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