Abstract
In many developing countries with a decentralized system, the effectiveness of subnational expenditures to support local economy and improve public welfare is constrained by institutional issues. This study is to determine the impact of subnational fiscal efficiency as one measure of institutional quality on poverty reduction in Indonesia. A relative efficiency score is computed with the data envelopment analysis (DEA) method for 26 Indonesian regions from 2001 until 2016. The empirical analysis using panel generalized method of moments (GMM) confirms a negative correlation between fiscal efficiency and poverty rate. Impact of capital expenditure on poverty reduction is found to be more dominant than current expenditures, which suggests the importance of public infrastructure investments in reducing poverty. The study also finds that despite a declining trend of fiscal efficiency, its impact on lowering poverty rate is stronger after the global financial crisis 2008. Furthermore, geographical differences also affect the level of impact of fiscal efficiency on poverty reduction in Indonesia.
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Notes
The poverty rate may be varied due to differences in the living costs that are higher than initially suggested using the Purchasing Power Parity (PPP) measurement. By measurement of daily income, the World Bank adjusted the poverty line threshold from $1.08 in 2001 to $1.90 in 2015.
Previous study by the author also finds that leading provinces based on the economic size are relatively more capable in efficiently allocating fiscal resources to support economic growth after decentralization. These leading provinces are primarily in the Java region (Tirtosuharto 2010).
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Since 2008, the method of calculating minimum living costs was standardized to provide more certainty to businesses, and as a consequence, the percentage adjustments of minimum living costs between regions converged.
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D. Tirtosuharto: The author is currently a Senior Economist at Bank Indonesia. The views expressed in this paper are the author's own and do not represent those of Bank Indonesia.
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Tirtosuharto, D. The impact of fiscal efficiency on poverty reduction in Indonesia: institutional factor and geographical differences. J Geogr Syst 24, 67–93 (2022). https://doi.org/10.1007/s10109-021-00359-1
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DOI: https://doi.org/10.1007/s10109-021-00359-1