sharing
fund sharing funds DAU and DAK The study concluded that (a) The policy of
fiscal decentralization in Indonesia is very important for policy making in the
regions almost all standard instruments for fiscal decentralization are used by the
government (b) DBHSDA policies not only have the potential to reduce growth
rates but also increase disparities between regions (c) DBHPPh will reduce
growth (d) DAU is more promising for growth than others although the DAU
policy does not support equity among regions and (e) The combination of
existing policies in Indonesia promises growth but still cannot reduce the
occurrence of disparities between regions
2) ldquoDampak Desentralisasi Fiskal di Indonesia Terhadap Pertumbuhan
Ekonomi dan Disparitas Antar Daerah Analisa Model Makro Ekonometrik
Simultan as conducted by Teguh Dartanto 2002
This study used a simultaneous macroeconometric regional model with
two stage least square (TSLS) The Simultaneous Macro Econometric Model is
made for analyzing the fiscal decentralization impact to economic growth and
region disparity The policy simulation in this model used transfer fund from
central government such as Tax Revenue Sharing Natural Resource Revenue
Sharing and General Allocation Fund The simulation is carried out to see the
optimality of various possible existing policies The optimality is measured by
evaluating the high rate of economic growth and low disparity
23
The results of the study indicate that revenue sharing funds from natural
resources (DBHSDA) land and building tax (PBB) tax on Acquisition of land
and building (DBPHTB) and income tax (PPH) generate negative economic
growth rates General allocation funds (DAU) as an inter-regional fiscal spattering
factor a the most dominant factor in encouraging regional economic growth and
have a very big role in encouraging regional economic growth as well as being an
economic growth regulator among regions These conditions indicate a very large
dependence on the central government However when combined with the
revenue-sharing policy and general allocation funds they will result in positive
(although relatively small) growth and can reduce disparities between regions
The combination also significantly affects investment growth but does not
significantly affect the growth of consumption in the region The impact of fiscal
decentralization policy is more pronounced in the Eastern Region of Indonesia
(KTI) than in the Western Region of Indonesia (KBI) The simulation results also
indicate the dependence of local governments on transfer funds from the central
government Therefore local governments are also expected to actively seek non-
distortive sources of income
3) ldquo Dampak Transfer Pemerintah Pusat Terhadap Penurunan Ketimpangan
Pendapatan Di Indonesia rdquo as conducted by Adhitya Wardhana Bambang
Juanda Hermanto Siregar dan Kodrat Wibowo Sosiohumaniora Volume 15
no 2 Juli 2013 111 ndash 118
The method used in this study uses data panel regression with the period
2001-2010 For regional characteristics it is made as a dummy of rich regions
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
8
In general the benefits and the weakness of fiscal decentralization can be
specified as follows1
1 The benefits of fiscal decentralization
An economic efficiency - the budget for public services could be more
easily adapted to local preferences with thelevel of accountability and a
high willingness to pay
Opportunities to increase tax revenue from local taxes - the local
government can levy taxes based on consumption and assets that
cannot be withdrawn by the Central Government
2 The weakness of fiscal decentralization
Low central government control to the macro economy
The difficulty of implementing policies of economic stabilization
The difficulty of implementing policies of econom1c development with
equity
A number of costs to local government rather than a benefit
In general decentralization includes political decentralization
administrative decentralization fiscal decentralization and economic or market
decentralization2
1 Bahl R (2008) ldquoThe Pillars of Fiscal Decentralizationrdquo CAF Working Paper 2 Sidik Machfud(2002) ldquo Format Hubungan Keuangan Pemerintah Pusat dan Daerah yang Mengacu pada Pencapaian Tujuan Nasional ldquoSeminar Nasional public sector score card Jakarta
9
Central-regional financial relations arrangements are based on 4 principles
(see figure 1)
(1) Affairs which are the tasks of the central government in the regions in the
context of deconcentration are financed from the APBN
(2) Affairs which are the tasks of the regional government itself in the context of
decentralization are financed from the APBD
(3) Affairs which are the tasks of the central government or upper level regional
government which are carried out in the framework of assistance tasks
financed by the APBN or provincial APBD
(4) As long as the potential of regional financial resources is insufficient the
government provides a number of contributions
Figure 1 Central-Regional Financial Relations Arrangements
Source Sidik Machfud (2002)ldquo Format Hubungan Keuangan Pemerintah Pusat dan Daerah
yang Mengacu pada Pencapaian Tujuan Nasionalrdquo seminar nasional public sector score card
Jakarta
Central and regional relations
Decentralization
government burden
APBD APBN
co-administration
Deconcentration
Central and Regional Financial Relations
Regional Loans LN amp DN Short amp long term
DAU (general allocation
DBH (revenue sharing fund)
PAD (local own revenue)
10
The implementation of fiscal decentralization will work well if supported
by the following factors
- Central government capable of supervision and enforcement
- Strong human resources at the regional government to replace the role of
the central government
- Balance and clarity in the distribution of responsibilities and authorities in
conducting regional tax and regional levies Based on Law Number 28 of
2009 concerning Regional Taxes and Regional Levies regional taxes are
divided into two types namely provincial tax and regency city tax
Provincial tax consists of motor vehicle tax motorbike name transfer fee
motor vehicle fuel tax The district city tax consists of hotel tax restaurant
tax entertainment tax advertisement tax
112 Understanding The Concept of intergovernmental transfer funds
Intergovernmental transfer funds sourced from The Indonesian National
budget (APBN) The Indonesian National budget is the annual financial plan of the
Indonesian government approved by the House of Representatives
Intergovernmental transfer funds are revenue allocated to regions to fund the
needs of the region for the implementation of decentralization
Intergovernmental transfer funds consist of
(1) Revenue sharing funds
Revenue sharing funds (DBH) are derived from certain revenues of the
APBN allocated to producing regions based on certain percentage figures with the
11
aim of reducing the inequality of financial capacity between the central and
regional governments
(2) General allocation funds
General allocation funds (DAU) are sourced from APBN revenues
allocated for the purpose of equitable inter-regional financial capacity to fund the
needs of the region in the context of the implementation of decentralization
By definition general allocation funds can be interpreted as follows (Sidik
2002)
bull One of the components of the balancing fund in the APBN whose
allocation is based on the concept of fiscal gap namely the difference
between fiscal needs and fiscal capacity
bull Instrument to overcome horizontal imbalance which is allocated with
the aim of equal distribution of financial capabilities between regions
where its use is determined entirely by the region
bull Equalization grant which functions to neutralize financial capacity
inequality with the existence of PAD tax sharing and revenue sharing
from the region
The DAU formula should be based on a simple formula easily understood
and calculated by the region if data is available The calculations made must be
logical and meet the rules of the theory and must be consistent for example
regions with large fiscal potential but small fiscal needs will get a relatively small
DAU allocation Conversely regions with small fiscal potential but large fiscal
needs will obtain a relatively large DAU DAU allocations for regions are
12
calculated using formulas fiscal gap and basic allocations fiscal gap is a financial
condition of a regional government that is related to its fiscal needs and fiscal
capacity Whereas the basic allocation is the need for regional funds to pay civil
servant salaries and infrastructure In general the basic formulations of DAU in an
area are as follows3
DAU = AD + CF
Where
DAU = General Allocation Fund
AD = Basic Allocation
CF = Fiscal Gap = Fiscal Needs - Fiscal Capacity
(3) Specific allocation funds
Specific allocation funds (DAK) are sourced from APBN revenues and
allocated to a particular region for the purpose of assisting in financing of special
activities which constitute the governmental affairs which are under the
jurisdiction of the region Development funded by DAK are directed at various
activities that are in the form of public infrastructure provision including
infrastructure in the fields of education health agriculture road bridges and
irrigation as well as procurement of other public infrastructure
Calculation of DAK allocations is based on several criteria
bull General criteria based on regional financial capacity
3 Brojonegoro B Pakpahan A T (2002)ldquoEvaluasi atas Alokasi DAU 2001 dan Permasalahannya Dana Alokasi Umum Konsep Hambatan dan Prospek di Era Otonomi Daerahrdquo LPEM-UI Jakarta
13
bull Specific criteria formulated based on legislation governing the
implementation of special autonomy and regional characteristics
bull Technical criteria prepared based on specific activity indicators that will
be funded from DAK Arrangements regarding technical criteria are
prepared by the relevant technical minister for example the education
sector was formulated by the education minister or health sector was
formulated by minister of health
12 Economic Growth and Income Disparity Among Regions
121 Economic Growth
Economic growth is defined as the expansion of the capacity to produce
goods and services of an economy or the expansion of the possibility of producing
of an economy The success of regional economic growth in order to improve the
welfare of the population can be assessed by the growth rate of gross domestic
product (GDP) The GDP is the output generated from inputs that are calculated in
prices in a base year or also known as the GDP at constant prices
The term growth can be interpreted differently by one person to another
one area with another one country with another country It is important for us to
be able to have the same definition in terms of growth Traditionally growth has
been a continuous increase in the gross domestic product or a countrys gross
domestic product For regions traditional growth meanings are focused on
increasing gross domestic product of a province district or city
14
The definition of economic growth according to several prominent
economists are as follows
(1) According to the views of the classical economists (Adam Smith David
Ricardo Thomas Robert Malthus and John Stuart Mill) as well as the
neoclassical economists (Robert Solow and Trevor Swan) there are basically
four factors affecting economic growth (1) total population (2) total stock of
capital goods (3) land area and natural wealth and (4) level of technology
used An economy is said to experience growth if the level of economic
activity is higher than what was achieved in the past4
(2) According to Kuznets economic growth is the increase in long-term capacity
of the countries concerned to provide various items to the citizen The
increase in capacity itself is determined or made possible by advances in
technology or adjustments institutional and ideologically against various
claims5
(3) M P Todaro (2000) defines economic growth as a steady process whereby
the production capacity of an economy increases over time to generate an
even greater level of national income The increase in capacity itself is
determined by technological institutional and ideological advances in the
various demands of the situation 6
4Mudrajad Kuncoro (2004) ldquoOtonomi dan Pembangunan Daerah Reformasi Perencanaan Strategi dan Peluangldquo Penerbit Erlangga Jakarta 5 Jhingan M L (2000) ldquoEkonomi Pembangunan dan Perencanaanrdquo edisi 3 Rajawali Press Jakarta 6 Todaro MP (2000) ldquoPembangunan Ekonomi di Dunia ke Tigardquo edisi 4 Penerbit Erlangga Jakarta
15
(4) According to Budiono (1999) economic growth is a process of long-term per
capita output growth that occurs when there is a tendency (per capita output
to rise) that comes from the internal process of the economy (the forces
within the economy itself) not from outside Or in other words self-
generating which means that the growth process itself produces a force or
momentum for the continuation of that growth in subsequent periods7
(5) Sadono Sukirno (2005) argues that economic growth is a change in the level
of economic activity prevailing from year to year So to estimate it units of
measurement must be held constant for comparison of national income from
year to year known as the rate of economic growth8
Furthermore Todaro (2000) stated there are three components in the
definition of economic growth namely
(1) The increase in output on an ongoing basis is a manifestation or embodiment
of what is known as economic growth while the ability to provide different
types of goods is itself a sign of economic maturity in a country
(2) The development of technology is the basis or a precondition for the
continuity of sustainable economic growth This is a condition that is
necessary but is not sufficient so in addition to the development or
advancement of technology other factors are needed
(3) In order to realize the growth potential inherent in the new technology we
need to hold a series of institutional adjustments attitudes and ideologies
7Budiono (1999) ldquoTeori Pertumbuhan Ekonomirdquo seri sinopsiedisi 1 bpfe Jogjakarta 8Sukirno S (2005) ldquoMakroekonomi teori pengantarrdquo Jakarta PT Raja Grafindo Persada
16
Technological innovation without social innovation means the potential is
there but without the complementary input then it cannot produce any results
122 Income disparity among regions
Aspects of fairness and equity can be reviewed on the basis of
interpersonal relationships but can also be reviewed by region Interpersonally it
indicates whether income among individuals or groups of community members is
fair and equitable
Meanwhile inter-regional interpersonally it shows equity that occurs
between regions both between provinces and between districtscities
(1) Distribution of income between income class (size distribution of income) or
relative income inequality
(2) Revenue sharing between urban and rural areas (urban-rural income
disparities)
(3) Regional income sharing (regional income disparities)
Thus in principle the distribution of national income reflects the uneven
and uneven distribution of a countrys development outcomes among its
inhabitants There are various criteria or benchmarks to assess the level of
distribution is as follows
(1) The Lorenz Curve
The Lorenz Curve illustrates the cumulative distribution of national
income among the layers of the population and is cumulative as well This curve
lies within a square that symbolizes the establishment of the cumulative
17
percentage of national income while the flat side represents the cumulative
percentage of the population
The Lorenz Curve shows the quantitative relationship between the
percentage of receipts (incomes of the population) and the percentage of total
revenue actually earned over a certain period The farther the Lorenz Curve
diverges from the straight diagonal line (perfect evenness) the more unequal
income distribution The Lorenz Curve is shown in the graph below
Figure 2 The Lorenz Curve
Source A practical example of a Lorenz curve by Mohammad Zulfan Tadjoeddin
(2003)
The Lorenz Curve is represented by the OBA line The income distribution
is said to be uniform if the curve of the Lorenz is a diagonal line of OA where
40 of income is received by 40 of the population and 60 of income is
received by 60 of the population So the further the Lorenz Curve is from the
Yi Income ()
Pi Population ()
18
diagonal line the more uneven the distribution of income This leads to the Gini
Index number ranging between zero and one9
(2) Gini Index
The Gini Index is a coefficient that ranges from zero to one explaining the
level of inequality of the distribution of national income The smaller (the closer
to zero) the coefficient the better or more even the distribution On the other
hand an increasingly large coefficient (approaching one) implies an increasingly
unbalanced distribution Gini Index figures can be assessed visually directly from
the Lorenz Curve the more curved the Lorenz Curve the larger the divided area
the greater the Gini Index implying an increasingly uneven income distribution
Some economists argue that the Gini Index is considered to have
weaknesses because it is less sensitive to changes in the low income group
Regardless of this the Gini Index that uses expenditure data as a proxy for income
data is considered to be still better than many ways of calculating existing income
distributions
9Tadjoeddin Mohammad Zulfan (2003)ldquo Aspiration to Inequality Regional Disparity and Centre-Regional Conflicts in Indonesia ldquoPaper disampaikan pada UNUWIDER Project Conference on Spatial Inequality in Asia United Nations University Centre Tokyo
19
Table 1 Gini Index In West Java Province from 2011 to 2016
Source BPS West Java Province 2011-2016
From the data above in Table 1 income inequality in West Java is
retailively high especially in urban areas This might be because in Bandung city
and Bogor city is a big city and this local government has not been able to
overcome the problem of income inequality so that income has not been perfectly
distributed
(3) Williamson Index
The existence of differences in natural resources between regions also
causes changes in distribution between regions The index commonly used in
CityRegency 2011 2012 2013 2014 2015 2016Bogor 041 042 038 039 042 04Sukabumi 03 035 03 032 036 033Cianjur 029 033 029 028 028 036Bandung 036 036 034 037 04 04Garut 03 034 031 033 031 035Tasikmalaya 037 033 032 029 03 03Ciamis 031 031 033 031 033 033Kuningan 033 036 033 037 034 033Cirebon 027 036 032 028 033 036Majalengka 031 039 032 034 035 036Sumedang 033 037 034 033 035 037Indramayu 028 029 028 028 029 026Subang 028 033 033 031 033 035Purwakarta 034 039 039 037 035 036Karawang 033 034 032 03 034 034Bekasi 033 036 033 033 035 031Bandung Barat 029 037 031 033 034 036Kota Bogor 039 045 041 036 047 043Kota Sukabumi 034 04 034 036 043 042Kota Bandung 041 042 042 048 044 044Kota Cirebon 038 041 038 04 041 04Kota Bekasi 037 037 035 033 041 039Kota Depok 036 04 039 037 04 04Kota Cimahi 034 037 04 039 04 042Kota Tasikmalaya 037 04 039 037 049 042Kota Banjar 037 039 034 032 042 037
Gini Ratio In West Java Province
20
distribution between these regions is the Williamson Index The formula used in
the Williamson Index is as follows
( )2
i iY Y f N
WY
minus times =sum
Where
W = Williamson Index
Y i = GRDP Capita in the city district i
Y = GRDP Capita West Java Province
fi = city district population i
N = population in West Java Province
The Williamson index obtained is located between 0 (zero) to 1 (one)
bull If the Williamson index approaches 0 then the inequality of income
distribution between regencies cities in West Java Province is low or
economic growth between regions is evenly distributed
bull If the Williamson index approaches 1 the inequality of income distribution
between regencies cities in West Java Province is high or economic growth
between regions is uneven
21
13 Empirical Review of Research on Fiscal Decentralization
131 Research on Fiscal Decentralization in Other Countries
ldquoFiscal Decentralization Contributes to Economic Growth Evidenc efrom State-
Level Cross-Section Data for The United Statesrdquo as conducted by Nobuo akai and
Masayo Sakata 2002
This study shows new evidence that fiscal decentralization effects
economic growth It used a cross-sectional method with 50 observations taking
the average 1992 to 1994 for time series and 50 states in the United States
The empirical models used to look at economic growth are
iiii zationDecentraliGSP εβαα +Χ++=∆ 10 i=1 50 (21)
Where i is the state ΔGSP I gross state production from 1992 to 1996
decentralizations show the average annual growth of the fiscal decentralization
indicator in state i and Xi is the control variable
Empirical research above shows that based on existing data fiscal
decentralization has contributed to economic growth The paper finds that fiscal
decentralization plays a key role in economic growth in the US As expected the
results also indicate that there are others affecting economic growth
132 Research on Fiscal Decentralization In Indonesia
1) Fiscal Decentralization Itrsquos Impact on Cities Growth as conducted by B
Raksaka Mahi 2001
This study used a simultaneous econometric model two stage least square
(TSLS) and regional econometric macros for (1) Evaluating intergovernmental
transfers and their impact on municipal government revenues and (2) Elaborating
22
on the implications of the transfer from government to city growth and disparity
between regions in Indonesia
The variable fiscal decentralization is measured by Revenue sharing
fund sharing funds DAU and DAK The study concluded that (a) The policy of
fiscal decentralization in Indonesia is very important for policy making in the
regions almost all standard instruments for fiscal decentralization are used by the
government (b) DBHSDA policies not only have the potential to reduce growth
rates but also increase disparities between regions (c) DBHPPh will reduce
growth (d) DAU is more promising for growth than others although the DAU
policy does not support equity among regions and (e) The combination of
existing policies in Indonesia promises growth but still cannot reduce the
occurrence of disparities between regions
2) ldquoDampak Desentralisasi Fiskal di Indonesia Terhadap Pertumbuhan
Ekonomi dan Disparitas Antar Daerah Analisa Model Makro Ekonometrik
Simultan as conducted by Teguh Dartanto 2002
This study used a simultaneous macroeconometric regional model with
two stage least square (TSLS) The Simultaneous Macro Econometric Model is
made for analyzing the fiscal decentralization impact to economic growth and
region disparity The policy simulation in this model used transfer fund from
central government such as Tax Revenue Sharing Natural Resource Revenue
Sharing and General Allocation Fund The simulation is carried out to see the
optimality of various possible existing policies The optimality is measured by
evaluating the high rate of economic growth and low disparity
23
The results of the study indicate that revenue sharing funds from natural
resources (DBHSDA) land and building tax (PBB) tax on Acquisition of land
and building (DBPHTB) and income tax (PPH) generate negative economic
growth rates General allocation funds (DAU) as an inter-regional fiscal spattering
factor a the most dominant factor in encouraging regional economic growth and
have a very big role in encouraging regional economic growth as well as being an
economic growth regulator among regions These conditions indicate a very large
dependence on the central government However when combined with the
revenue-sharing policy and general allocation funds they will result in positive
(although relatively small) growth and can reduce disparities between regions
The combination also significantly affects investment growth but does not
significantly affect the growth of consumption in the region The impact of fiscal
decentralization policy is more pronounced in the Eastern Region of Indonesia
(KTI) than in the Western Region of Indonesia (KBI) The simulation results also
indicate the dependence of local governments on transfer funds from the central
government Therefore local governments are also expected to actively seek non-
distortive sources of income
3) ldquo Dampak Transfer Pemerintah Pusat Terhadap Penurunan Ketimpangan
Pendapatan Di Indonesia rdquo as conducted by Adhitya Wardhana Bambang
Juanda Hermanto Siregar dan Kodrat Wibowo Sosiohumaniora Volume 15
no 2 Juli 2013 111 ndash 118
The method used in this study uses data panel regression with the period
2001-2010 For regional characteristics it is made as a dummy of rich regions
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
9
Central-regional financial relations arrangements are based on 4 principles
(see figure 1)
(1) Affairs which are the tasks of the central government in the regions in the
context of deconcentration are financed from the APBN
(2) Affairs which are the tasks of the regional government itself in the context of
decentralization are financed from the APBD
(3) Affairs which are the tasks of the central government or upper level regional
government which are carried out in the framework of assistance tasks
financed by the APBN or provincial APBD
(4) As long as the potential of regional financial resources is insufficient the
government provides a number of contributions
Figure 1 Central-Regional Financial Relations Arrangements
Source Sidik Machfud (2002)ldquo Format Hubungan Keuangan Pemerintah Pusat dan Daerah
yang Mengacu pada Pencapaian Tujuan Nasionalrdquo seminar nasional public sector score card
Jakarta
Central and regional relations
Decentralization
government burden
APBD APBN
co-administration
Deconcentration
Central and Regional Financial Relations
Regional Loans LN amp DN Short amp long term
DAU (general allocation
DBH (revenue sharing fund)
PAD (local own revenue)
10
The implementation of fiscal decentralization will work well if supported
by the following factors
- Central government capable of supervision and enforcement
- Strong human resources at the regional government to replace the role of
the central government
- Balance and clarity in the distribution of responsibilities and authorities in
conducting regional tax and regional levies Based on Law Number 28 of
2009 concerning Regional Taxes and Regional Levies regional taxes are
divided into two types namely provincial tax and regency city tax
Provincial tax consists of motor vehicle tax motorbike name transfer fee
motor vehicle fuel tax The district city tax consists of hotel tax restaurant
tax entertainment tax advertisement tax
112 Understanding The Concept of intergovernmental transfer funds
Intergovernmental transfer funds sourced from The Indonesian National
budget (APBN) The Indonesian National budget is the annual financial plan of the
Indonesian government approved by the House of Representatives
Intergovernmental transfer funds are revenue allocated to regions to fund the
needs of the region for the implementation of decentralization
Intergovernmental transfer funds consist of
(1) Revenue sharing funds
Revenue sharing funds (DBH) are derived from certain revenues of the
APBN allocated to producing regions based on certain percentage figures with the
11
aim of reducing the inequality of financial capacity between the central and
regional governments
(2) General allocation funds
General allocation funds (DAU) are sourced from APBN revenues
allocated for the purpose of equitable inter-regional financial capacity to fund the
needs of the region in the context of the implementation of decentralization
By definition general allocation funds can be interpreted as follows (Sidik
2002)
bull One of the components of the balancing fund in the APBN whose
allocation is based on the concept of fiscal gap namely the difference
between fiscal needs and fiscal capacity
bull Instrument to overcome horizontal imbalance which is allocated with
the aim of equal distribution of financial capabilities between regions
where its use is determined entirely by the region
bull Equalization grant which functions to neutralize financial capacity
inequality with the existence of PAD tax sharing and revenue sharing
from the region
The DAU formula should be based on a simple formula easily understood
and calculated by the region if data is available The calculations made must be
logical and meet the rules of the theory and must be consistent for example
regions with large fiscal potential but small fiscal needs will get a relatively small
DAU allocation Conversely regions with small fiscal potential but large fiscal
needs will obtain a relatively large DAU DAU allocations for regions are
12
calculated using formulas fiscal gap and basic allocations fiscal gap is a financial
condition of a regional government that is related to its fiscal needs and fiscal
capacity Whereas the basic allocation is the need for regional funds to pay civil
servant salaries and infrastructure In general the basic formulations of DAU in an
area are as follows3
DAU = AD + CF
Where
DAU = General Allocation Fund
AD = Basic Allocation
CF = Fiscal Gap = Fiscal Needs - Fiscal Capacity
(3) Specific allocation funds
Specific allocation funds (DAK) are sourced from APBN revenues and
allocated to a particular region for the purpose of assisting in financing of special
activities which constitute the governmental affairs which are under the
jurisdiction of the region Development funded by DAK are directed at various
activities that are in the form of public infrastructure provision including
infrastructure in the fields of education health agriculture road bridges and
irrigation as well as procurement of other public infrastructure
Calculation of DAK allocations is based on several criteria
bull General criteria based on regional financial capacity
3 Brojonegoro B Pakpahan A T (2002)ldquoEvaluasi atas Alokasi DAU 2001 dan Permasalahannya Dana Alokasi Umum Konsep Hambatan dan Prospek di Era Otonomi Daerahrdquo LPEM-UI Jakarta
13
bull Specific criteria formulated based on legislation governing the
implementation of special autonomy and regional characteristics
bull Technical criteria prepared based on specific activity indicators that will
be funded from DAK Arrangements regarding technical criteria are
prepared by the relevant technical minister for example the education
sector was formulated by the education minister or health sector was
formulated by minister of health
12 Economic Growth and Income Disparity Among Regions
121 Economic Growth
Economic growth is defined as the expansion of the capacity to produce
goods and services of an economy or the expansion of the possibility of producing
of an economy The success of regional economic growth in order to improve the
welfare of the population can be assessed by the growth rate of gross domestic
product (GDP) The GDP is the output generated from inputs that are calculated in
prices in a base year or also known as the GDP at constant prices
The term growth can be interpreted differently by one person to another
one area with another one country with another country It is important for us to
be able to have the same definition in terms of growth Traditionally growth has
been a continuous increase in the gross domestic product or a countrys gross
domestic product For regions traditional growth meanings are focused on
increasing gross domestic product of a province district or city
14
The definition of economic growth according to several prominent
economists are as follows
(1) According to the views of the classical economists (Adam Smith David
Ricardo Thomas Robert Malthus and John Stuart Mill) as well as the
neoclassical economists (Robert Solow and Trevor Swan) there are basically
four factors affecting economic growth (1) total population (2) total stock of
capital goods (3) land area and natural wealth and (4) level of technology
used An economy is said to experience growth if the level of economic
activity is higher than what was achieved in the past4
(2) According to Kuznets economic growth is the increase in long-term capacity
of the countries concerned to provide various items to the citizen The
increase in capacity itself is determined or made possible by advances in
technology or adjustments institutional and ideologically against various
claims5
(3) M P Todaro (2000) defines economic growth as a steady process whereby
the production capacity of an economy increases over time to generate an
even greater level of national income The increase in capacity itself is
determined by technological institutional and ideological advances in the
various demands of the situation 6
4Mudrajad Kuncoro (2004) ldquoOtonomi dan Pembangunan Daerah Reformasi Perencanaan Strategi dan Peluangldquo Penerbit Erlangga Jakarta 5 Jhingan M L (2000) ldquoEkonomi Pembangunan dan Perencanaanrdquo edisi 3 Rajawali Press Jakarta 6 Todaro MP (2000) ldquoPembangunan Ekonomi di Dunia ke Tigardquo edisi 4 Penerbit Erlangga Jakarta
15
(4) According to Budiono (1999) economic growth is a process of long-term per
capita output growth that occurs when there is a tendency (per capita output
to rise) that comes from the internal process of the economy (the forces
within the economy itself) not from outside Or in other words self-
generating which means that the growth process itself produces a force or
momentum for the continuation of that growth in subsequent periods7
(5) Sadono Sukirno (2005) argues that economic growth is a change in the level
of economic activity prevailing from year to year So to estimate it units of
measurement must be held constant for comparison of national income from
year to year known as the rate of economic growth8
Furthermore Todaro (2000) stated there are three components in the
definition of economic growth namely
(1) The increase in output on an ongoing basis is a manifestation or embodiment
of what is known as economic growth while the ability to provide different
types of goods is itself a sign of economic maturity in a country
(2) The development of technology is the basis or a precondition for the
continuity of sustainable economic growth This is a condition that is
necessary but is not sufficient so in addition to the development or
advancement of technology other factors are needed
(3) In order to realize the growth potential inherent in the new technology we
need to hold a series of institutional adjustments attitudes and ideologies
7Budiono (1999) ldquoTeori Pertumbuhan Ekonomirdquo seri sinopsiedisi 1 bpfe Jogjakarta 8Sukirno S (2005) ldquoMakroekonomi teori pengantarrdquo Jakarta PT Raja Grafindo Persada
16
Technological innovation without social innovation means the potential is
there but without the complementary input then it cannot produce any results
122 Income disparity among regions
Aspects of fairness and equity can be reviewed on the basis of
interpersonal relationships but can also be reviewed by region Interpersonally it
indicates whether income among individuals or groups of community members is
fair and equitable
Meanwhile inter-regional interpersonally it shows equity that occurs
between regions both between provinces and between districtscities
(1) Distribution of income between income class (size distribution of income) or
relative income inequality
(2) Revenue sharing between urban and rural areas (urban-rural income
disparities)
(3) Regional income sharing (regional income disparities)
Thus in principle the distribution of national income reflects the uneven
and uneven distribution of a countrys development outcomes among its
inhabitants There are various criteria or benchmarks to assess the level of
distribution is as follows
(1) The Lorenz Curve
The Lorenz Curve illustrates the cumulative distribution of national
income among the layers of the population and is cumulative as well This curve
lies within a square that symbolizes the establishment of the cumulative
17
percentage of national income while the flat side represents the cumulative
percentage of the population
The Lorenz Curve shows the quantitative relationship between the
percentage of receipts (incomes of the population) and the percentage of total
revenue actually earned over a certain period The farther the Lorenz Curve
diverges from the straight diagonal line (perfect evenness) the more unequal
income distribution The Lorenz Curve is shown in the graph below
Figure 2 The Lorenz Curve
Source A practical example of a Lorenz curve by Mohammad Zulfan Tadjoeddin
(2003)
The Lorenz Curve is represented by the OBA line The income distribution
is said to be uniform if the curve of the Lorenz is a diagonal line of OA where
40 of income is received by 40 of the population and 60 of income is
received by 60 of the population So the further the Lorenz Curve is from the
Yi Income ()
Pi Population ()
18
diagonal line the more uneven the distribution of income This leads to the Gini
Index number ranging between zero and one9
(2) Gini Index
The Gini Index is a coefficient that ranges from zero to one explaining the
level of inequality of the distribution of national income The smaller (the closer
to zero) the coefficient the better or more even the distribution On the other
hand an increasingly large coefficient (approaching one) implies an increasingly
unbalanced distribution Gini Index figures can be assessed visually directly from
the Lorenz Curve the more curved the Lorenz Curve the larger the divided area
the greater the Gini Index implying an increasingly uneven income distribution
Some economists argue that the Gini Index is considered to have
weaknesses because it is less sensitive to changes in the low income group
Regardless of this the Gini Index that uses expenditure data as a proxy for income
data is considered to be still better than many ways of calculating existing income
distributions
9Tadjoeddin Mohammad Zulfan (2003)ldquo Aspiration to Inequality Regional Disparity and Centre-Regional Conflicts in Indonesia ldquoPaper disampaikan pada UNUWIDER Project Conference on Spatial Inequality in Asia United Nations University Centre Tokyo
19
Table 1 Gini Index In West Java Province from 2011 to 2016
Source BPS West Java Province 2011-2016
From the data above in Table 1 income inequality in West Java is
retailively high especially in urban areas This might be because in Bandung city
and Bogor city is a big city and this local government has not been able to
overcome the problem of income inequality so that income has not been perfectly
distributed
(3) Williamson Index
The existence of differences in natural resources between regions also
causes changes in distribution between regions The index commonly used in
CityRegency 2011 2012 2013 2014 2015 2016Bogor 041 042 038 039 042 04Sukabumi 03 035 03 032 036 033Cianjur 029 033 029 028 028 036Bandung 036 036 034 037 04 04Garut 03 034 031 033 031 035Tasikmalaya 037 033 032 029 03 03Ciamis 031 031 033 031 033 033Kuningan 033 036 033 037 034 033Cirebon 027 036 032 028 033 036Majalengka 031 039 032 034 035 036Sumedang 033 037 034 033 035 037Indramayu 028 029 028 028 029 026Subang 028 033 033 031 033 035Purwakarta 034 039 039 037 035 036Karawang 033 034 032 03 034 034Bekasi 033 036 033 033 035 031Bandung Barat 029 037 031 033 034 036Kota Bogor 039 045 041 036 047 043Kota Sukabumi 034 04 034 036 043 042Kota Bandung 041 042 042 048 044 044Kota Cirebon 038 041 038 04 041 04Kota Bekasi 037 037 035 033 041 039Kota Depok 036 04 039 037 04 04Kota Cimahi 034 037 04 039 04 042Kota Tasikmalaya 037 04 039 037 049 042Kota Banjar 037 039 034 032 042 037
Gini Ratio In West Java Province
20
distribution between these regions is the Williamson Index The formula used in
the Williamson Index is as follows
( )2
i iY Y f N
WY
minus times =sum
Where
W = Williamson Index
Y i = GRDP Capita in the city district i
Y = GRDP Capita West Java Province
fi = city district population i
N = population in West Java Province
The Williamson index obtained is located between 0 (zero) to 1 (one)
bull If the Williamson index approaches 0 then the inequality of income
distribution between regencies cities in West Java Province is low or
economic growth between regions is evenly distributed
bull If the Williamson index approaches 1 the inequality of income distribution
between regencies cities in West Java Province is high or economic growth
between regions is uneven
21
13 Empirical Review of Research on Fiscal Decentralization
131 Research on Fiscal Decentralization in Other Countries
ldquoFiscal Decentralization Contributes to Economic Growth Evidenc efrom State-
Level Cross-Section Data for The United Statesrdquo as conducted by Nobuo akai and
Masayo Sakata 2002
This study shows new evidence that fiscal decentralization effects
economic growth It used a cross-sectional method with 50 observations taking
the average 1992 to 1994 for time series and 50 states in the United States
The empirical models used to look at economic growth are
iiii zationDecentraliGSP εβαα +Χ++=∆ 10 i=1 50 (21)
Where i is the state ΔGSP I gross state production from 1992 to 1996
decentralizations show the average annual growth of the fiscal decentralization
indicator in state i and Xi is the control variable
Empirical research above shows that based on existing data fiscal
decentralization has contributed to economic growth The paper finds that fiscal
decentralization plays a key role in economic growth in the US As expected the
results also indicate that there are others affecting economic growth
132 Research on Fiscal Decentralization In Indonesia
1) Fiscal Decentralization Itrsquos Impact on Cities Growth as conducted by B
Raksaka Mahi 2001
This study used a simultaneous econometric model two stage least square
(TSLS) and regional econometric macros for (1) Evaluating intergovernmental
transfers and their impact on municipal government revenues and (2) Elaborating
22
on the implications of the transfer from government to city growth and disparity
between regions in Indonesia
The variable fiscal decentralization is measured by Revenue sharing
fund sharing funds DAU and DAK The study concluded that (a) The policy of
fiscal decentralization in Indonesia is very important for policy making in the
regions almost all standard instruments for fiscal decentralization are used by the
government (b) DBHSDA policies not only have the potential to reduce growth
rates but also increase disparities between regions (c) DBHPPh will reduce
growth (d) DAU is more promising for growth than others although the DAU
policy does not support equity among regions and (e) The combination of
existing policies in Indonesia promises growth but still cannot reduce the
occurrence of disparities between regions
2) ldquoDampak Desentralisasi Fiskal di Indonesia Terhadap Pertumbuhan
Ekonomi dan Disparitas Antar Daerah Analisa Model Makro Ekonometrik
Simultan as conducted by Teguh Dartanto 2002
This study used a simultaneous macroeconometric regional model with
two stage least square (TSLS) The Simultaneous Macro Econometric Model is
made for analyzing the fiscal decentralization impact to economic growth and
region disparity The policy simulation in this model used transfer fund from
central government such as Tax Revenue Sharing Natural Resource Revenue
Sharing and General Allocation Fund The simulation is carried out to see the
optimality of various possible existing policies The optimality is measured by
evaluating the high rate of economic growth and low disparity
23
The results of the study indicate that revenue sharing funds from natural
resources (DBHSDA) land and building tax (PBB) tax on Acquisition of land
and building (DBPHTB) and income tax (PPH) generate negative economic
growth rates General allocation funds (DAU) as an inter-regional fiscal spattering
factor a the most dominant factor in encouraging regional economic growth and
have a very big role in encouraging regional economic growth as well as being an
economic growth regulator among regions These conditions indicate a very large
dependence on the central government However when combined with the
revenue-sharing policy and general allocation funds they will result in positive
(although relatively small) growth and can reduce disparities between regions
The combination also significantly affects investment growth but does not
significantly affect the growth of consumption in the region The impact of fiscal
decentralization policy is more pronounced in the Eastern Region of Indonesia
(KTI) than in the Western Region of Indonesia (KBI) The simulation results also
indicate the dependence of local governments on transfer funds from the central
government Therefore local governments are also expected to actively seek non-
distortive sources of income
3) ldquo Dampak Transfer Pemerintah Pusat Terhadap Penurunan Ketimpangan
Pendapatan Di Indonesia rdquo as conducted by Adhitya Wardhana Bambang
Juanda Hermanto Siregar dan Kodrat Wibowo Sosiohumaniora Volume 15
no 2 Juli 2013 111 ndash 118
The method used in this study uses data panel regression with the period
2001-2010 For regional characteristics it is made as a dummy of rich regions
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
10
The implementation of fiscal decentralization will work well if supported
by the following factors
- Central government capable of supervision and enforcement
- Strong human resources at the regional government to replace the role of
the central government
- Balance and clarity in the distribution of responsibilities and authorities in
conducting regional tax and regional levies Based on Law Number 28 of
2009 concerning Regional Taxes and Regional Levies regional taxes are
divided into two types namely provincial tax and regency city tax
Provincial tax consists of motor vehicle tax motorbike name transfer fee
motor vehicle fuel tax The district city tax consists of hotel tax restaurant
tax entertainment tax advertisement tax
112 Understanding The Concept of intergovernmental transfer funds
Intergovernmental transfer funds sourced from The Indonesian National
budget (APBN) The Indonesian National budget is the annual financial plan of the
Indonesian government approved by the House of Representatives
Intergovernmental transfer funds are revenue allocated to regions to fund the
needs of the region for the implementation of decentralization
Intergovernmental transfer funds consist of
(1) Revenue sharing funds
Revenue sharing funds (DBH) are derived from certain revenues of the
APBN allocated to producing regions based on certain percentage figures with the
11
aim of reducing the inequality of financial capacity between the central and
regional governments
(2) General allocation funds
General allocation funds (DAU) are sourced from APBN revenues
allocated for the purpose of equitable inter-regional financial capacity to fund the
needs of the region in the context of the implementation of decentralization
By definition general allocation funds can be interpreted as follows (Sidik
2002)
bull One of the components of the balancing fund in the APBN whose
allocation is based on the concept of fiscal gap namely the difference
between fiscal needs and fiscal capacity
bull Instrument to overcome horizontal imbalance which is allocated with
the aim of equal distribution of financial capabilities between regions
where its use is determined entirely by the region
bull Equalization grant which functions to neutralize financial capacity
inequality with the existence of PAD tax sharing and revenue sharing
from the region
The DAU formula should be based on a simple formula easily understood
and calculated by the region if data is available The calculations made must be
logical and meet the rules of the theory and must be consistent for example
regions with large fiscal potential but small fiscal needs will get a relatively small
DAU allocation Conversely regions with small fiscal potential but large fiscal
needs will obtain a relatively large DAU DAU allocations for regions are
12
calculated using formulas fiscal gap and basic allocations fiscal gap is a financial
condition of a regional government that is related to its fiscal needs and fiscal
capacity Whereas the basic allocation is the need for regional funds to pay civil
servant salaries and infrastructure In general the basic formulations of DAU in an
area are as follows3
DAU = AD + CF
Where
DAU = General Allocation Fund
AD = Basic Allocation
CF = Fiscal Gap = Fiscal Needs - Fiscal Capacity
(3) Specific allocation funds
Specific allocation funds (DAK) are sourced from APBN revenues and
allocated to a particular region for the purpose of assisting in financing of special
activities which constitute the governmental affairs which are under the
jurisdiction of the region Development funded by DAK are directed at various
activities that are in the form of public infrastructure provision including
infrastructure in the fields of education health agriculture road bridges and
irrigation as well as procurement of other public infrastructure
Calculation of DAK allocations is based on several criteria
bull General criteria based on regional financial capacity
3 Brojonegoro B Pakpahan A T (2002)ldquoEvaluasi atas Alokasi DAU 2001 dan Permasalahannya Dana Alokasi Umum Konsep Hambatan dan Prospek di Era Otonomi Daerahrdquo LPEM-UI Jakarta
13
bull Specific criteria formulated based on legislation governing the
implementation of special autonomy and regional characteristics
bull Technical criteria prepared based on specific activity indicators that will
be funded from DAK Arrangements regarding technical criteria are
prepared by the relevant technical minister for example the education
sector was formulated by the education minister or health sector was
formulated by minister of health
12 Economic Growth and Income Disparity Among Regions
121 Economic Growth
Economic growth is defined as the expansion of the capacity to produce
goods and services of an economy or the expansion of the possibility of producing
of an economy The success of regional economic growth in order to improve the
welfare of the population can be assessed by the growth rate of gross domestic
product (GDP) The GDP is the output generated from inputs that are calculated in
prices in a base year or also known as the GDP at constant prices
The term growth can be interpreted differently by one person to another
one area with another one country with another country It is important for us to
be able to have the same definition in terms of growth Traditionally growth has
been a continuous increase in the gross domestic product or a countrys gross
domestic product For regions traditional growth meanings are focused on
increasing gross domestic product of a province district or city
14
The definition of economic growth according to several prominent
economists are as follows
(1) According to the views of the classical economists (Adam Smith David
Ricardo Thomas Robert Malthus and John Stuart Mill) as well as the
neoclassical economists (Robert Solow and Trevor Swan) there are basically
four factors affecting economic growth (1) total population (2) total stock of
capital goods (3) land area and natural wealth and (4) level of technology
used An economy is said to experience growth if the level of economic
activity is higher than what was achieved in the past4
(2) According to Kuznets economic growth is the increase in long-term capacity
of the countries concerned to provide various items to the citizen The
increase in capacity itself is determined or made possible by advances in
technology or adjustments institutional and ideologically against various
claims5
(3) M P Todaro (2000) defines economic growth as a steady process whereby
the production capacity of an economy increases over time to generate an
even greater level of national income The increase in capacity itself is
determined by technological institutional and ideological advances in the
various demands of the situation 6
4Mudrajad Kuncoro (2004) ldquoOtonomi dan Pembangunan Daerah Reformasi Perencanaan Strategi dan Peluangldquo Penerbit Erlangga Jakarta 5 Jhingan M L (2000) ldquoEkonomi Pembangunan dan Perencanaanrdquo edisi 3 Rajawali Press Jakarta 6 Todaro MP (2000) ldquoPembangunan Ekonomi di Dunia ke Tigardquo edisi 4 Penerbit Erlangga Jakarta
15
(4) According to Budiono (1999) economic growth is a process of long-term per
capita output growth that occurs when there is a tendency (per capita output
to rise) that comes from the internal process of the economy (the forces
within the economy itself) not from outside Or in other words self-
generating which means that the growth process itself produces a force or
momentum for the continuation of that growth in subsequent periods7
(5) Sadono Sukirno (2005) argues that economic growth is a change in the level
of economic activity prevailing from year to year So to estimate it units of
measurement must be held constant for comparison of national income from
year to year known as the rate of economic growth8
Furthermore Todaro (2000) stated there are three components in the
definition of economic growth namely
(1) The increase in output on an ongoing basis is a manifestation or embodiment
of what is known as economic growth while the ability to provide different
types of goods is itself a sign of economic maturity in a country
(2) The development of technology is the basis or a precondition for the
continuity of sustainable economic growth This is a condition that is
necessary but is not sufficient so in addition to the development or
advancement of technology other factors are needed
(3) In order to realize the growth potential inherent in the new technology we
need to hold a series of institutional adjustments attitudes and ideologies
7Budiono (1999) ldquoTeori Pertumbuhan Ekonomirdquo seri sinopsiedisi 1 bpfe Jogjakarta 8Sukirno S (2005) ldquoMakroekonomi teori pengantarrdquo Jakarta PT Raja Grafindo Persada
16
Technological innovation without social innovation means the potential is
there but without the complementary input then it cannot produce any results
122 Income disparity among regions
Aspects of fairness and equity can be reviewed on the basis of
interpersonal relationships but can also be reviewed by region Interpersonally it
indicates whether income among individuals or groups of community members is
fair and equitable
Meanwhile inter-regional interpersonally it shows equity that occurs
between regions both between provinces and between districtscities
(1) Distribution of income between income class (size distribution of income) or
relative income inequality
(2) Revenue sharing between urban and rural areas (urban-rural income
disparities)
(3) Regional income sharing (regional income disparities)
Thus in principle the distribution of national income reflects the uneven
and uneven distribution of a countrys development outcomes among its
inhabitants There are various criteria or benchmarks to assess the level of
distribution is as follows
(1) The Lorenz Curve
The Lorenz Curve illustrates the cumulative distribution of national
income among the layers of the population and is cumulative as well This curve
lies within a square that symbolizes the establishment of the cumulative
17
percentage of national income while the flat side represents the cumulative
percentage of the population
The Lorenz Curve shows the quantitative relationship between the
percentage of receipts (incomes of the population) and the percentage of total
revenue actually earned over a certain period The farther the Lorenz Curve
diverges from the straight diagonal line (perfect evenness) the more unequal
income distribution The Lorenz Curve is shown in the graph below
Figure 2 The Lorenz Curve
Source A practical example of a Lorenz curve by Mohammad Zulfan Tadjoeddin
(2003)
The Lorenz Curve is represented by the OBA line The income distribution
is said to be uniform if the curve of the Lorenz is a diagonal line of OA where
40 of income is received by 40 of the population and 60 of income is
received by 60 of the population So the further the Lorenz Curve is from the
Yi Income ()
Pi Population ()
18
diagonal line the more uneven the distribution of income This leads to the Gini
Index number ranging between zero and one9
(2) Gini Index
The Gini Index is a coefficient that ranges from zero to one explaining the
level of inequality of the distribution of national income The smaller (the closer
to zero) the coefficient the better or more even the distribution On the other
hand an increasingly large coefficient (approaching one) implies an increasingly
unbalanced distribution Gini Index figures can be assessed visually directly from
the Lorenz Curve the more curved the Lorenz Curve the larger the divided area
the greater the Gini Index implying an increasingly uneven income distribution
Some economists argue that the Gini Index is considered to have
weaknesses because it is less sensitive to changes in the low income group
Regardless of this the Gini Index that uses expenditure data as a proxy for income
data is considered to be still better than many ways of calculating existing income
distributions
9Tadjoeddin Mohammad Zulfan (2003)ldquo Aspiration to Inequality Regional Disparity and Centre-Regional Conflicts in Indonesia ldquoPaper disampaikan pada UNUWIDER Project Conference on Spatial Inequality in Asia United Nations University Centre Tokyo
19
Table 1 Gini Index In West Java Province from 2011 to 2016
Source BPS West Java Province 2011-2016
From the data above in Table 1 income inequality in West Java is
retailively high especially in urban areas This might be because in Bandung city
and Bogor city is a big city and this local government has not been able to
overcome the problem of income inequality so that income has not been perfectly
distributed
(3) Williamson Index
The existence of differences in natural resources between regions also
causes changes in distribution between regions The index commonly used in
CityRegency 2011 2012 2013 2014 2015 2016Bogor 041 042 038 039 042 04Sukabumi 03 035 03 032 036 033Cianjur 029 033 029 028 028 036Bandung 036 036 034 037 04 04Garut 03 034 031 033 031 035Tasikmalaya 037 033 032 029 03 03Ciamis 031 031 033 031 033 033Kuningan 033 036 033 037 034 033Cirebon 027 036 032 028 033 036Majalengka 031 039 032 034 035 036Sumedang 033 037 034 033 035 037Indramayu 028 029 028 028 029 026Subang 028 033 033 031 033 035Purwakarta 034 039 039 037 035 036Karawang 033 034 032 03 034 034Bekasi 033 036 033 033 035 031Bandung Barat 029 037 031 033 034 036Kota Bogor 039 045 041 036 047 043Kota Sukabumi 034 04 034 036 043 042Kota Bandung 041 042 042 048 044 044Kota Cirebon 038 041 038 04 041 04Kota Bekasi 037 037 035 033 041 039Kota Depok 036 04 039 037 04 04Kota Cimahi 034 037 04 039 04 042Kota Tasikmalaya 037 04 039 037 049 042Kota Banjar 037 039 034 032 042 037
Gini Ratio In West Java Province
20
distribution between these regions is the Williamson Index The formula used in
the Williamson Index is as follows
( )2
i iY Y f N
WY
minus times =sum
Where
W = Williamson Index
Y i = GRDP Capita in the city district i
Y = GRDP Capita West Java Province
fi = city district population i
N = population in West Java Province
The Williamson index obtained is located between 0 (zero) to 1 (one)
bull If the Williamson index approaches 0 then the inequality of income
distribution between regencies cities in West Java Province is low or
economic growth between regions is evenly distributed
bull If the Williamson index approaches 1 the inequality of income distribution
between regencies cities in West Java Province is high or economic growth
between regions is uneven
21
13 Empirical Review of Research on Fiscal Decentralization
131 Research on Fiscal Decentralization in Other Countries
ldquoFiscal Decentralization Contributes to Economic Growth Evidenc efrom State-
Level Cross-Section Data for The United Statesrdquo as conducted by Nobuo akai and
Masayo Sakata 2002
This study shows new evidence that fiscal decentralization effects
economic growth It used a cross-sectional method with 50 observations taking
the average 1992 to 1994 for time series and 50 states in the United States
The empirical models used to look at economic growth are
iiii zationDecentraliGSP εβαα +Χ++=∆ 10 i=1 50 (21)
Where i is the state ΔGSP I gross state production from 1992 to 1996
decentralizations show the average annual growth of the fiscal decentralization
indicator in state i and Xi is the control variable
Empirical research above shows that based on existing data fiscal
decentralization has contributed to economic growth The paper finds that fiscal
decentralization plays a key role in economic growth in the US As expected the
results also indicate that there are others affecting economic growth
132 Research on Fiscal Decentralization In Indonesia
1) Fiscal Decentralization Itrsquos Impact on Cities Growth as conducted by B
Raksaka Mahi 2001
This study used a simultaneous econometric model two stage least square
(TSLS) and regional econometric macros for (1) Evaluating intergovernmental
transfers and their impact on municipal government revenues and (2) Elaborating
22
on the implications of the transfer from government to city growth and disparity
between regions in Indonesia
The variable fiscal decentralization is measured by Revenue sharing
fund sharing funds DAU and DAK The study concluded that (a) The policy of
fiscal decentralization in Indonesia is very important for policy making in the
regions almost all standard instruments for fiscal decentralization are used by the
government (b) DBHSDA policies not only have the potential to reduce growth
rates but also increase disparities between regions (c) DBHPPh will reduce
growth (d) DAU is more promising for growth than others although the DAU
policy does not support equity among regions and (e) The combination of
existing policies in Indonesia promises growth but still cannot reduce the
occurrence of disparities between regions
2) ldquoDampak Desentralisasi Fiskal di Indonesia Terhadap Pertumbuhan
Ekonomi dan Disparitas Antar Daerah Analisa Model Makro Ekonometrik
Simultan as conducted by Teguh Dartanto 2002
This study used a simultaneous macroeconometric regional model with
two stage least square (TSLS) The Simultaneous Macro Econometric Model is
made for analyzing the fiscal decentralization impact to economic growth and
region disparity The policy simulation in this model used transfer fund from
central government such as Tax Revenue Sharing Natural Resource Revenue
Sharing and General Allocation Fund The simulation is carried out to see the
optimality of various possible existing policies The optimality is measured by
evaluating the high rate of economic growth and low disparity
23
The results of the study indicate that revenue sharing funds from natural
resources (DBHSDA) land and building tax (PBB) tax on Acquisition of land
and building (DBPHTB) and income tax (PPH) generate negative economic
growth rates General allocation funds (DAU) as an inter-regional fiscal spattering
factor a the most dominant factor in encouraging regional economic growth and
have a very big role in encouraging regional economic growth as well as being an
economic growth regulator among regions These conditions indicate a very large
dependence on the central government However when combined with the
revenue-sharing policy and general allocation funds they will result in positive
(although relatively small) growth and can reduce disparities between regions
The combination also significantly affects investment growth but does not
significantly affect the growth of consumption in the region The impact of fiscal
decentralization policy is more pronounced in the Eastern Region of Indonesia
(KTI) than in the Western Region of Indonesia (KBI) The simulation results also
indicate the dependence of local governments on transfer funds from the central
government Therefore local governments are also expected to actively seek non-
distortive sources of income
3) ldquo Dampak Transfer Pemerintah Pusat Terhadap Penurunan Ketimpangan
Pendapatan Di Indonesia rdquo as conducted by Adhitya Wardhana Bambang
Juanda Hermanto Siregar dan Kodrat Wibowo Sosiohumaniora Volume 15
no 2 Juli 2013 111 ndash 118
The method used in this study uses data panel regression with the period
2001-2010 For regional characteristics it is made as a dummy of rich regions
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
11
aim of reducing the inequality of financial capacity between the central and
regional governments
(2) General allocation funds
General allocation funds (DAU) are sourced from APBN revenues
allocated for the purpose of equitable inter-regional financial capacity to fund the
needs of the region in the context of the implementation of decentralization
By definition general allocation funds can be interpreted as follows (Sidik
2002)
bull One of the components of the balancing fund in the APBN whose
allocation is based on the concept of fiscal gap namely the difference
between fiscal needs and fiscal capacity
bull Instrument to overcome horizontal imbalance which is allocated with
the aim of equal distribution of financial capabilities between regions
where its use is determined entirely by the region
bull Equalization grant which functions to neutralize financial capacity
inequality with the existence of PAD tax sharing and revenue sharing
from the region
The DAU formula should be based on a simple formula easily understood
and calculated by the region if data is available The calculations made must be
logical and meet the rules of the theory and must be consistent for example
regions with large fiscal potential but small fiscal needs will get a relatively small
DAU allocation Conversely regions with small fiscal potential but large fiscal
needs will obtain a relatively large DAU DAU allocations for regions are
12
calculated using formulas fiscal gap and basic allocations fiscal gap is a financial
condition of a regional government that is related to its fiscal needs and fiscal
capacity Whereas the basic allocation is the need for regional funds to pay civil
servant salaries and infrastructure In general the basic formulations of DAU in an
area are as follows3
DAU = AD + CF
Where
DAU = General Allocation Fund
AD = Basic Allocation
CF = Fiscal Gap = Fiscal Needs - Fiscal Capacity
(3) Specific allocation funds
Specific allocation funds (DAK) are sourced from APBN revenues and
allocated to a particular region for the purpose of assisting in financing of special
activities which constitute the governmental affairs which are under the
jurisdiction of the region Development funded by DAK are directed at various
activities that are in the form of public infrastructure provision including
infrastructure in the fields of education health agriculture road bridges and
irrigation as well as procurement of other public infrastructure
Calculation of DAK allocations is based on several criteria
bull General criteria based on regional financial capacity
3 Brojonegoro B Pakpahan A T (2002)ldquoEvaluasi atas Alokasi DAU 2001 dan Permasalahannya Dana Alokasi Umum Konsep Hambatan dan Prospek di Era Otonomi Daerahrdquo LPEM-UI Jakarta
13
bull Specific criteria formulated based on legislation governing the
implementation of special autonomy and regional characteristics
bull Technical criteria prepared based on specific activity indicators that will
be funded from DAK Arrangements regarding technical criteria are
prepared by the relevant technical minister for example the education
sector was formulated by the education minister or health sector was
formulated by minister of health
12 Economic Growth and Income Disparity Among Regions
121 Economic Growth
Economic growth is defined as the expansion of the capacity to produce
goods and services of an economy or the expansion of the possibility of producing
of an economy The success of regional economic growth in order to improve the
welfare of the population can be assessed by the growth rate of gross domestic
product (GDP) The GDP is the output generated from inputs that are calculated in
prices in a base year or also known as the GDP at constant prices
The term growth can be interpreted differently by one person to another
one area with another one country with another country It is important for us to
be able to have the same definition in terms of growth Traditionally growth has
been a continuous increase in the gross domestic product or a countrys gross
domestic product For regions traditional growth meanings are focused on
increasing gross domestic product of a province district or city
14
The definition of economic growth according to several prominent
economists are as follows
(1) According to the views of the classical economists (Adam Smith David
Ricardo Thomas Robert Malthus and John Stuart Mill) as well as the
neoclassical economists (Robert Solow and Trevor Swan) there are basically
four factors affecting economic growth (1) total population (2) total stock of
capital goods (3) land area and natural wealth and (4) level of technology
used An economy is said to experience growth if the level of economic
activity is higher than what was achieved in the past4
(2) According to Kuznets economic growth is the increase in long-term capacity
of the countries concerned to provide various items to the citizen The
increase in capacity itself is determined or made possible by advances in
technology or adjustments institutional and ideologically against various
claims5
(3) M P Todaro (2000) defines economic growth as a steady process whereby
the production capacity of an economy increases over time to generate an
even greater level of national income The increase in capacity itself is
determined by technological institutional and ideological advances in the
various demands of the situation 6
4Mudrajad Kuncoro (2004) ldquoOtonomi dan Pembangunan Daerah Reformasi Perencanaan Strategi dan Peluangldquo Penerbit Erlangga Jakarta 5 Jhingan M L (2000) ldquoEkonomi Pembangunan dan Perencanaanrdquo edisi 3 Rajawali Press Jakarta 6 Todaro MP (2000) ldquoPembangunan Ekonomi di Dunia ke Tigardquo edisi 4 Penerbit Erlangga Jakarta
15
(4) According to Budiono (1999) economic growth is a process of long-term per
capita output growth that occurs when there is a tendency (per capita output
to rise) that comes from the internal process of the economy (the forces
within the economy itself) not from outside Or in other words self-
generating which means that the growth process itself produces a force or
momentum for the continuation of that growth in subsequent periods7
(5) Sadono Sukirno (2005) argues that economic growth is a change in the level
of economic activity prevailing from year to year So to estimate it units of
measurement must be held constant for comparison of national income from
year to year known as the rate of economic growth8
Furthermore Todaro (2000) stated there are three components in the
definition of economic growth namely
(1) The increase in output on an ongoing basis is a manifestation or embodiment
of what is known as economic growth while the ability to provide different
types of goods is itself a sign of economic maturity in a country
(2) The development of technology is the basis or a precondition for the
continuity of sustainable economic growth This is a condition that is
necessary but is not sufficient so in addition to the development or
advancement of technology other factors are needed
(3) In order to realize the growth potential inherent in the new technology we
need to hold a series of institutional adjustments attitudes and ideologies
7Budiono (1999) ldquoTeori Pertumbuhan Ekonomirdquo seri sinopsiedisi 1 bpfe Jogjakarta 8Sukirno S (2005) ldquoMakroekonomi teori pengantarrdquo Jakarta PT Raja Grafindo Persada
16
Technological innovation without social innovation means the potential is
there but without the complementary input then it cannot produce any results
122 Income disparity among regions
Aspects of fairness and equity can be reviewed on the basis of
interpersonal relationships but can also be reviewed by region Interpersonally it
indicates whether income among individuals or groups of community members is
fair and equitable
Meanwhile inter-regional interpersonally it shows equity that occurs
between regions both between provinces and between districtscities
(1) Distribution of income between income class (size distribution of income) or
relative income inequality
(2) Revenue sharing between urban and rural areas (urban-rural income
disparities)
(3) Regional income sharing (regional income disparities)
Thus in principle the distribution of national income reflects the uneven
and uneven distribution of a countrys development outcomes among its
inhabitants There are various criteria or benchmarks to assess the level of
distribution is as follows
(1) The Lorenz Curve
The Lorenz Curve illustrates the cumulative distribution of national
income among the layers of the population and is cumulative as well This curve
lies within a square that symbolizes the establishment of the cumulative
17
percentage of national income while the flat side represents the cumulative
percentage of the population
The Lorenz Curve shows the quantitative relationship between the
percentage of receipts (incomes of the population) and the percentage of total
revenue actually earned over a certain period The farther the Lorenz Curve
diverges from the straight diagonal line (perfect evenness) the more unequal
income distribution The Lorenz Curve is shown in the graph below
Figure 2 The Lorenz Curve
Source A practical example of a Lorenz curve by Mohammad Zulfan Tadjoeddin
(2003)
The Lorenz Curve is represented by the OBA line The income distribution
is said to be uniform if the curve of the Lorenz is a diagonal line of OA where
40 of income is received by 40 of the population and 60 of income is
received by 60 of the population So the further the Lorenz Curve is from the
Yi Income ()
Pi Population ()
18
diagonal line the more uneven the distribution of income This leads to the Gini
Index number ranging between zero and one9
(2) Gini Index
The Gini Index is a coefficient that ranges from zero to one explaining the
level of inequality of the distribution of national income The smaller (the closer
to zero) the coefficient the better or more even the distribution On the other
hand an increasingly large coefficient (approaching one) implies an increasingly
unbalanced distribution Gini Index figures can be assessed visually directly from
the Lorenz Curve the more curved the Lorenz Curve the larger the divided area
the greater the Gini Index implying an increasingly uneven income distribution
Some economists argue that the Gini Index is considered to have
weaknesses because it is less sensitive to changes in the low income group
Regardless of this the Gini Index that uses expenditure data as a proxy for income
data is considered to be still better than many ways of calculating existing income
distributions
9Tadjoeddin Mohammad Zulfan (2003)ldquo Aspiration to Inequality Regional Disparity and Centre-Regional Conflicts in Indonesia ldquoPaper disampaikan pada UNUWIDER Project Conference on Spatial Inequality in Asia United Nations University Centre Tokyo
19
Table 1 Gini Index In West Java Province from 2011 to 2016
Source BPS West Java Province 2011-2016
From the data above in Table 1 income inequality in West Java is
retailively high especially in urban areas This might be because in Bandung city
and Bogor city is a big city and this local government has not been able to
overcome the problem of income inequality so that income has not been perfectly
distributed
(3) Williamson Index
The existence of differences in natural resources between regions also
causes changes in distribution between regions The index commonly used in
CityRegency 2011 2012 2013 2014 2015 2016Bogor 041 042 038 039 042 04Sukabumi 03 035 03 032 036 033Cianjur 029 033 029 028 028 036Bandung 036 036 034 037 04 04Garut 03 034 031 033 031 035Tasikmalaya 037 033 032 029 03 03Ciamis 031 031 033 031 033 033Kuningan 033 036 033 037 034 033Cirebon 027 036 032 028 033 036Majalengka 031 039 032 034 035 036Sumedang 033 037 034 033 035 037Indramayu 028 029 028 028 029 026Subang 028 033 033 031 033 035Purwakarta 034 039 039 037 035 036Karawang 033 034 032 03 034 034Bekasi 033 036 033 033 035 031Bandung Barat 029 037 031 033 034 036Kota Bogor 039 045 041 036 047 043Kota Sukabumi 034 04 034 036 043 042Kota Bandung 041 042 042 048 044 044Kota Cirebon 038 041 038 04 041 04Kota Bekasi 037 037 035 033 041 039Kota Depok 036 04 039 037 04 04Kota Cimahi 034 037 04 039 04 042Kota Tasikmalaya 037 04 039 037 049 042Kota Banjar 037 039 034 032 042 037
Gini Ratio In West Java Province
20
distribution between these regions is the Williamson Index The formula used in
the Williamson Index is as follows
( )2
i iY Y f N
WY
minus times =sum
Where
W = Williamson Index
Y i = GRDP Capita in the city district i
Y = GRDP Capita West Java Province
fi = city district population i
N = population in West Java Province
The Williamson index obtained is located between 0 (zero) to 1 (one)
bull If the Williamson index approaches 0 then the inequality of income
distribution between regencies cities in West Java Province is low or
economic growth between regions is evenly distributed
bull If the Williamson index approaches 1 the inequality of income distribution
between regencies cities in West Java Province is high or economic growth
between regions is uneven
21
13 Empirical Review of Research on Fiscal Decentralization
131 Research on Fiscal Decentralization in Other Countries
ldquoFiscal Decentralization Contributes to Economic Growth Evidenc efrom State-
Level Cross-Section Data for The United Statesrdquo as conducted by Nobuo akai and
Masayo Sakata 2002
This study shows new evidence that fiscal decentralization effects
economic growth It used a cross-sectional method with 50 observations taking
the average 1992 to 1994 for time series and 50 states in the United States
The empirical models used to look at economic growth are
iiii zationDecentraliGSP εβαα +Χ++=∆ 10 i=1 50 (21)
Where i is the state ΔGSP I gross state production from 1992 to 1996
decentralizations show the average annual growth of the fiscal decentralization
indicator in state i and Xi is the control variable
Empirical research above shows that based on existing data fiscal
decentralization has contributed to economic growth The paper finds that fiscal
decentralization plays a key role in economic growth in the US As expected the
results also indicate that there are others affecting economic growth
132 Research on Fiscal Decentralization In Indonesia
1) Fiscal Decentralization Itrsquos Impact on Cities Growth as conducted by B
Raksaka Mahi 2001
This study used a simultaneous econometric model two stage least square
(TSLS) and regional econometric macros for (1) Evaluating intergovernmental
transfers and their impact on municipal government revenues and (2) Elaborating
22
on the implications of the transfer from government to city growth and disparity
between regions in Indonesia
The variable fiscal decentralization is measured by Revenue sharing
fund sharing funds DAU and DAK The study concluded that (a) The policy of
fiscal decentralization in Indonesia is very important for policy making in the
regions almost all standard instruments for fiscal decentralization are used by the
government (b) DBHSDA policies not only have the potential to reduce growth
rates but also increase disparities between regions (c) DBHPPh will reduce
growth (d) DAU is more promising for growth than others although the DAU
policy does not support equity among regions and (e) The combination of
existing policies in Indonesia promises growth but still cannot reduce the
occurrence of disparities between regions
2) ldquoDampak Desentralisasi Fiskal di Indonesia Terhadap Pertumbuhan
Ekonomi dan Disparitas Antar Daerah Analisa Model Makro Ekonometrik
Simultan as conducted by Teguh Dartanto 2002
This study used a simultaneous macroeconometric regional model with
two stage least square (TSLS) The Simultaneous Macro Econometric Model is
made for analyzing the fiscal decentralization impact to economic growth and
region disparity The policy simulation in this model used transfer fund from
central government such as Tax Revenue Sharing Natural Resource Revenue
Sharing and General Allocation Fund The simulation is carried out to see the
optimality of various possible existing policies The optimality is measured by
evaluating the high rate of economic growth and low disparity
23
The results of the study indicate that revenue sharing funds from natural
resources (DBHSDA) land and building tax (PBB) tax on Acquisition of land
and building (DBPHTB) and income tax (PPH) generate negative economic
growth rates General allocation funds (DAU) as an inter-regional fiscal spattering
factor a the most dominant factor in encouraging regional economic growth and
have a very big role in encouraging regional economic growth as well as being an
economic growth regulator among regions These conditions indicate a very large
dependence on the central government However when combined with the
revenue-sharing policy and general allocation funds they will result in positive
(although relatively small) growth and can reduce disparities between regions
The combination also significantly affects investment growth but does not
significantly affect the growth of consumption in the region The impact of fiscal
decentralization policy is more pronounced in the Eastern Region of Indonesia
(KTI) than in the Western Region of Indonesia (KBI) The simulation results also
indicate the dependence of local governments on transfer funds from the central
government Therefore local governments are also expected to actively seek non-
distortive sources of income
3) ldquo Dampak Transfer Pemerintah Pusat Terhadap Penurunan Ketimpangan
Pendapatan Di Indonesia rdquo as conducted by Adhitya Wardhana Bambang
Juanda Hermanto Siregar dan Kodrat Wibowo Sosiohumaniora Volume 15
no 2 Juli 2013 111 ndash 118
The method used in this study uses data panel regression with the period
2001-2010 For regional characteristics it is made as a dummy of rich regions
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
12
calculated using formulas fiscal gap and basic allocations fiscal gap is a financial
condition of a regional government that is related to its fiscal needs and fiscal
capacity Whereas the basic allocation is the need for regional funds to pay civil
servant salaries and infrastructure In general the basic formulations of DAU in an
area are as follows3
DAU = AD + CF
Where
DAU = General Allocation Fund
AD = Basic Allocation
CF = Fiscal Gap = Fiscal Needs - Fiscal Capacity
(3) Specific allocation funds
Specific allocation funds (DAK) are sourced from APBN revenues and
allocated to a particular region for the purpose of assisting in financing of special
activities which constitute the governmental affairs which are under the
jurisdiction of the region Development funded by DAK are directed at various
activities that are in the form of public infrastructure provision including
infrastructure in the fields of education health agriculture road bridges and
irrigation as well as procurement of other public infrastructure
Calculation of DAK allocations is based on several criteria
bull General criteria based on regional financial capacity
3 Brojonegoro B Pakpahan A T (2002)ldquoEvaluasi atas Alokasi DAU 2001 dan Permasalahannya Dana Alokasi Umum Konsep Hambatan dan Prospek di Era Otonomi Daerahrdquo LPEM-UI Jakarta
13
bull Specific criteria formulated based on legislation governing the
implementation of special autonomy and regional characteristics
bull Technical criteria prepared based on specific activity indicators that will
be funded from DAK Arrangements regarding technical criteria are
prepared by the relevant technical minister for example the education
sector was formulated by the education minister or health sector was
formulated by minister of health
12 Economic Growth and Income Disparity Among Regions
121 Economic Growth
Economic growth is defined as the expansion of the capacity to produce
goods and services of an economy or the expansion of the possibility of producing
of an economy The success of regional economic growth in order to improve the
welfare of the population can be assessed by the growth rate of gross domestic
product (GDP) The GDP is the output generated from inputs that are calculated in
prices in a base year or also known as the GDP at constant prices
The term growth can be interpreted differently by one person to another
one area with another one country with another country It is important for us to
be able to have the same definition in terms of growth Traditionally growth has
been a continuous increase in the gross domestic product or a countrys gross
domestic product For regions traditional growth meanings are focused on
increasing gross domestic product of a province district or city
14
The definition of economic growth according to several prominent
economists are as follows
(1) According to the views of the classical economists (Adam Smith David
Ricardo Thomas Robert Malthus and John Stuart Mill) as well as the
neoclassical economists (Robert Solow and Trevor Swan) there are basically
four factors affecting economic growth (1) total population (2) total stock of
capital goods (3) land area and natural wealth and (4) level of technology
used An economy is said to experience growth if the level of economic
activity is higher than what was achieved in the past4
(2) According to Kuznets economic growth is the increase in long-term capacity
of the countries concerned to provide various items to the citizen The
increase in capacity itself is determined or made possible by advances in
technology or adjustments institutional and ideologically against various
claims5
(3) M P Todaro (2000) defines economic growth as a steady process whereby
the production capacity of an economy increases over time to generate an
even greater level of national income The increase in capacity itself is
determined by technological institutional and ideological advances in the
various demands of the situation 6
4Mudrajad Kuncoro (2004) ldquoOtonomi dan Pembangunan Daerah Reformasi Perencanaan Strategi dan Peluangldquo Penerbit Erlangga Jakarta 5 Jhingan M L (2000) ldquoEkonomi Pembangunan dan Perencanaanrdquo edisi 3 Rajawali Press Jakarta 6 Todaro MP (2000) ldquoPembangunan Ekonomi di Dunia ke Tigardquo edisi 4 Penerbit Erlangga Jakarta
15
(4) According to Budiono (1999) economic growth is a process of long-term per
capita output growth that occurs when there is a tendency (per capita output
to rise) that comes from the internal process of the economy (the forces
within the economy itself) not from outside Or in other words self-
generating which means that the growth process itself produces a force or
momentum for the continuation of that growth in subsequent periods7
(5) Sadono Sukirno (2005) argues that economic growth is a change in the level
of economic activity prevailing from year to year So to estimate it units of
measurement must be held constant for comparison of national income from
year to year known as the rate of economic growth8
Furthermore Todaro (2000) stated there are three components in the
definition of economic growth namely
(1) The increase in output on an ongoing basis is a manifestation or embodiment
of what is known as economic growth while the ability to provide different
types of goods is itself a sign of economic maturity in a country
(2) The development of technology is the basis or a precondition for the
continuity of sustainable economic growth This is a condition that is
necessary but is not sufficient so in addition to the development or
advancement of technology other factors are needed
(3) In order to realize the growth potential inherent in the new technology we
need to hold a series of institutional adjustments attitudes and ideologies
7Budiono (1999) ldquoTeori Pertumbuhan Ekonomirdquo seri sinopsiedisi 1 bpfe Jogjakarta 8Sukirno S (2005) ldquoMakroekonomi teori pengantarrdquo Jakarta PT Raja Grafindo Persada
16
Technological innovation without social innovation means the potential is
there but without the complementary input then it cannot produce any results
122 Income disparity among regions
Aspects of fairness and equity can be reviewed on the basis of
interpersonal relationships but can also be reviewed by region Interpersonally it
indicates whether income among individuals or groups of community members is
fair and equitable
Meanwhile inter-regional interpersonally it shows equity that occurs
between regions both between provinces and between districtscities
(1) Distribution of income between income class (size distribution of income) or
relative income inequality
(2) Revenue sharing between urban and rural areas (urban-rural income
disparities)
(3) Regional income sharing (regional income disparities)
Thus in principle the distribution of national income reflects the uneven
and uneven distribution of a countrys development outcomes among its
inhabitants There are various criteria or benchmarks to assess the level of
distribution is as follows
(1) The Lorenz Curve
The Lorenz Curve illustrates the cumulative distribution of national
income among the layers of the population and is cumulative as well This curve
lies within a square that symbolizes the establishment of the cumulative
17
percentage of national income while the flat side represents the cumulative
percentage of the population
The Lorenz Curve shows the quantitative relationship between the
percentage of receipts (incomes of the population) and the percentage of total
revenue actually earned over a certain period The farther the Lorenz Curve
diverges from the straight diagonal line (perfect evenness) the more unequal
income distribution The Lorenz Curve is shown in the graph below
Figure 2 The Lorenz Curve
Source A practical example of a Lorenz curve by Mohammad Zulfan Tadjoeddin
(2003)
The Lorenz Curve is represented by the OBA line The income distribution
is said to be uniform if the curve of the Lorenz is a diagonal line of OA where
40 of income is received by 40 of the population and 60 of income is
received by 60 of the population So the further the Lorenz Curve is from the
Yi Income ()
Pi Population ()
18
diagonal line the more uneven the distribution of income This leads to the Gini
Index number ranging between zero and one9
(2) Gini Index
The Gini Index is a coefficient that ranges from zero to one explaining the
level of inequality of the distribution of national income The smaller (the closer
to zero) the coefficient the better or more even the distribution On the other
hand an increasingly large coefficient (approaching one) implies an increasingly
unbalanced distribution Gini Index figures can be assessed visually directly from
the Lorenz Curve the more curved the Lorenz Curve the larger the divided area
the greater the Gini Index implying an increasingly uneven income distribution
Some economists argue that the Gini Index is considered to have
weaknesses because it is less sensitive to changes in the low income group
Regardless of this the Gini Index that uses expenditure data as a proxy for income
data is considered to be still better than many ways of calculating existing income
distributions
9Tadjoeddin Mohammad Zulfan (2003)ldquo Aspiration to Inequality Regional Disparity and Centre-Regional Conflicts in Indonesia ldquoPaper disampaikan pada UNUWIDER Project Conference on Spatial Inequality in Asia United Nations University Centre Tokyo
19
Table 1 Gini Index In West Java Province from 2011 to 2016
Source BPS West Java Province 2011-2016
From the data above in Table 1 income inequality in West Java is
retailively high especially in urban areas This might be because in Bandung city
and Bogor city is a big city and this local government has not been able to
overcome the problem of income inequality so that income has not been perfectly
distributed
(3) Williamson Index
The existence of differences in natural resources between regions also
causes changes in distribution between regions The index commonly used in
CityRegency 2011 2012 2013 2014 2015 2016Bogor 041 042 038 039 042 04Sukabumi 03 035 03 032 036 033Cianjur 029 033 029 028 028 036Bandung 036 036 034 037 04 04Garut 03 034 031 033 031 035Tasikmalaya 037 033 032 029 03 03Ciamis 031 031 033 031 033 033Kuningan 033 036 033 037 034 033Cirebon 027 036 032 028 033 036Majalengka 031 039 032 034 035 036Sumedang 033 037 034 033 035 037Indramayu 028 029 028 028 029 026Subang 028 033 033 031 033 035Purwakarta 034 039 039 037 035 036Karawang 033 034 032 03 034 034Bekasi 033 036 033 033 035 031Bandung Barat 029 037 031 033 034 036Kota Bogor 039 045 041 036 047 043Kota Sukabumi 034 04 034 036 043 042Kota Bandung 041 042 042 048 044 044Kota Cirebon 038 041 038 04 041 04Kota Bekasi 037 037 035 033 041 039Kota Depok 036 04 039 037 04 04Kota Cimahi 034 037 04 039 04 042Kota Tasikmalaya 037 04 039 037 049 042Kota Banjar 037 039 034 032 042 037
Gini Ratio In West Java Province
20
distribution between these regions is the Williamson Index The formula used in
the Williamson Index is as follows
( )2
i iY Y f N
WY
minus times =sum
Where
W = Williamson Index
Y i = GRDP Capita in the city district i
Y = GRDP Capita West Java Province
fi = city district population i
N = population in West Java Province
The Williamson index obtained is located between 0 (zero) to 1 (one)
bull If the Williamson index approaches 0 then the inequality of income
distribution between regencies cities in West Java Province is low or
economic growth between regions is evenly distributed
bull If the Williamson index approaches 1 the inequality of income distribution
between regencies cities in West Java Province is high or economic growth
between regions is uneven
21
13 Empirical Review of Research on Fiscal Decentralization
131 Research on Fiscal Decentralization in Other Countries
ldquoFiscal Decentralization Contributes to Economic Growth Evidenc efrom State-
Level Cross-Section Data for The United Statesrdquo as conducted by Nobuo akai and
Masayo Sakata 2002
This study shows new evidence that fiscal decentralization effects
economic growth It used a cross-sectional method with 50 observations taking
the average 1992 to 1994 for time series and 50 states in the United States
The empirical models used to look at economic growth are
iiii zationDecentraliGSP εβαα +Χ++=∆ 10 i=1 50 (21)
Where i is the state ΔGSP I gross state production from 1992 to 1996
decentralizations show the average annual growth of the fiscal decentralization
indicator in state i and Xi is the control variable
Empirical research above shows that based on existing data fiscal
decentralization has contributed to economic growth The paper finds that fiscal
decentralization plays a key role in economic growth in the US As expected the
results also indicate that there are others affecting economic growth
132 Research on Fiscal Decentralization In Indonesia
1) Fiscal Decentralization Itrsquos Impact on Cities Growth as conducted by B
Raksaka Mahi 2001
This study used a simultaneous econometric model two stage least square
(TSLS) and regional econometric macros for (1) Evaluating intergovernmental
transfers and their impact on municipal government revenues and (2) Elaborating
22
on the implications of the transfer from government to city growth and disparity
between regions in Indonesia
The variable fiscal decentralization is measured by Revenue sharing
fund sharing funds DAU and DAK The study concluded that (a) The policy of
fiscal decentralization in Indonesia is very important for policy making in the
regions almost all standard instruments for fiscal decentralization are used by the
government (b) DBHSDA policies not only have the potential to reduce growth
rates but also increase disparities between regions (c) DBHPPh will reduce
growth (d) DAU is more promising for growth than others although the DAU
policy does not support equity among regions and (e) The combination of
existing policies in Indonesia promises growth but still cannot reduce the
occurrence of disparities between regions
2) ldquoDampak Desentralisasi Fiskal di Indonesia Terhadap Pertumbuhan
Ekonomi dan Disparitas Antar Daerah Analisa Model Makro Ekonometrik
Simultan as conducted by Teguh Dartanto 2002
This study used a simultaneous macroeconometric regional model with
two stage least square (TSLS) The Simultaneous Macro Econometric Model is
made for analyzing the fiscal decentralization impact to economic growth and
region disparity The policy simulation in this model used transfer fund from
central government such as Tax Revenue Sharing Natural Resource Revenue
Sharing and General Allocation Fund The simulation is carried out to see the
optimality of various possible existing policies The optimality is measured by
evaluating the high rate of economic growth and low disparity
23
The results of the study indicate that revenue sharing funds from natural
resources (DBHSDA) land and building tax (PBB) tax on Acquisition of land
and building (DBPHTB) and income tax (PPH) generate negative economic
growth rates General allocation funds (DAU) as an inter-regional fiscal spattering
factor a the most dominant factor in encouraging regional economic growth and
have a very big role in encouraging regional economic growth as well as being an
economic growth regulator among regions These conditions indicate a very large
dependence on the central government However when combined with the
revenue-sharing policy and general allocation funds they will result in positive
(although relatively small) growth and can reduce disparities between regions
The combination also significantly affects investment growth but does not
significantly affect the growth of consumption in the region The impact of fiscal
decentralization policy is more pronounced in the Eastern Region of Indonesia
(KTI) than in the Western Region of Indonesia (KBI) The simulation results also
indicate the dependence of local governments on transfer funds from the central
government Therefore local governments are also expected to actively seek non-
distortive sources of income
3) ldquo Dampak Transfer Pemerintah Pusat Terhadap Penurunan Ketimpangan
Pendapatan Di Indonesia rdquo as conducted by Adhitya Wardhana Bambang
Juanda Hermanto Siregar dan Kodrat Wibowo Sosiohumaniora Volume 15
no 2 Juli 2013 111 ndash 118
The method used in this study uses data panel regression with the period
2001-2010 For regional characteristics it is made as a dummy of rich regions
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
13
bull Specific criteria formulated based on legislation governing the
implementation of special autonomy and regional characteristics
bull Technical criteria prepared based on specific activity indicators that will
be funded from DAK Arrangements regarding technical criteria are
prepared by the relevant technical minister for example the education
sector was formulated by the education minister or health sector was
formulated by minister of health
12 Economic Growth and Income Disparity Among Regions
121 Economic Growth
Economic growth is defined as the expansion of the capacity to produce
goods and services of an economy or the expansion of the possibility of producing
of an economy The success of regional economic growth in order to improve the
welfare of the population can be assessed by the growth rate of gross domestic
product (GDP) The GDP is the output generated from inputs that are calculated in
prices in a base year or also known as the GDP at constant prices
The term growth can be interpreted differently by one person to another
one area with another one country with another country It is important for us to
be able to have the same definition in terms of growth Traditionally growth has
been a continuous increase in the gross domestic product or a countrys gross
domestic product For regions traditional growth meanings are focused on
increasing gross domestic product of a province district or city
14
The definition of economic growth according to several prominent
economists are as follows
(1) According to the views of the classical economists (Adam Smith David
Ricardo Thomas Robert Malthus and John Stuart Mill) as well as the
neoclassical economists (Robert Solow and Trevor Swan) there are basically
four factors affecting economic growth (1) total population (2) total stock of
capital goods (3) land area and natural wealth and (4) level of technology
used An economy is said to experience growth if the level of economic
activity is higher than what was achieved in the past4
(2) According to Kuznets economic growth is the increase in long-term capacity
of the countries concerned to provide various items to the citizen The
increase in capacity itself is determined or made possible by advances in
technology or adjustments institutional and ideologically against various
claims5
(3) M P Todaro (2000) defines economic growth as a steady process whereby
the production capacity of an economy increases over time to generate an
even greater level of national income The increase in capacity itself is
determined by technological institutional and ideological advances in the
various demands of the situation 6
4Mudrajad Kuncoro (2004) ldquoOtonomi dan Pembangunan Daerah Reformasi Perencanaan Strategi dan Peluangldquo Penerbit Erlangga Jakarta 5 Jhingan M L (2000) ldquoEkonomi Pembangunan dan Perencanaanrdquo edisi 3 Rajawali Press Jakarta 6 Todaro MP (2000) ldquoPembangunan Ekonomi di Dunia ke Tigardquo edisi 4 Penerbit Erlangga Jakarta
15
(4) According to Budiono (1999) economic growth is a process of long-term per
capita output growth that occurs when there is a tendency (per capita output
to rise) that comes from the internal process of the economy (the forces
within the economy itself) not from outside Or in other words self-
generating which means that the growth process itself produces a force or
momentum for the continuation of that growth in subsequent periods7
(5) Sadono Sukirno (2005) argues that economic growth is a change in the level
of economic activity prevailing from year to year So to estimate it units of
measurement must be held constant for comparison of national income from
year to year known as the rate of economic growth8
Furthermore Todaro (2000) stated there are three components in the
definition of economic growth namely
(1) The increase in output on an ongoing basis is a manifestation or embodiment
of what is known as economic growth while the ability to provide different
types of goods is itself a sign of economic maturity in a country
(2) The development of technology is the basis or a precondition for the
continuity of sustainable economic growth This is a condition that is
necessary but is not sufficient so in addition to the development or
advancement of technology other factors are needed
(3) In order to realize the growth potential inherent in the new technology we
need to hold a series of institutional adjustments attitudes and ideologies
7Budiono (1999) ldquoTeori Pertumbuhan Ekonomirdquo seri sinopsiedisi 1 bpfe Jogjakarta 8Sukirno S (2005) ldquoMakroekonomi teori pengantarrdquo Jakarta PT Raja Grafindo Persada
16
Technological innovation without social innovation means the potential is
there but without the complementary input then it cannot produce any results
122 Income disparity among regions
Aspects of fairness and equity can be reviewed on the basis of
interpersonal relationships but can also be reviewed by region Interpersonally it
indicates whether income among individuals or groups of community members is
fair and equitable
Meanwhile inter-regional interpersonally it shows equity that occurs
between regions both between provinces and between districtscities
(1) Distribution of income between income class (size distribution of income) or
relative income inequality
(2) Revenue sharing between urban and rural areas (urban-rural income
disparities)
(3) Regional income sharing (regional income disparities)
Thus in principle the distribution of national income reflects the uneven
and uneven distribution of a countrys development outcomes among its
inhabitants There are various criteria or benchmarks to assess the level of
distribution is as follows
(1) The Lorenz Curve
The Lorenz Curve illustrates the cumulative distribution of national
income among the layers of the population and is cumulative as well This curve
lies within a square that symbolizes the establishment of the cumulative
17
percentage of national income while the flat side represents the cumulative
percentage of the population
The Lorenz Curve shows the quantitative relationship between the
percentage of receipts (incomes of the population) and the percentage of total
revenue actually earned over a certain period The farther the Lorenz Curve
diverges from the straight diagonal line (perfect evenness) the more unequal
income distribution The Lorenz Curve is shown in the graph below
Figure 2 The Lorenz Curve
Source A practical example of a Lorenz curve by Mohammad Zulfan Tadjoeddin
(2003)
The Lorenz Curve is represented by the OBA line The income distribution
is said to be uniform if the curve of the Lorenz is a diagonal line of OA where
40 of income is received by 40 of the population and 60 of income is
received by 60 of the population So the further the Lorenz Curve is from the
Yi Income ()
Pi Population ()
18
diagonal line the more uneven the distribution of income This leads to the Gini
Index number ranging between zero and one9
(2) Gini Index
The Gini Index is a coefficient that ranges from zero to one explaining the
level of inequality of the distribution of national income The smaller (the closer
to zero) the coefficient the better or more even the distribution On the other
hand an increasingly large coefficient (approaching one) implies an increasingly
unbalanced distribution Gini Index figures can be assessed visually directly from
the Lorenz Curve the more curved the Lorenz Curve the larger the divided area
the greater the Gini Index implying an increasingly uneven income distribution
Some economists argue that the Gini Index is considered to have
weaknesses because it is less sensitive to changes in the low income group
Regardless of this the Gini Index that uses expenditure data as a proxy for income
data is considered to be still better than many ways of calculating existing income
distributions
9Tadjoeddin Mohammad Zulfan (2003)ldquo Aspiration to Inequality Regional Disparity and Centre-Regional Conflicts in Indonesia ldquoPaper disampaikan pada UNUWIDER Project Conference on Spatial Inequality in Asia United Nations University Centre Tokyo
19
Table 1 Gini Index In West Java Province from 2011 to 2016
Source BPS West Java Province 2011-2016
From the data above in Table 1 income inequality in West Java is
retailively high especially in urban areas This might be because in Bandung city
and Bogor city is a big city and this local government has not been able to
overcome the problem of income inequality so that income has not been perfectly
distributed
(3) Williamson Index
The existence of differences in natural resources between regions also
causes changes in distribution between regions The index commonly used in
CityRegency 2011 2012 2013 2014 2015 2016Bogor 041 042 038 039 042 04Sukabumi 03 035 03 032 036 033Cianjur 029 033 029 028 028 036Bandung 036 036 034 037 04 04Garut 03 034 031 033 031 035Tasikmalaya 037 033 032 029 03 03Ciamis 031 031 033 031 033 033Kuningan 033 036 033 037 034 033Cirebon 027 036 032 028 033 036Majalengka 031 039 032 034 035 036Sumedang 033 037 034 033 035 037Indramayu 028 029 028 028 029 026Subang 028 033 033 031 033 035Purwakarta 034 039 039 037 035 036Karawang 033 034 032 03 034 034Bekasi 033 036 033 033 035 031Bandung Barat 029 037 031 033 034 036Kota Bogor 039 045 041 036 047 043Kota Sukabumi 034 04 034 036 043 042Kota Bandung 041 042 042 048 044 044Kota Cirebon 038 041 038 04 041 04Kota Bekasi 037 037 035 033 041 039Kota Depok 036 04 039 037 04 04Kota Cimahi 034 037 04 039 04 042Kota Tasikmalaya 037 04 039 037 049 042Kota Banjar 037 039 034 032 042 037
Gini Ratio In West Java Province
20
distribution between these regions is the Williamson Index The formula used in
the Williamson Index is as follows
( )2
i iY Y f N
WY
minus times =sum
Where
W = Williamson Index
Y i = GRDP Capita in the city district i
Y = GRDP Capita West Java Province
fi = city district population i
N = population in West Java Province
The Williamson index obtained is located between 0 (zero) to 1 (one)
bull If the Williamson index approaches 0 then the inequality of income
distribution between regencies cities in West Java Province is low or
economic growth between regions is evenly distributed
bull If the Williamson index approaches 1 the inequality of income distribution
between regencies cities in West Java Province is high or economic growth
between regions is uneven
21
13 Empirical Review of Research on Fiscal Decentralization
131 Research on Fiscal Decentralization in Other Countries
ldquoFiscal Decentralization Contributes to Economic Growth Evidenc efrom State-
Level Cross-Section Data for The United Statesrdquo as conducted by Nobuo akai and
Masayo Sakata 2002
This study shows new evidence that fiscal decentralization effects
economic growth It used a cross-sectional method with 50 observations taking
the average 1992 to 1994 for time series and 50 states in the United States
The empirical models used to look at economic growth are
iiii zationDecentraliGSP εβαα +Χ++=∆ 10 i=1 50 (21)
Where i is the state ΔGSP I gross state production from 1992 to 1996
decentralizations show the average annual growth of the fiscal decentralization
indicator in state i and Xi is the control variable
Empirical research above shows that based on existing data fiscal
decentralization has contributed to economic growth The paper finds that fiscal
decentralization plays a key role in economic growth in the US As expected the
results also indicate that there are others affecting economic growth
132 Research on Fiscal Decentralization In Indonesia
1) Fiscal Decentralization Itrsquos Impact on Cities Growth as conducted by B
Raksaka Mahi 2001
This study used a simultaneous econometric model two stage least square
(TSLS) and regional econometric macros for (1) Evaluating intergovernmental
transfers and their impact on municipal government revenues and (2) Elaborating
22
on the implications of the transfer from government to city growth and disparity
between regions in Indonesia
The variable fiscal decentralization is measured by Revenue sharing
fund sharing funds DAU and DAK The study concluded that (a) The policy of
fiscal decentralization in Indonesia is very important for policy making in the
regions almost all standard instruments for fiscal decentralization are used by the
government (b) DBHSDA policies not only have the potential to reduce growth
rates but also increase disparities between regions (c) DBHPPh will reduce
growth (d) DAU is more promising for growth than others although the DAU
policy does not support equity among regions and (e) The combination of
existing policies in Indonesia promises growth but still cannot reduce the
occurrence of disparities between regions
2) ldquoDampak Desentralisasi Fiskal di Indonesia Terhadap Pertumbuhan
Ekonomi dan Disparitas Antar Daerah Analisa Model Makro Ekonometrik
Simultan as conducted by Teguh Dartanto 2002
This study used a simultaneous macroeconometric regional model with
two stage least square (TSLS) The Simultaneous Macro Econometric Model is
made for analyzing the fiscal decentralization impact to economic growth and
region disparity The policy simulation in this model used transfer fund from
central government such as Tax Revenue Sharing Natural Resource Revenue
Sharing and General Allocation Fund The simulation is carried out to see the
optimality of various possible existing policies The optimality is measured by
evaluating the high rate of economic growth and low disparity
23
The results of the study indicate that revenue sharing funds from natural
resources (DBHSDA) land and building tax (PBB) tax on Acquisition of land
and building (DBPHTB) and income tax (PPH) generate negative economic
growth rates General allocation funds (DAU) as an inter-regional fiscal spattering
factor a the most dominant factor in encouraging regional economic growth and
have a very big role in encouraging regional economic growth as well as being an
economic growth regulator among regions These conditions indicate a very large
dependence on the central government However when combined with the
revenue-sharing policy and general allocation funds they will result in positive
(although relatively small) growth and can reduce disparities between regions
The combination also significantly affects investment growth but does not
significantly affect the growth of consumption in the region The impact of fiscal
decentralization policy is more pronounced in the Eastern Region of Indonesia
(KTI) than in the Western Region of Indonesia (KBI) The simulation results also
indicate the dependence of local governments on transfer funds from the central
government Therefore local governments are also expected to actively seek non-
distortive sources of income
3) ldquo Dampak Transfer Pemerintah Pusat Terhadap Penurunan Ketimpangan
Pendapatan Di Indonesia rdquo as conducted by Adhitya Wardhana Bambang
Juanda Hermanto Siregar dan Kodrat Wibowo Sosiohumaniora Volume 15
no 2 Juli 2013 111 ndash 118
The method used in this study uses data panel regression with the period
2001-2010 For regional characteristics it is made as a dummy of rich regions
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
14
The definition of economic growth according to several prominent
economists are as follows
(1) According to the views of the classical economists (Adam Smith David
Ricardo Thomas Robert Malthus and John Stuart Mill) as well as the
neoclassical economists (Robert Solow and Trevor Swan) there are basically
four factors affecting economic growth (1) total population (2) total stock of
capital goods (3) land area and natural wealth and (4) level of technology
used An economy is said to experience growth if the level of economic
activity is higher than what was achieved in the past4
(2) According to Kuznets economic growth is the increase in long-term capacity
of the countries concerned to provide various items to the citizen The
increase in capacity itself is determined or made possible by advances in
technology or adjustments institutional and ideologically against various
claims5
(3) M P Todaro (2000) defines economic growth as a steady process whereby
the production capacity of an economy increases over time to generate an
even greater level of national income The increase in capacity itself is
determined by technological institutional and ideological advances in the
various demands of the situation 6
4Mudrajad Kuncoro (2004) ldquoOtonomi dan Pembangunan Daerah Reformasi Perencanaan Strategi dan Peluangldquo Penerbit Erlangga Jakarta 5 Jhingan M L (2000) ldquoEkonomi Pembangunan dan Perencanaanrdquo edisi 3 Rajawali Press Jakarta 6 Todaro MP (2000) ldquoPembangunan Ekonomi di Dunia ke Tigardquo edisi 4 Penerbit Erlangga Jakarta
15
(4) According to Budiono (1999) economic growth is a process of long-term per
capita output growth that occurs when there is a tendency (per capita output
to rise) that comes from the internal process of the economy (the forces
within the economy itself) not from outside Or in other words self-
generating which means that the growth process itself produces a force or
momentum for the continuation of that growth in subsequent periods7
(5) Sadono Sukirno (2005) argues that economic growth is a change in the level
of economic activity prevailing from year to year So to estimate it units of
measurement must be held constant for comparison of national income from
year to year known as the rate of economic growth8
Furthermore Todaro (2000) stated there are three components in the
definition of economic growth namely
(1) The increase in output on an ongoing basis is a manifestation or embodiment
of what is known as economic growth while the ability to provide different
types of goods is itself a sign of economic maturity in a country
(2) The development of technology is the basis or a precondition for the
continuity of sustainable economic growth This is a condition that is
necessary but is not sufficient so in addition to the development or
advancement of technology other factors are needed
(3) In order to realize the growth potential inherent in the new technology we
need to hold a series of institutional adjustments attitudes and ideologies
7Budiono (1999) ldquoTeori Pertumbuhan Ekonomirdquo seri sinopsiedisi 1 bpfe Jogjakarta 8Sukirno S (2005) ldquoMakroekonomi teori pengantarrdquo Jakarta PT Raja Grafindo Persada
16
Technological innovation without social innovation means the potential is
there but without the complementary input then it cannot produce any results
122 Income disparity among regions
Aspects of fairness and equity can be reviewed on the basis of
interpersonal relationships but can also be reviewed by region Interpersonally it
indicates whether income among individuals or groups of community members is
fair and equitable
Meanwhile inter-regional interpersonally it shows equity that occurs
between regions both between provinces and between districtscities
(1) Distribution of income between income class (size distribution of income) or
relative income inequality
(2) Revenue sharing between urban and rural areas (urban-rural income
disparities)
(3) Regional income sharing (regional income disparities)
Thus in principle the distribution of national income reflects the uneven
and uneven distribution of a countrys development outcomes among its
inhabitants There are various criteria or benchmarks to assess the level of
distribution is as follows
(1) The Lorenz Curve
The Lorenz Curve illustrates the cumulative distribution of national
income among the layers of the population and is cumulative as well This curve
lies within a square that symbolizes the establishment of the cumulative
17
percentage of national income while the flat side represents the cumulative
percentage of the population
The Lorenz Curve shows the quantitative relationship between the
percentage of receipts (incomes of the population) and the percentage of total
revenue actually earned over a certain period The farther the Lorenz Curve
diverges from the straight diagonal line (perfect evenness) the more unequal
income distribution The Lorenz Curve is shown in the graph below
Figure 2 The Lorenz Curve
Source A practical example of a Lorenz curve by Mohammad Zulfan Tadjoeddin
(2003)
The Lorenz Curve is represented by the OBA line The income distribution
is said to be uniform if the curve of the Lorenz is a diagonal line of OA where
40 of income is received by 40 of the population and 60 of income is
received by 60 of the population So the further the Lorenz Curve is from the
Yi Income ()
Pi Population ()
18
diagonal line the more uneven the distribution of income This leads to the Gini
Index number ranging between zero and one9
(2) Gini Index
The Gini Index is a coefficient that ranges from zero to one explaining the
level of inequality of the distribution of national income The smaller (the closer
to zero) the coefficient the better or more even the distribution On the other
hand an increasingly large coefficient (approaching one) implies an increasingly
unbalanced distribution Gini Index figures can be assessed visually directly from
the Lorenz Curve the more curved the Lorenz Curve the larger the divided area
the greater the Gini Index implying an increasingly uneven income distribution
Some economists argue that the Gini Index is considered to have
weaknesses because it is less sensitive to changes in the low income group
Regardless of this the Gini Index that uses expenditure data as a proxy for income
data is considered to be still better than many ways of calculating existing income
distributions
9Tadjoeddin Mohammad Zulfan (2003)ldquo Aspiration to Inequality Regional Disparity and Centre-Regional Conflicts in Indonesia ldquoPaper disampaikan pada UNUWIDER Project Conference on Spatial Inequality in Asia United Nations University Centre Tokyo
19
Table 1 Gini Index In West Java Province from 2011 to 2016
Source BPS West Java Province 2011-2016
From the data above in Table 1 income inequality in West Java is
retailively high especially in urban areas This might be because in Bandung city
and Bogor city is a big city and this local government has not been able to
overcome the problem of income inequality so that income has not been perfectly
distributed
(3) Williamson Index
The existence of differences in natural resources between regions also
causes changes in distribution between regions The index commonly used in
CityRegency 2011 2012 2013 2014 2015 2016Bogor 041 042 038 039 042 04Sukabumi 03 035 03 032 036 033Cianjur 029 033 029 028 028 036Bandung 036 036 034 037 04 04Garut 03 034 031 033 031 035Tasikmalaya 037 033 032 029 03 03Ciamis 031 031 033 031 033 033Kuningan 033 036 033 037 034 033Cirebon 027 036 032 028 033 036Majalengka 031 039 032 034 035 036Sumedang 033 037 034 033 035 037Indramayu 028 029 028 028 029 026Subang 028 033 033 031 033 035Purwakarta 034 039 039 037 035 036Karawang 033 034 032 03 034 034Bekasi 033 036 033 033 035 031Bandung Barat 029 037 031 033 034 036Kota Bogor 039 045 041 036 047 043Kota Sukabumi 034 04 034 036 043 042Kota Bandung 041 042 042 048 044 044Kota Cirebon 038 041 038 04 041 04Kota Bekasi 037 037 035 033 041 039Kota Depok 036 04 039 037 04 04Kota Cimahi 034 037 04 039 04 042Kota Tasikmalaya 037 04 039 037 049 042Kota Banjar 037 039 034 032 042 037
Gini Ratio In West Java Province
20
distribution between these regions is the Williamson Index The formula used in
the Williamson Index is as follows
( )2
i iY Y f N
WY
minus times =sum
Where
W = Williamson Index
Y i = GRDP Capita in the city district i
Y = GRDP Capita West Java Province
fi = city district population i
N = population in West Java Province
The Williamson index obtained is located between 0 (zero) to 1 (one)
bull If the Williamson index approaches 0 then the inequality of income
distribution between regencies cities in West Java Province is low or
economic growth between regions is evenly distributed
bull If the Williamson index approaches 1 the inequality of income distribution
between regencies cities in West Java Province is high or economic growth
between regions is uneven
21
13 Empirical Review of Research on Fiscal Decentralization
131 Research on Fiscal Decentralization in Other Countries
ldquoFiscal Decentralization Contributes to Economic Growth Evidenc efrom State-
Level Cross-Section Data for The United Statesrdquo as conducted by Nobuo akai and
Masayo Sakata 2002
This study shows new evidence that fiscal decentralization effects
economic growth It used a cross-sectional method with 50 observations taking
the average 1992 to 1994 for time series and 50 states in the United States
The empirical models used to look at economic growth are
iiii zationDecentraliGSP εβαα +Χ++=∆ 10 i=1 50 (21)
Where i is the state ΔGSP I gross state production from 1992 to 1996
decentralizations show the average annual growth of the fiscal decentralization
indicator in state i and Xi is the control variable
Empirical research above shows that based on existing data fiscal
decentralization has contributed to economic growth The paper finds that fiscal
decentralization plays a key role in economic growth in the US As expected the
results also indicate that there are others affecting economic growth
132 Research on Fiscal Decentralization In Indonesia
1) Fiscal Decentralization Itrsquos Impact on Cities Growth as conducted by B
Raksaka Mahi 2001
This study used a simultaneous econometric model two stage least square
(TSLS) and regional econometric macros for (1) Evaluating intergovernmental
transfers and their impact on municipal government revenues and (2) Elaborating
22
on the implications of the transfer from government to city growth and disparity
between regions in Indonesia
The variable fiscal decentralization is measured by Revenue sharing
fund sharing funds DAU and DAK The study concluded that (a) The policy of
fiscal decentralization in Indonesia is very important for policy making in the
regions almost all standard instruments for fiscal decentralization are used by the
government (b) DBHSDA policies not only have the potential to reduce growth
rates but also increase disparities between regions (c) DBHPPh will reduce
growth (d) DAU is more promising for growth than others although the DAU
policy does not support equity among regions and (e) The combination of
existing policies in Indonesia promises growth but still cannot reduce the
occurrence of disparities between regions
2) ldquoDampak Desentralisasi Fiskal di Indonesia Terhadap Pertumbuhan
Ekonomi dan Disparitas Antar Daerah Analisa Model Makro Ekonometrik
Simultan as conducted by Teguh Dartanto 2002
This study used a simultaneous macroeconometric regional model with
two stage least square (TSLS) The Simultaneous Macro Econometric Model is
made for analyzing the fiscal decentralization impact to economic growth and
region disparity The policy simulation in this model used transfer fund from
central government such as Tax Revenue Sharing Natural Resource Revenue
Sharing and General Allocation Fund The simulation is carried out to see the
optimality of various possible existing policies The optimality is measured by
evaluating the high rate of economic growth and low disparity
23
The results of the study indicate that revenue sharing funds from natural
resources (DBHSDA) land and building tax (PBB) tax on Acquisition of land
and building (DBPHTB) and income tax (PPH) generate negative economic
growth rates General allocation funds (DAU) as an inter-regional fiscal spattering
factor a the most dominant factor in encouraging regional economic growth and
have a very big role in encouraging regional economic growth as well as being an
economic growth regulator among regions These conditions indicate a very large
dependence on the central government However when combined with the
revenue-sharing policy and general allocation funds they will result in positive
(although relatively small) growth and can reduce disparities between regions
The combination also significantly affects investment growth but does not
significantly affect the growth of consumption in the region The impact of fiscal
decentralization policy is more pronounced in the Eastern Region of Indonesia
(KTI) than in the Western Region of Indonesia (KBI) The simulation results also
indicate the dependence of local governments on transfer funds from the central
government Therefore local governments are also expected to actively seek non-
distortive sources of income
3) ldquo Dampak Transfer Pemerintah Pusat Terhadap Penurunan Ketimpangan
Pendapatan Di Indonesia rdquo as conducted by Adhitya Wardhana Bambang
Juanda Hermanto Siregar dan Kodrat Wibowo Sosiohumaniora Volume 15
no 2 Juli 2013 111 ndash 118
The method used in this study uses data panel regression with the period
2001-2010 For regional characteristics it is made as a dummy of rich regions
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
15
(4) According to Budiono (1999) economic growth is a process of long-term per
capita output growth that occurs when there is a tendency (per capita output
to rise) that comes from the internal process of the economy (the forces
within the economy itself) not from outside Or in other words self-
generating which means that the growth process itself produces a force or
momentum for the continuation of that growth in subsequent periods7
(5) Sadono Sukirno (2005) argues that economic growth is a change in the level
of economic activity prevailing from year to year So to estimate it units of
measurement must be held constant for comparison of national income from
year to year known as the rate of economic growth8
Furthermore Todaro (2000) stated there are three components in the
definition of economic growth namely
(1) The increase in output on an ongoing basis is a manifestation or embodiment
of what is known as economic growth while the ability to provide different
types of goods is itself a sign of economic maturity in a country
(2) The development of technology is the basis or a precondition for the
continuity of sustainable economic growth This is a condition that is
necessary but is not sufficient so in addition to the development or
advancement of technology other factors are needed
(3) In order to realize the growth potential inherent in the new technology we
need to hold a series of institutional adjustments attitudes and ideologies
7Budiono (1999) ldquoTeori Pertumbuhan Ekonomirdquo seri sinopsiedisi 1 bpfe Jogjakarta 8Sukirno S (2005) ldquoMakroekonomi teori pengantarrdquo Jakarta PT Raja Grafindo Persada
16
Technological innovation without social innovation means the potential is
there but without the complementary input then it cannot produce any results
122 Income disparity among regions
Aspects of fairness and equity can be reviewed on the basis of
interpersonal relationships but can also be reviewed by region Interpersonally it
indicates whether income among individuals or groups of community members is
fair and equitable
Meanwhile inter-regional interpersonally it shows equity that occurs
between regions both between provinces and between districtscities
(1) Distribution of income between income class (size distribution of income) or
relative income inequality
(2) Revenue sharing between urban and rural areas (urban-rural income
disparities)
(3) Regional income sharing (regional income disparities)
Thus in principle the distribution of national income reflects the uneven
and uneven distribution of a countrys development outcomes among its
inhabitants There are various criteria or benchmarks to assess the level of
distribution is as follows
(1) The Lorenz Curve
The Lorenz Curve illustrates the cumulative distribution of national
income among the layers of the population and is cumulative as well This curve
lies within a square that symbolizes the establishment of the cumulative
17
percentage of national income while the flat side represents the cumulative
percentage of the population
The Lorenz Curve shows the quantitative relationship between the
percentage of receipts (incomes of the population) and the percentage of total
revenue actually earned over a certain period The farther the Lorenz Curve
diverges from the straight diagonal line (perfect evenness) the more unequal
income distribution The Lorenz Curve is shown in the graph below
Figure 2 The Lorenz Curve
Source A practical example of a Lorenz curve by Mohammad Zulfan Tadjoeddin
(2003)
The Lorenz Curve is represented by the OBA line The income distribution
is said to be uniform if the curve of the Lorenz is a diagonal line of OA where
40 of income is received by 40 of the population and 60 of income is
received by 60 of the population So the further the Lorenz Curve is from the
Yi Income ()
Pi Population ()
18
diagonal line the more uneven the distribution of income This leads to the Gini
Index number ranging between zero and one9
(2) Gini Index
The Gini Index is a coefficient that ranges from zero to one explaining the
level of inequality of the distribution of national income The smaller (the closer
to zero) the coefficient the better or more even the distribution On the other
hand an increasingly large coefficient (approaching one) implies an increasingly
unbalanced distribution Gini Index figures can be assessed visually directly from
the Lorenz Curve the more curved the Lorenz Curve the larger the divided area
the greater the Gini Index implying an increasingly uneven income distribution
Some economists argue that the Gini Index is considered to have
weaknesses because it is less sensitive to changes in the low income group
Regardless of this the Gini Index that uses expenditure data as a proxy for income
data is considered to be still better than many ways of calculating existing income
distributions
9Tadjoeddin Mohammad Zulfan (2003)ldquo Aspiration to Inequality Regional Disparity and Centre-Regional Conflicts in Indonesia ldquoPaper disampaikan pada UNUWIDER Project Conference on Spatial Inequality in Asia United Nations University Centre Tokyo
19
Table 1 Gini Index In West Java Province from 2011 to 2016
Source BPS West Java Province 2011-2016
From the data above in Table 1 income inequality in West Java is
retailively high especially in urban areas This might be because in Bandung city
and Bogor city is a big city and this local government has not been able to
overcome the problem of income inequality so that income has not been perfectly
distributed
(3) Williamson Index
The existence of differences in natural resources between regions also
causes changes in distribution between regions The index commonly used in
CityRegency 2011 2012 2013 2014 2015 2016Bogor 041 042 038 039 042 04Sukabumi 03 035 03 032 036 033Cianjur 029 033 029 028 028 036Bandung 036 036 034 037 04 04Garut 03 034 031 033 031 035Tasikmalaya 037 033 032 029 03 03Ciamis 031 031 033 031 033 033Kuningan 033 036 033 037 034 033Cirebon 027 036 032 028 033 036Majalengka 031 039 032 034 035 036Sumedang 033 037 034 033 035 037Indramayu 028 029 028 028 029 026Subang 028 033 033 031 033 035Purwakarta 034 039 039 037 035 036Karawang 033 034 032 03 034 034Bekasi 033 036 033 033 035 031Bandung Barat 029 037 031 033 034 036Kota Bogor 039 045 041 036 047 043Kota Sukabumi 034 04 034 036 043 042Kota Bandung 041 042 042 048 044 044Kota Cirebon 038 041 038 04 041 04Kota Bekasi 037 037 035 033 041 039Kota Depok 036 04 039 037 04 04Kota Cimahi 034 037 04 039 04 042Kota Tasikmalaya 037 04 039 037 049 042Kota Banjar 037 039 034 032 042 037
Gini Ratio In West Java Province
20
distribution between these regions is the Williamson Index The formula used in
the Williamson Index is as follows
( )2
i iY Y f N
WY
minus times =sum
Where
W = Williamson Index
Y i = GRDP Capita in the city district i
Y = GRDP Capita West Java Province
fi = city district population i
N = population in West Java Province
The Williamson index obtained is located between 0 (zero) to 1 (one)
bull If the Williamson index approaches 0 then the inequality of income
distribution between regencies cities in West Java Province is low or
economic growth between regions is evenly distributed
bull If the Williamson index approaches 1 the inequality of income distribution
between regencies cities in West Java Province is high or economic growth
between regions is uneven
21
13 Empirical Review of Research on Fiscal Decentralization
131 Research on Fiscal Decentralization in Other Countries
ldquoFiscal Decentralization Contributes to Economic Growth Evidenc efrom State-
Level Cross-Section Data for The United Statesrdquo as conducted by Nobuo akai and
Masayo Sakata 2002
This study shows new evidence that fiscal decentralization effects
economic growth It used a cross-sectional method with 50 observations taking
the average 1992 to 1994 for time series and 50 states in the United States
The empirical models used to look at economic growth are
iiii zationDecentraliGSP εβαα +Χ++=∆ 10 i=1 50 (21)
Where i is the state ΔGSP I gross state production from 1992 to 1996
decentralizations show the average annual growth of the fiscal decentralization
indicator in state i and Xi is the control variable
Empirical research above shows that based on existing data fiscal
decentralization has contributed to economic growth The paper finds that fiscal
decentralization plays a key role in economic growth in the US As expected the
results also indicate that there are others affecting economic growth
132 Research on Fiscal Decentralization In Indonesia
1) Fiscal Decentralization Itrsquos Impact on Cities Growth as conducted by B
Raksaka Mahi 2001
This study used a simultaneous econometric model two stage least square
(TSLS) and regional econometric macros for (1) Evaluating intergovernmental
transfers and their impact on municipal government revenues and (2) Elaborating
22
on the implications of the transfer from government to city growth and disparity
between regions in Indonesia
The variable fiscal decentralization is measured by Revenue sharing
fund sharing funds DAU and DAK The study concluded that (a) The policy of
fiscal decentralization in Indonesia is very important for policy making in the
regions almost all standard instruments for fiscal decentralization are used by the
government (b) DBHSDA policies not only have the potential to reduce growth
rates but also increase disparities between regions (c) DBHPPh will reduce
growth (d) DAU is more promising for growth than others although the DAU
policy does not support equity among regions and (e) The combination of
existing policies in Indonesia promises growth but still cannot reduce the
occurrence of disparities between regions
2) ldquoDampak Desentralisasi Fiskal di Indonesia Terhadap Pertumbuhan
Ekonomi dan Disparitas Antar Daerah Analisa Model Makro Ekonometrik
Simultan as conducted by Teguh Dartanto 2002
This study used a simultaneous macroeconometric regional model with
two stage least square (TSLS) The Simultaneous Macro Econometric Model is
made for analyzing the fiscal decentralization impact to economic growth and
region disparity The policy simulation in this model used transfer fund from
central government such as Tax Revenue Sharing Natural Resource Revenue
Sharing and General Allocation Fund The simulation is carried out to see the
optimality of various possible existing policies The optimality is measured by
evaluating the high rate of economic growth and low disparity
23
The results of the study indicate that revenue sharing funds from natural
resources (DBHSDA) land and building tax (PBB) tax on Acquisition of land
and building (DBPHTB) and income tax (PPH) generate negative economic
growth rates General allocation funds (DAU) as an inter-regional fiscal spattering
factor a the most dominant factor in encouraging regional economic growth and
have a very big role in encouraging regional economic growth as well as being an
economic growth regulator among regions These conditions indicate a very large
dependence on the central government However when combined with the
revenue-sharing policy and general allocation funds they will result in positive
(although relatively small) growth and can reduce disparities between regions
The combination also significantly affects investment growth but does not
significantly affect the growth of consumption in the region The impact of fiscal
decentralization policy is more pronounced in the Eastern Region of Indonesia
(KTI) than in the Western Region of Indonesia (KBI) The simulation results also
indicate the dependence of local governments on transfer funds from the central
government Therefore local governments are also expected to actively seek non-
distortive sources of income
3) ldquo Dampak Transfer Pemerintah Pusat Terhadap Penurunan Ketimpangan
Pendapatan Di Indonesia rdquo as conducted by Adhitya Wardhana Bambang
Juanda Hermanto Siregar dan Kodrat Wibowo Sosiohumaniora Volume 15
no 2 Juli 2013 111 ndash 118
The method used in this study uses data panel regression with the period
2001-2010 For regional characteristics it is made as a dummy of rich regions
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
16
Technological innovation without social innovation means the potential is
there but without the complementary input then it cannot produce any results
122 Income disparity among regions
Aspects of fairness and equity can be reviewed on the basis of
interpersonal relationships but can also be reviewed by region Interpersonally it
indicates whether income among individuals or groups of community members is
fair and equitable
Meanwhile inter-regional interpersonally it shows equity that occurs
between regions both between provinces and between districtscities
(1) Distribution of income between income class (size distribution of income) or
relative income inequality
(2) Revenue sharing between urban and rural areas (urban-rural income
disparities)
(3) Regional income sharing (regional income disparities)
Thus in principle the distribution of national income reflects the uneven
and uneven distribution of a countrys development outcomes among its
inhabitants There are various criteria or benchmarks to assess the level of
distribution is as follows
(1) The Lorenz Curve
The Lorenz Curve illustrates the cumulative distribution of national
income among the layers of the population and is cumulative as well This curve
lies within a square that symbolizes the establishment of the cumulative
17
percentage of national income while the flat side represents the cumulative
percentage of the population
The Lorenz Curve shows the quantitative relationship between the
percentage of receipts (incomes of the population) and the percentage of total
revenue actually earned over a certain period The farther the Lorenz Curve
diverges from the straight diagonal line (perfect evenness) the more unequal
income distribution The Lorenz Curve is shown in the graph below
Figure 2 The Lorenz Curve
Source A practical example of a Lorenz curve by Mohammad Zulfan Tadjoeddin
(2003)
The Lorenz Curve is represented by the OBA line The income distribution
is said to be uniform if the curve of the Lorenz is a diagonal line of OA where
40 of income is received by 40 of the population and 60 of income is
received by 60 of the population So the further the Lorenz Curve is from the
Yi Income ()
Pi Population ()
18
diagonal line the more uneven the distribution of income This leads to the Gini
Index number ranging between zero and one9
(2) Gini Index
The Gini Index is a coefficient that ranges from zero to one explaining the
level of inequality of the distribution of national income The smaller (the closer
to zero) the coefficient the better or more even the distribution On the other
hand an increasingly large coefficient (approaching one) implies an increasingly
unbalanced distribution Gini Index figures can be assessed visually directly from
the Lorenz Curve the more curved the Lorenz Curve the larger the divided area
the greater the Gini Index implying an increasingly uneven income distribution
Some economists argue that the Gini Index is considered to have
weaknesses because it is less sensitive to changes in the low income group
Regardless of this the Gini Index that uses expenditure data as a proxy for income
data is considered to be still better than many ways of calculating existing income
distributions
9Tadjoeddin Mohammad Zulfan (2003)ldquo Aspiration to Inequality Regional Disparity and Centre-Regional Conflicts in Indonesia ldquoPaper disampaikan pada UNUWIDER Project Conference on Spatial Inequality in Asia United Nations University Centre Tokyo
19
Table 1 Gini Index In West Java Province from 2011 to 2016
Source BPS West Java Province 2011-2016
From the data above in Table 1 income inequality in West Java is
retailively high especially in urban areas This might be because in Bandung city
and Bogor city is a big city and this local government has not been able to
overcome the problem of income inequality so that income has not been perfectly
distributed
(3) Williamson Index
The existence of differences in natural resources between regions also
causes changes in distribution between regions The index commonly used in
CityRegency 2011 2012 2013 2014 2015 2016Bogor 041 042 038 039 042 04Sukabumi 03 035 03 032 036 033Cianjur 029 033 029 028 028 036Bandung 036 036 034 037 04 04Garut 03 034 031 033 031 035Tasikmalaya 037 033 032 029 03 03Ciamis 031 031 033 031 033 033Kuningan 033 036 033 037 034 033Cirebon 027 036 032 028 033 036Majalengka 031 039 032 034 035 036Sumedang 033 037 034 033 035 037Indramayu 028 029 028 028 029 026Subang 028 033 033 031 033 035Purwakarta 034 039 039 037 035 036Karawang 033 034 032 03 034 034Bekasi 033 036 033 033 035 031Bandung Barat 029 037 031 033 034 036Kota Bogor 039 045 041 036 047 043Kota Sukabumi 034 04 034 036 043 042Kota Bandung 041 042 042 048 044 044Kota Cirebon 038 041 038 04 041 04Kota Bekasi 037 037 035 033 041 039Kota Depok 036 04 039 037 04 04Kota Cimahi 034 037 04 039 04 042Kota Tasikmalaya 037 04 039 037 049 042Kota Banjar 037 039 034 032 042 037
Gini Ratio In West Java Province
20
distribution between these regions is the Williamson Index The formula used in
the Williamson Index is as follows
( )2
i iY Y f N
WY
minus times =sum
Where
W = Williamson Index
Y i = GRDP Capita in the city district i
Y = GRDP Capita West Java Province
fi = city district population i
N = population in West Java Province
The Williamson index obtained is located between 0 (zero) to 1 (one)
bull If the Williamson index approaches 0 then the inequality of income
distribution between regencies cities in West Java Province is low or
economic growth between regions is evenly distributed
bull If the Williamson index approaches 1 the inequality of income distribution
between regencies cities in West Java Province is high or economic growth
between regions is uneven
21
13 Empirical Review of Research on Fiscal Decentralization
131 Research on Fiscal Decentralization in Other Countries
ldquoFiscal Decentralization Contributes to Economic Growth Evidenc efrom State-
Level Cross-Section Data for The United Statesrdquo as conducted by Nobuo akai and
Masayo Sakata 2002
This study shows new evidence that fiscal decentralization effects
economic growth It used a cross-sectional method with 50 observations taking
the average 1992 to 1994 for time series and 50 states in the United States
The empirical models used to look at economic growth are
iiii zationDecentraliGSP εβαα +Χ++=∆ 10 i=1 50 (21)
Where i is the state ΔGSP I gross state production from 1992 to 1996
decentralizations show the average annual growth of the fiscal decentralization
indicator in state i and Xi is the control variable
Empirical research above shows that based on existing data fiscal
decentralization has contributed to economic growth The paper finds that fiscal
decentralization plays a key role in economic growth in the US As expected the
results also indicate that there are others affecting economic growth
132 Research on Fiscal Decentralization In Indonesia
1) Fiscal Decentralization Itrsquos Impact on Cities Growth as conducted by B
Raksaka Mahi 2001
This study used a simultaneous econometric model two stage least square
(TSLS) and regional econometric macros for (1) Evaluating intergovernmental
transfers and their impact on municipal government revenues and (2) Elaborating
22
on the implications of the transfer from government to city growth and disparity
between regions in Indonesia
The variable fiscal decentralization is measured by Revenue sharing
fund sharing funds DAU and DAK The study concluded that (a) The policy of
fiscal decentralization in Indonesia is very important for policy making in the
regions almost all standard instruments for fiscal decentralization are used by the
government (b) DBHSDA policies not only have the potential to reduce growth
rates but also increase disparities between regions (c) DBHPPh will reduce
growth (d) DAU is more promising for growth than others although the DAU
policy does not support equity among regions and (e) The combination of
existing policies in Indonesia promises growth but still cannot reduce the
occurrence of disparities between regions
2) ldquoDampak Desentralisasi Fiskal di Indonesia Terhadap Pertumbuhan
Ekonomi dan Disparitas Antar Daerah Analisa Model Makro Ekonometrik
Simultan as conducted by Teguh Dartanto 2002
This study used a simultaneous macroeconometric regional model with
two stage least square (TSLS) The Simultaneous Macro Econometric Model is
made for analyzing the fiscal decentralization impact to economic growth and
region disparity The policy simulation in this model used transfer fund from
central government such as Tax Revenue Sharing Natural Resource Revenue
Sharing and General Allocation Fund The simulation is carried out to see the
optimality of various possible existing policies The optimality is measured by
evaluating the high rate of economic growth and low disparity
23
The results of the study indicate that revenue sharing funds from natural
resources (DBHSDA) land and building tax (PBB) tax on Acquisition of land
and building (DBPHTB) and income tax (PPH) generate negative economic
growth rates General allocation funds (DAU) as an inter-regional fiscal spattering
factor a the most dominant factor in encouraging regional economic growth and
have a very big role in encouraging regional economic growth as well as being an
economic growth regulator among regions These conditions indicate a very large
dependence on the central government However when combined with the
revenue-sharing policy and general allocation funds they will result in positive
(although relatively small) growth and can reduce disparities between regions
The combination also significantly affects investment growth but does not
significantly affect the growth of consumption in the region The impact of fiscal
decentralization policy is more pronounced in the Eastern Region of Indonesia
(KTI) than in the Western Region of Indonesia (KBI) The simulation results also
indicate the dependence of local governments on transfer funds from the central
government Therefore local governments are also expected to actively seek non-
distortive sources of income
3) ldquo Dampak Transfer Pemerintah Pusat Terhadap Penurunan Ketimpangan
Pendapatan Di Indonesia rdquo as conducted by Adhitya Wardhana Bambang
Juanda Hermanto Siregar dan Kodrat Wibowo Sosiohumaniora Volume 15
no 2 Juli 2013 111 ndash 118
The method used in this study uses data panel regression with the period
2001-2010 For regional characteristics it is made as a dummy of rich regions
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
17
percentage of national income while the flat side represents the cumulative
percentage of the population
The Lorenz Curve shows the quantitative relationship between the
percentage of receipts (incomes of the population) and the percentage of total
revenue actually earned over a certain period The farther the Lorenz Curve
diverges from the straight diagonal line (perfect evenness) the more unequal
income distribution The Lorenz Curve is shown in the graph below
Figure 2 The Lorenz Curve
Source A practical example of a Lorenz curve by Mohammad Zulfan Tadjoeddin
(2003)
The Lorenz Curve is represented by the OBA line The income distribution
is said to be uniform if the curve of the Lorenz is a diagonal line of OA where
40 of income is received by 40 of the population and 60 of income is
received by 60 of the population So the further the Lorenz Curve is from the
Yi Income ()
Pi Population ()
18
diagonal line the more uneven the distribution of income This leads to the Gini
Index number ranging between zero and one9
(2) Gini Index
The Gini Index is a coefficient that ranges from zero to one explaining the
level of inequality of the distribution of national income The smaller (the closer
to zero) the coefficient the better or more even the distribution On the other
hand an increasingly large coefficient (approaching one) implies an increasingly
unbalanced distribution Gini Index figures can be assessed visually directly from
the Lorenz Curve the more curved the Lorenz Curve the larger the divided area
the greater the Gini Index implying an increasingly uneven income distribution
Some economists argue that the Gini Index is considered to have
weaknesses because it is less sensitive to changes in the low income group
Regardless of this the Gini Index that uses expenditure data as a proxy for income
data is considered to be still better than many ways of calculating existing income
distributions
9Tadjoeddin Mohammad Zulfan (2003)ldquo Aspiration to Inequality Regional Disparity and Centre-Regional Conflicts in Indonesia ldquoPaper disampaikan pada UNUWIDER Project Conference on Spatial Inequality in Asia United Nations University Centre Tokyo
19
Table 1 Gini Index In West Java Province from 2011 to 2016
Source BPS West Java Province 2011-2016
From the data above in Table 1 income inequality in West Java is
retailively high especially in urban areas This might be because in Bandung city
and Bogor city is a big city and this local government has not been able to
overcome the problem of income inequality so that income has not been perfectly
distributed
(3) Williamson Index
The existence of differences in natural resources between regions also
causes changes in distribution between regions The index commonly used in
CityRegency 2011 2012 2013 2014 2015 2016Bogor 041 042 038 039 042 04Sukabumi 03 035 03 032 036 033Cianjur 029 033 029 028 028 036Bandung 036 036 034 037 04 04Garut 03 034 031 033 031 035Tasikmalaya 037 033 032 029 03 03Ciamis 031 031 033 031 033 033Kuningan 033 036 033 037 034 033Cirebon 027 036 032 028 033 036Majalengka 031 039 032 034 035 036Sumedang 033 037 034 033 035 037Indramayu 028 029 028 028 029 026Subang 028 033 033 031 033 035Purwakarta 034 039 039 037 035 036Karawang 033 034 032 03 034 034Bekasi 033 036 033 033 035 031Bandung Barat 029 037 031 033 034 036Kota Bogor 039 045 041 036 047 043Kota Sukabumi 034 04 034 036 043 042Kota Bandung 041 042 042 048 044 044Kota Cirebon 038 041 038 04 041 04Kota Bekasi 037 037 035 033 041 039Kota Depok 036 04 039 037 04 04Kota Cimahi 034 037 04 039 04 042Kota Tasikmalaya 037 04 039 037 049 042Kota Banjar 037 039 034 032 042 037
Gini Ratio In West Java Province
20
distribution between these regions is the Williamson Index The formula used in
the Williamson Index is as follows
( )2
i iY Y f N
WY
minus times =sum
Where
W = Williamson Index
Y i = GRDP Capita in the city district i
Y = GRDP Capita West Java Province
fi = city district population i
N = population in West Java Province
The Williamson index obtained is located between 0 (zero) to 1 (one)
bull If the Williamson index approaches 0 then the inequality of income
distribution between regencies cities in West Java Province is low or
economic growth between regions is evenly distributed
bull If the Williamson index approaches 1 the inequality of income distribution
between regencies cities in West Java Province is high or economic growth
between regions is uneven
21
13 Empirical Review of Research on Fiscal Decentralization
131 Research on Fiscal Decentralization in Other Countries
ldquoFiscal Decentralization Contributes to Economic Growth Evidenc efrom State-
Level Cross-Section Data for The United Statesrdquo as conducted by Nobuo akai and
Masayo Sakata 2002
This study shows new evidence that fiscal decentralization effects
economic growth It used a cross-sectional method with 50 observations taking
the average 1992 to 1994 for time series and 50 states in the United States
The empirical models used to look at economic growth are
iiii zationDecentraliGSP εβαα +Χ++=∆ 10 i=1 50 (21)
Where i is the state ΔGSP I gross state production from 1992 to 1996
decentralizations show the average annual growth of the fiscal decentralization
indicator in state i and Xi is the control variable
Empirical research above shows that based on existing data fiscal
decentralization has contributed to economic growth The paper finds that fiscal
decentralization plays a key role in economic growth in the US As expected the
results also indicate that there are others affecting economic growth
132 Research on Fiscal Decentralization In Indonesia
1) Fiscal Decentralization Itrsquos Impact on Cities Growth as conducted by B
Raksaka Mahi 2001
This study used a simultaneous econometric model two stage least square
(TSLS) and regional econometric macros for (1) Evaluating intergovernmental
transfers and their impact on municipal government revenues and (2) Elaborating
22
on the implications of the transfer from government to city growth and disparity
between regions in Indonesia
The variable fiscal decentralization is measured by Revenue sharing
fund sharing funds DAU and DAK The study concluded that (a) The policy of
fiscal decentralization in Indonesia is very important for policy making in the
regions almost all standard instruments for fiscal decentralization are used by the
government (b) DBHSDA policies not only have the potential to reduce growth
rates but also increase disparities between regions (c) DBHPPh will reduce
growth (d) DAU is more promising for growth than others although the DAU
policy does not support equity among regions and (e) The combination of
existing policies in Indonesia promises growth but still cannot reduce the
occurrence of disparities between regions
2) ldquoDampak Desentralisasi Fiskal di Indonesia Terhadap Pertumbuhan
Ekonomi dan Disparitas Antar Daerah Analisa Model Makro Ekonometrik
Simultan as conducted by Teguh Dartanto 2002
This study used a simultaneous macroeconometric regional model with
two stage least square (TSLS) The Simultaneous Macro Econometric Model is
made for analyzing the fiscal decentralization impact to economic growth and
region disparity The policy simulation in this model used transfer fund from
central government such as Tax Revenue Sharing Natural Resource Revenue
Sharing and General Allocation Fund The simulation is carried out to see the
optimality of various possible existing policies The optimality is measured by
evaluating the high rate of economic growth and low disparity
23
The results of the study indicate that revenue sharing funds from natural
resources (DBHSDA) land and building tax (PBB) tax on Acquisition of land
and building (DBPHTB) and income tax (PPH) generate negative economic
growth rates General allocation funds (DAU) as an inter-regional fiscal spattering
factor a the most dominant factor in encouraging regional economic growth and
have a very big role in encouraging regional economic growth as well as being an
economic growth regulator among regions These conditions indicate a very large
dependence on the central government However when combined with the
revenue-sharing policy and general allocation funds they will result in positive
(although relatively small) growth and can reduce disparities between regions
The combination also significantly affects investment growth but does not
significantly affect the growth of consumption in the region The impact of fiscal
decentralization policy is more pronounced in the Eastern Region of Indonesia
(KTI) than in the Western Region of Indonesia (KBI) The simulation results also
indicate the dependence of local governments on transfer funds from the central
government Therefore local governments are also expected to actively seek non-
distortive sources of income
3) ldquo Dampak Transfer Pemerintah Pusat Terhadap Penurunan Ketimpangan
Pendapatan Di Indonesia rdquo as conducted by Adhitya Wardhana Bambang
Juanda Hermanto Siregar dan Kodrat Wibowo Sosiohumaniora Volume 15
no 2 Juli 2013 111 ndash 118
The method used in this study uses data panel regression with the period
2001-2010 For regional characteristics it is made as a dummy of rich regions
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
18
diagonal line the more uneven the distribution of income This leads to the Gini
Index number ranging between zero and one9
(2) Gini Index
The Gini Index is a coefficient that ranges from zero to one explaining the
level of inequality of the distribution of national income The smaller (the closer
to zero) the coefficient the better or more even the distribution On the other
hand an increasingly large coefficient (approaching one) implies an increasingly
unbalanced distribution Gini Index figures can be assessed visually directly from
the Lorenz Curve the more curved the Lorenz Curve the larger the divided area
the greater the Gini Index implying an increasingly uneven income distribution
Some economists argue that the Gini Index is considered to have
weaknesses because it is less sensitive to changes in the low income group
Regardless of this the Gini Index that uses expenditure data as a proxy for income
data is considered to be still better than many ways of calculating existing income
distributions
9Tadjoeddin Mohammad Zulfan (2003)ldquo Aspiration to Inequality Regional Disparity and Centre-Regional Conflicts in Indonesia ldquoPaper disampaikan pada UNUWIDER Project Conference on Spatial Inequality in Asia United Nations University Centre Tokyo
19
Table 1 Gini Index In West Java Province from 2011 to 2016
Source BPS West Java Province 2011-2016
From the data above in Table 1 income inequality in West Java is
retailively high especially in urban areas This might be because in Bandung city
and Bogor city is a big city and this local government has not been able to
overcome the problem of income inequality so that income has not been perfectly
distributed
(3) Williamson Index
The existence of differences in natural resources between regions also
causes changes in distribution between regions The index commonly used in
CityRegency 2011 2012 2013 2014 2015 2016Bogor 041 042 038 039 042 04Sukabumi 03 035 03 032 036 033Cianjur 029 033 029 028 028 036Bandung 036 036 034 037 04 04Garut 03 034 031 033 031 035Tasikmalaya 037 033 032 029 03 03Ciamis 031 031 033 031 033 033Kuningan 033 036 033 037 034 033Cirebon 027 036 032 028 033 036Majalengka 031 039 032 034 035 036Sumedang 033 037 034 033 035 037Indramayu 028 029 028 028 029 026Subang 028 033 033 031 033 035Purwakarta 034 039 039 037 035 036Karawang 033 034 032 03 034 034Bekasi 033 036 033 033 035 031Bandung Barat 029 037 031 033 034 036Kota Bogor 039 045 041 036 047 043Kota Sukabumi 034 04 034 036 043 042Kota Bandung 041 042 042 048 044 044Kota Cirebon 038 041 038 04 041 04Kota Bekasi 037 037 035 033 041 039Kota Depok 036 04 039 037 04 04Kota Cimahi 034 037 04 039 04 042Kota Tasikmalaya 037 04 039 037 049 042Kota Banjar 037 039 034 032 042 037
Gini Ratio In West Java Province
20
distribution between these regions is the Williamson Index The formula used in
the Williamson Index is as follows
( )2
i iY Y f N
WY
minus times =sum
Where
W = Williamson Index
Y i = GRDP Capita in the city district i
Y = GRDP Capita West Java Province
fi = city district population i
N = population in West Java Province
The Williamson index obtained is located between 0 (zero) to 1 (one)
bull If the Williamson index approaches 0 then the inequality of income
distribution between regencies cities in West Java Province is low or
economic growth between regions is evenly distributed
bull If the Williamson index approaches 1 the inequality of income distribution
between regencies cities in West Java Province is high or economic growth
between regions is uneven
21
13 Empirical Review of Research on Fiscal Decentralization
131 Research on Fiscal Decentralization in Other Countries
ldquoFiscal Decentralization Contributes to Economic Growth Evidenc efrom State-
Level Cross-Section Data for The United Statesrdquo as conducted by Nobuo akai and
Masayo Sakata 2002
This study shows new evidence that fiscal decentralization effects
economic growth It used a cross-sectional method with 50 observations taking
the average 1992 to 1994 for time series and 50 states in the United States
The empirical models used to look at economic growth are
iiii zationDecentraliGSP εβαα +Χ++=∆ 10 i=1 50 (21)
Where i is the state ΔGSP I gross state production from 1992 to 1996
decentralizations show the average annual growth of the fiscal decentralization
indicator in state i and Xi is the control variable
Empirical research above shows that based on existing data fiscal
decentralization has contributed to economic growth The paper finds that fiscal
decentralization plays a key role in economic growth in the US As expected the
results also indicate that there are others affecting economic growth
132 Research on Fiscal Decentralization In Indonesia
1) Fiscal Decentralization Itrsquos Impact on Cities Growth as conducted by B
Raksaka Mahi 2001
This study used a simultaneous econometric model two stage least square
(TSLS) and regional econometric macros for (1) Evaluating intergovernmental
transfers and their impact on municipal government revenues and (2) Elaborating
22
on the implications of the transfer from government to city growth and disparity
between regions in Indonesia
The variable fiscal decentralization is measured by Revenue sharing
fund sharing funds DAU and DAK The study concluded that (a) The policy of
fiscal decentralization in Indonesia is very important for policy making in the
regions almost all standard instruments for fiscal decentralization are used by the
government (b) DBHSDA policies not only have the potential to reduce growth
rates but also increase disparities between regions (c) DBHPPh will reduce
growth (d) DAU is more promising for growth than others although the DAU
policy does not support equity among regions and (e) The combination of
existing policies in Indonesia promises growth but still cannot reduce the
occurrence of disparities between regions
2) ldquoDampak Desentralisasi Fiskal di Indonesia Terhadap Pertumbuhan
Ekonomi dan Disparitas Antar Daerah Analisa Model Makro Ekonometrik
Simultan as conducted by Teguh Dartanto 2002
This study used a simultaneous macroeconometric regional model with
two stage least square (TSLS) The Simultaneous Macro Econometric Model is
made for analyzing the fiscal decentralization impact to economic growth and
region disparity The policy simulation in this model used transfer fund from
central government such as Tax Revenue Sharing Natural Resource Revenue
Sharing and General Allocation Fund The simulation is carried out to see the
optimality of various possible existing policies The optimality is measured by
evaluating the high rate of economic growth and low disparity
23
The results of the study indicate that revenue sharing funds from natural
resources (DBHSDA) land and building tax (PBB) tax on Acquisition of land
and building (DBPHTB) and income tax (PPH) generate negative economic
growth rates General allocation funds (DAU) as an inter-regional fiscal spattering
factor a the most dominant factor in encouraging regional economic growth and
have a very big role in encouraging regional economic growth as well as being an
economic growth regulator among regions These conditions indicate a very large
dependence on the central government However when combined with the
revenue-sharing policy and general allocation funds they will result in positive
(although relatively small) growth and can reduce disparities between regions
The combination also significantly affects investment growth but does not
significantly affect the growth of consumption in the region The impact of fiscal
decentralization policy is more pronounced in the Eastern Region of Indonesia
(KTI) than in the Western Region of Indonesia (KBI) The simulation results also
indicate the dependence of local governments on transfer funds from the central
government Therefore local governments are also expected to actively seek non-
distortive sources of income
3) ldquo Dampak Transfer Pemerintah Pusat Terhadap Penurunan Ketimpangan
Pendapatan Di Indonesia rdquo as conducted by Adhitya Wardhana Bambang
Juanda Hermanto Siregar dan Kodrat Wibowo Sosiohumaniora Volume 15
no 2 Juli 2013 111 ndash 118
The method used in this study uses data panel regression with the period
2001-2010 For regional characteristics it is made as a dummy of rich regions
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
19
Table 1 Gini Index In West Java Province from 2011 to 2016
Source BPS West Java Province 2011-2016
From the data above in Table 1 income inequality in West Java is
retailively high especially in urban areas This might be because in Bandung city
and Bogor city is a big city and this local government has not been able to
overcome the problem of income inequality so that income has not been perfectly
distributed
(3) Williamson Index
The existence of differences in natural resources between regions also
causes changes in distribution between regions The index commonly used in
CityRegency 2011 2012 2013 2014 2015 2016Bogor 041 042 038 039 042 04Sukabumi 03 035 03 032 036 033Cianjur 029 033 029 028 028 036Bandung 036 036 034 037 04 04Garut 03 034 031 033 031 035Tasikmalaya 037 033 032 029 03 03Ciamis 031 031 033 031 033 033Kuningan 033 036 033 037 034 033Cirebon 027 036 032 028 033 036Majalengka 031 039 032 034 035 036Sumedang 033 037 034 033 035 037Indramayu 028 029 028 028 029 026Subang 028 033 033 031 033 035Purwakarta 034 039 039 037 035 036Karawang 033 034 032 03 034 034Bekasi 033 036 033 033 035 031Bandung Barat 029 037 031 033 034 036Kota Bogor 039 045 041 036 047 043Kota Sukabumi 034 04 034 036 043 042Kota Bandung 041 042 042 048 044 044Kota Cirebon 038 041 038 04 041 04Kota Bekasi 037 037 035 033 041 039Kota Depok 036 04 039 037 04 04Kota Cimahi 034 037 04 039 04 042Kota Tasikmalaya 037 04 039 037 049 042Kota Banjar 037 039 034 032 042 037
Gini Ratio In West Java Province
20
distribution between these regions is the Williamson Index The formula used in
the Williamson Index is as follows
( )2
i iY Y f N
WY
minus times =sum
Where
W = Williamson Index
Y i = GRDP Capita in the city district i
Y = GRDP Capita West Java Province
fi = city district population i
N = population in West Java Province
The Williamson index obtained is located between 0 (zero) to 1 (one)
bull If the Williamson index approaches 0 then the inequality of income
distribution between regencies cities in West Java Province is low or
economic growth between regions is evenly distributed
bull If the Williamson index approaches 1 the inequality of income distribution
between regencies cities in West Java Province is high or economic growth
between regions is uneven
21
13 Empirical Review of Research on Fiscal Decentralization
131 Research on Fiscal Decentralization in Other Countries
ldquoFiscal Decentralization Contributes to Economic Growth Evidenc efrom State-
Level Cross-Section Data for The United Statesrdquo as conducted by Nobuo akai and
Masayo Sakata 2002
This study shows new evidence that fiscal decentralization effects
economic growth It used a cross-sectional method with 50 observations taking
the average 1992 to 1994 for time series and 50 states in the United States
The empirical models used to look at economic growth are
iiii zationDecentraliGSP εβαα +Χ++=∆ 10 i=1 50 (21)
Where i is the state ΔGSP I gross state production from 1992 to 1996
decentralizations show the average annual growth of the fiscal decentralization
indicator in state i and Xi is the control variable
Empirical research above shows that based on existing data fiscal
decentralization has contributed to economic growth The paper finds that fiscal
decentralization plays a key role in economic growth in the US As expected the
results also indicate that there are others affecting economic growth
132 Research on Fiscal Decentralization In Indonesia
1) Fiscal Decentralization Itrsquos Impact on Cities Growth as conducted by B
Raksaka Mahi 2001
This study used a simultaneous econometric model two stage least square
(TSLS) and regional econometric macros for (1) Evaluating intergovernmental
transfers and their impact on municipal government revenues and (2) Elaborating
22
on the implications of the transfer from government to city growth and disparity
between regions in Indonesia
The variable fiscal decentralization is measured by Revenue sharing
fund sharing funds DAU and DAK The study concluded that (a) The policy of
fiscal decentralization in Indonesia is very important for policy making in the
regions almost all standard instruments for fiscal decentralization are used by the
government (b) DBHSDA policies not only have the potential to reduce growth
rates but also increase disparities between regions (c) DBHPPh will reduce
growth (d) DAU is more promising for growth than others although the DAU
policy does not support equity among regions and (e) The combination of
existing policies in Indonesia promises growth but still cannot reduce the
occurrence of disparities between regions
2) ldquoDampak Desentralisasi Fiskal di Indonesia Terhadap Pertumbuhan
Ekonomi dan Disparitas Antar Daerah Analisa Model Makro Ekonometrik
Simultan as conducted by Teguh Dartanto 2002
This study used a simultaneous macroeconometric regional model with
two stage least square (TSLS) The Simultaneous Macro Econometric Model is
made for analyzing the fiscal decentralization impact to economic growth and
region disparity The policy simulation in this model used transfer fund from
central government such as Tax Revenue Sharing Natural Resource Revenue
Sharing and General Allocation Fund The simulation is carried out to see the
optimality of various possible existing policies The optimality is measured by
evaluating the high rate of economic growth and low disparity
23
The results of the study indicate that revenue sharing funds from natural
resources (DBHSDA) land and building tax (PBB) tax on Acquisition of land
and building (DBPHTB) and income tax (PPH) generate negative economic
growth rates General allocation funds (DAU) as an inter-regional fiscal spattering
factor a the most dominant factor in encouraging regional economic growth and
have a very big role in encouraging regional economic growth as well as being an
economic growth regulator among regions These conditions indicate a very large
dependence on the central government However when combined with the
revenue-sharing policy and general allocation funds they will result in positive
(although relatively small) growth and can reduce disparities between regions
The combination also significantly affects investment growth but does not
significantly affect the growth of consumption in the region The impact of fiscal
decentralization policy is more pronounced in the Eastern Region of Indonesia
(KTI) than in the Western Region of Indonesia (KBI) The simulation results also
indicate the dependence of local governments on transfer funds from the central
government Therefore local governments are also expected to actively seek non-
distortive sources of income
3) ldquo Dampak Transfer Pemerintah Pusat Terhadap Penurunan Ketimpangan
Pendapatan Di Indonesia rdquo as conducted by Adhitya Wardhana Bambang
Juanda Hermanto Siregar dan Kodrat Wibowo Sosiohumaniora Volume 15
no 2 Juli 2013 111 ndash 118
The method used in this study uses data panel regression with the period
2001-2010 For regional characteristics it is made as a dummy of rich regions
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
20
distribution between these regions is the Williamson Index The formula used in
the Williamson Index is as follows
( )2
i iY Y f N
WY
minus times =sum
Where
W = Williamson Index
Y i = GRDP Capita in the city district i
Y = GRDP Capita West Java Province
fi = city district population i
N = population in West Java Province
The Williamson index obtained is located between 0 (zero) to 1 (one)
bull If the Williamson index approaches 0 then the inequality of income
distribution between regencies cities in West Java Province is low or
economic growth between regions is evenly distributed
bull If the Williamson index approaches 1 the inequality of income distribution
between regencies cities in West Java Province is high or economic growth
between regions is uneven
21
13 Empirical Review of Research on Fiscal Decentralization
131 Research on Fiscal Decentralization in Other Countries
ldquoFiscal Decentralization Contributes to Economic Growth Evidenc efrom State-
Level Cross-Section Data for The United Statesrdquo as conducted by Nobuo akai and
Masayo Sakata 2002
This study shows new evidence that fiscal decentralization effects
economic growth It used a cross-sectional method with 50 observations taking
the average 1992 to 1994 for time series and 50 states in the United States
The empirical models used to look at economic growth are
iiii zationDecentraliGSP εβαα +Χ++=∆ 10 i=1 50 (21)
Where i is the state ΔGSP I gross state production from 1992 to 1996
decentralizations show the average annual growth of the fiscal decentralization
indicator in state i and Xi is the control variable
Empirical research above shows that based on existing data fiscal
decentralization has contributed to economic growth The paper finds that fiscal
decentralization plays a key role in economic growth in the US As expected the
results also indicate that there are others affecting economic growth
132 Research on Fiscal Decentralization In Indonesia
1) Fiscal Decentralization Itrsquos Impact on Cities Growth as conducted by B
Raksaka Mahi 2001
This study used a simultaneous econometric model two stage least square
(TSLS) and regional econometric macros for (1) Evaluating intergovernmental
transfers and their impact on municipal government revenues and (2) Elaborating
22
on the implications of the transfer from government to city growth and disparity
between regions in Indonesia
The variable fiscal decentralization is measured by Revenue sharing
fund sharing funds DAU and DAK The study concluded that (a) The policy of
fiscal decentralization in Indonesia is very important for policy making in the
regions almost all standard instruments for fiscal decentralization are used by the
government (b) DBHSDA policies not only have the potential to reduce growth
rates but also increase disparities between regions (c) DBHPPh will reduce
growth (d) DAU is more promising for growth than others although the DAU
policy does not support equity among regions and (e) The combination of
existing policies in Indonesia promises growth but still cannot reduce the
occurrence of disparities between regions
2) ldquoDampak Desentralisasi Fiskal di Indonesia Terhadap Pertumbuhan
Ekonomi dan Disparitas Antar Daerah Analisa Model Makro Ekonometrik
Simultan as conducted by Teguh Dartanto 2002
This study used a simultaneous macroeconometric regional model with
two stage least square (TSLS) The Simultaneous Macro Econometric Model is
made for analyzing the fiscal decentralization impact to economic growth and
region disparity The policy simulation in this model used transfer fund from
central government such as Tax Revenue Sharing Natural Resource Revenue
Sharing and General Allocation Fund The simulation is carried out to see the
optimality of various possible existing policies The optimality is measured by
evaluating the high rate of economic growth and low disparity
23
The results of the study indicate that revenue sharing funds from natural
resources (DBHSDA) land and building tax (PBB) tax on Acquisition of land
and building (DBPHTB) and income tax (PPH) generate negative economic
growth rates General allocation funds (DAU) as an inter-regional fiscal spattering
factor a the most dominant factor in encouraging regional economic growth and
have a very big role in encouraging regional economic growth as well as being an
economic growth regulator among regions These conditions indicate a very large
dependence on the central government However when combined with the
revenue-sharing policy and general allocation funds they will result in positive
(although relatively small) growth and can reduce disparities between regions
The combination also significantly affects investment growth but does not
significantly affect the growth of consumption in the region The impact of fiscal
decentralization policy is more pronounced in the Eastern Region of Indonesia
(KTI) than in the Western Region of Indonesia (KBI) The simulation results also
indicate the dependence of local governments on transfer funds from the central
government Therefore local governments are also expected to actively seek non-
distortive sources of income
3) ldquo Dampak Transfer Pemerintah Pusat Terhadap Penurunan Ketimpangan
Pendapatan Di Indonesia rdquo as conducted by Adhitya Wardhana Bambang
Juanda Hermanto Siregar dan Kodrat Wibowo Sosiohumaniora Volume 15
no 2 Juli 2013 111 ndash 118
The method used in this study uses data panel regression with the period
2001-2010 For regional characteristics it is made as a dummy of rich regions
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
21
13 Empirical Review of Research on Fiscal Decentralization
131 Research on Fiscal Decentralization in Other Countries
ldquoFiscal Decentralization Contributes to Economic Growth Evidenc efrom State-
Level Cross-Section Data for The United Statesrdquo as conducted by Nobuo akai and
Masayo Sakata 2002
This study shows new evidence that fiscal decentralization effects
economic growth It used a cross-sectional method with 50 observations taking
the average 1992 to 1994 for time series and 50 states in the United States
The empirical models used to look at economic growth are
iiii zationDecentraliGSP εβαα +Χ++=∆ 10 i=1 50 (21)
Where i is the state ΔGSP I gross state production from 1992 to 1996
decentralizations show the average annual growth of the fiscal decentralization
indicator in state i and Xi is the control variable
Empirical research above shows that based on existing data fiscal
decentralization has contributed to economic growth The paper finds that fiscal
decentralization plays a key role in economic growth in the US As expected the
results also indicate that there are others affecting economic growth
132 Research on Fiscal Decentralization In Indonesia
1) Fiscal Decentralization Itrsquos Impact on Cities Growth as conducted by B
Raksaka Mahi 2001
This study used a simultaneous econometric model two stage least square
(TSLS) and regional econometric macros for (1) Evaluating intergovernmental
transfers and their impact on municipal government revenues and (2) Elaborating
22
on the implications of the transfer from government to city growth and disparity
between regions in Indonesia
The variable fiscal decentralization is measured by Revenue sharing
fund sharing funds DAU and DAK The study concluded that (a) The policy of
fiscal decentralization in Indonesia is very important for policy making in the
regions almost all standard instruments for fiscal decentralization are used by the
government (b) DBHSDA policies not only have the potential to reduce growth
rates but also increase disparities between regions (c) DBHPPh will reduce
growth (d) DAU is more promising for growth than others although the DAU
policy does not support equity among regions and (e) The combination of
existing policies in Indonesia promises growth but still cannot reduce the
occurrence of disparities between regions
2) ldquoDampak Desentralisasi Fiskal di Indonesia Terhadap Pertumbuhan
Ekonomi dan Disparitas Antar Daerah Analisa Model Makro Ekonometrik
Simultan as conducted by Teguh Dartanto 2002
This study used a simultaneous macroeconometric regional model with
two stage least square (TSLS) The Simultaneous Macro Econometric Model is
made for analyzing the fiscal decentralization impact to economic growth and
region disparity The policy simulation in this model used transfer fund from
central government such as Tax Revenue Sharing Natural Resource Revenue
Sharing and General Allocation Fund The simulation is carried out to see the
optimality of various possible existing policies The optimality is measured by
evaluating the high rate of economic growth and low disparity
23
The results of the study indicate that revenue sharing funds from natural
resources (DBHSDA) land and building tax (PBB) tax on Acquisition of land
and building (DBPHTB) and income tax (PPH) generate negative economic
growth rates General allocation funds (DAU) as an inter-regional fiscal spattering
factor a the most dominant factor in encouraging regional economic growth and
have a very big role in encouraging regional economic growth as well as being an
economic growth regulator among regions These conditions indicate a very large
dependence on the central government However when combined with the
revenue-sharing policy and general allocation funds they will result in positive
(although relatively small) growth and can reduce disparities between regions
The combination also significantly affects investment growth but does not
significantly affect the growth of consumption in the region The impact of fiscal
decentralization policy is more pronounced in the Eastern Region of Indonesia
(KTI) than in the Western Region of Indonesia (KBI) The simulation results also
indicate the dependence of local governments on transfer funds from the central
government Therefore local governments are also expected to actively seek non-
distortive sources of income
3) ldquo Dampak Transfer Pemerintah Pusat Terhadap Penurunan Ketimpangan
Pendapatan Di Indonesia rdquo as conducted by Adhitya Wardhana Bambang
Juanda Hermanto Siregar dan Kodrat Wibowo Sosiohumaniora Volume 15
no 2 Juli 2013 111 ndash 118
The method used in this study uses data panel regression with the period
2001-2010 For regional characteristics it is made as a dummy of rich regions
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
22
on the implications of the transfer from government to city growth and disparity
between regions in Indonesia
The variable fiscal decentralization is measured by Revenue sharing
fund sharing funds DAU and DAK The study concluded that (a) The policy of
fiscal decentralization in Indonesia is very important for policy making in the
regions almost all standard instruments for fiscal decentralization are used by the
government (b) DBHSDA policies not only have the potential to reduce growth
rates but also increase disparities between regions (c) DBHPPh will reduce
growth (d) DAU is more promising for growth than others although the DAU
policy does not support equity among regions and (e) The combination of
existing policies in Indonesia promises growth but still cannot reduce the
occurrence of disparities between regions
2) ldquoDampak Desentralisasi Fiskal di Indonesia Terhadap Pertumbuhan
Ekonomi dan Disparitas Antar Daerah Analisa Model Makro Ekonometrik
Simultan as conducted by Teguh Dartanto 2002
This study used a simultaneous macroeconometric regional model with
two stage least square (TSLS) The Simultaneous Macro Econometric Model is
made for analyzing the fiscal decentralization impact to economic growth and
region disparity The policy simulation in this model used transfer fund from
central government such as Tax Revenue Sharing Natural Resource Revenue
Sharing and General Allocation Fund The simulation is carried out to see the
optimality of various possible existing policies The optimality is measured by
evaluating the high rate of economic growth and low disparity
23
The results of the study indicate that revenue sharing funds from natural
resources (DBHSDA) land and building tax (PBB) tax on Acquisition of land
and building (DBPHTB) and income tax (PPH) generate negative economic
growth rates General allocation funds (DAU) as an inter-regional fiscal spattering
factor a the most dominant factor in encouraging regional economic growth and
have a very big role in encouraging regional economic growth as well as being an
economic growth regulator among regions These conditions indicate a very large
dependence on the central government However when combined with the
revenue-sharing policy and general allocation funds they will result in positive
(although relatively small) growth and can reduce disparities between regions
The combination also significantly affects investment growth but does not
significantly affect the growth of consumption in the region The impact of fiscal
decentralization policy is more pronounced in the Eastern Region of Indonesia
(KTI) than in the Western Region of Indonesia (KBI) The simulation results also
indicate the dependence of local governments on transfer funds from the central
government Therefore local governments are also expected to actively seek non-
distortive sources of income
3) ldquo Dampak Transfer Pemerintah Pusat Terhadap Penurunan Ketimpangan
Pendapatan Di Indonesia rdquo as conducted by Adhitya Wardhana Bambang
Juanda Hermanto Siregar dan Kodrat Wibowo Sosiohumaniora Volume 15
no 2 Juli 2013 111 ndash 118
The method used in this study uses data panel regression with the period
2001-2010 For regional characteristics it is made as a dummy of rich regions
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
23
The results of the study indicate that revenue sharing funds from natural
resources (DBHSDA) land and building tax (PBB) tax on Acquisition of land
and building (DBPHTB) and income tax (PPH) generate negative economic
growth rates General allocation funds (DAU) as an inter-regional fiscal spattering
factor a the most dominant factor in encouraging regional economic growth and
have a very big role in encouraging regional economic growth as well as being an
economic growth regulator among regions These conditions indicate a very large
dependence on the central government However when combined with the
revenue-sharing policy and general allocation funds they will result in positive
(although relatively small) growth and can reduce disparities between regions
The combination also significantly affects investment growth but does not
significantly affect the growth of consumption in the region The impact of fiscal
decentralization policy is more pronounced in the Eastern Region of Indonesia
(KTI) than in the Western Region of Indonesia (KBI) The simulation results also
indicate the dependence of local governments on transfer funds from the central
government Therefore local governments are also expected to actively seek non-
distortive sources of income
3) ldquo Dampak Transfer Pemerintah Pusat Terhadap Penurunan Ketimpangan
Pendapatan Di Indonesia rdquo as conducted by Adhitya Wardhana Bambang
Juanda Hermanto Siregar dan Kodrat Wibowo Sosiohumaniora Volume 15
no 2 Juli 2013 111 ndash 118
The method used in this study uses data panel regression with the period
2001-2010 For regional characteristics it is made as a dummy of rich regions
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
24
equal to one The Harmless hold variable in the study was made as a dummy
variable which before 2009 was given a value of one The data used is data from
32 provinces in Indonesia Determination of income inequality equation can be
seen as follows
IW = f (dau regional characteristics dau area rich dak road infrastructure
rules Harmless hold road infrastructure total population )
The model used is
iw = γ0 + γ1 Lndauit + γ2 D rich t + γ3 D rich Lndau t + γ4 Lndakjln t
+ γ5 LnDhhit + γ6 Lnjlnit + γ7 Lnpopit + et
Remarks iw Inequality (Index Williamson) dau General Allocation
Fund (million) daujln Special Allocation Fund road infrastructure pop
population Dkaya Rich area = 1 jln infrastructure Street Dhh Harmless hold
rule before2009 = 1 i province to i t year t
This study looked determined factors inequality in Indonesian 2001-2010
After the rule hold harmless has eliminated 2008 showed estimation from general
purpose grant (DAU) special purpose grant (DAK) significantly affected the
decreasing inequality of income This research will look at the development of the
provinces income inequality by using Williamson index The result of inequality
on the poor region more prevalent than the rich region The determination of the
rich and poor region of using the median of GDP per capita
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
25
14 Theoretical Framework
Figure 3 Theoretical framework
Realization The balance between the authority of the central government
and local government is realized through the policy of regional autonomy and
fiscal decentralization The policy of regional autonomy and fiscal
decentralization has been running since 2001 In the era of regional autonomy
each local government manages their finances to increase regional economic
Regional Autonomy
Fiscal Decentralization 992256 UU No 32 2004 992256 UU No 33 2004
Intergovermental Transfer Funds
DAU (General
allocation funds)
Kuznet Theory Todaro Theory
DAK (Spesific
allocation funds)
DBH (Tax revenue
sharing)
Economic Growth Region Income Disparity
Wiliamson Index
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-
26
activity Each region will increase their GRDP The increase in GRDP must come
from regional revenues such as PAD and intergovernmental transfer funds
The central government issued intergovernmental transfer funds (DAU
DAK and DBH) to make a major contribution to regional expenditure According
to Brodjonegoro (2001) the central government provides transfer funds to the
regions for financial equality between regions through DAU and DAK The
central government provides these funds so that local governments are more
responsive to improve their development through regional spending
The central government through fiscal policy will provide
intergovernmental transfer funds that are expected to increase economic growth
and affect income inequality between regions In reducing inequality various
alternative fiscal policies are implemented which can equalize regional finances
accompanied by meeting minimum service standards
15 Hypothesis
In this study the hypothesis that will be tested is
1) Decentralization indicators namely Intergovernmenral transfer (revenue
sharing fund (DBH) general allocation fund (DAU) and specific allocation
fund (DAK)) significantly influence regional economic growth
2) Intergovernmental transfer funds derived from revenue sharing fund (DBH)
increase disparity between regions
3) The general allocation fund (DAU) is effective to reduce disparities between
regions
- Decentralization Theory and Central and Regional Finance
- Definition and Concept of Decentralization
- Economic Growth and Income Disparity Among Regions
- Economic Growth
- Income disparity among regions
- Theoretical Framework
- Hypothesis
-