Skip to main content

Advertisement

Log in

The impact of fiscal efficiency on poverty reduction in Indonesia: institutional factor and geographical differences

  • Original Article
  • Published:
Journal of Geographical Systems Aims and scope Submit manuscript

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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7
Fig. 8
Fig. 9
Fig. 10
Fig. 11

Similar content being viewed by others

Notes

  1. 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.

  2. 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).

  3. “What Does the End of the Commodity Boom Mean for Poverty in Latin America?” World Bank Blogs, 23 June 2015, blogs.worldbank.org/developmenttalk/what-does-end-commodity-boom-mean-poverty-latin-america. Accessed 12 Dec. 2020.

    ‌IMFBlog. “How the Commodity Boom Helped Tackle Poverty and Inequality in Latin America.” IMF Blog, IMF Blog, 2018, blogs.imf.org/2018/06/21/how-the-commodity-boom-helped-tackle-poverty-and-inequality-in-latin-america/. Accessed 12 Dec. 2020.

  4. 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.

References

  • Alfada A (2019) Does fiscal decentralization encourage corruption in local governments? evidence from Indonesia. J Risk Financ Manag 12(3):118

    Article  Google Scholar 

  • Anand R, et al (2014) India: Defining and Explaining Inclusive Growth and Poverty Reduction. IMF Working Papers, 14(63):1

  • Asian Development Bank (2006), Poverty Handbook: Analysis and Processes to Support ADB Operations, Report by the ADB

  • Azis IJ (2003) Concepts and Practice of Decentralization: Some Notes on the Case of Indonesia. Policy Dialogue in the United Nations, New York

    Google Scholar 

  • Balisacan AM, et al (2002) Revisiting Growth and Poverty Reduction in Indonesia: What Do Subnational Data Show?. ERD Working Paper Series No. 25, Asian Development Bank.

  • Bardhan P (2002) Decentralization of governance and development. J Econ Perspect 16(4):185–205

    Article  Google Scholar 

  • Bird K, Manning C (2008) Minimum wages and poverty in a developing country: simulations from Indonesia’s household survey. World Dev 36(5):916–933

    Article  Google Scholar 

  • Braun JV and Grote U (2000) Does Decentralization Serve the Poor?, IMF-Conference on Fiscal Decentralization 20–21 November 2000, Washington D.C.

  • Cardoso E (1992) Inflation and Poverty. NBER Working Paper No. 4006.

  • Dartanto T, Nurkholis, (2013) The determinants of poverty dynamics in indonesia: evidence from panel data. Bull Indones Econ Stud 49(1):61–84

    Article  Google Scholar 

  • Devarajan H, Swaroop V, Zou HF (1996) The composition of public expenditure and economic growth. J Monet Econ 37:313–344

    Article  Google Scholar 

  • Dollar D, Kraay A (2002) Growth is good for the poor. J Econ Growth 7(3):195–225

    Article  Google Scholar 

  • Dorward AR (2012) The short and medium term impacts of rises in staple food prices. Food Secur 4(4):633–645

    Article  Google Scholar 

  • Escaleras M, Chiang EP (2017) Fiscal decentralization and institutional quality on the business environment. Econ Lett 159:161–163

    Article  Google Scholar 

  • Fan S (2008) Public Expenditures, Growth, and Poverty in Developing Countries: Lessons from Developing Countries. Issue Brief 51, International Food Policy Research Institute.

  • Farrell MJ (1957) The measurement of productive efficiency. J Roy Stat Soc 120(3):253–290

    Article  Google Scholar 

  • Gindling TH (2014) Does increasing the minimum wage reduce poverty in developing countries? IZA World of Labor Report 2014:30

    Google Scholar 

  • Jin et al (2001) Regional decentralization and fiscal incentives: federalism, Chinese style. The Center for Research on Economic Development and Policy Reform, Stanford, CA

    Google Scholar 

  • Klein M et al (2001) Foreign Direct Investment and Poverty Reduction. Policy Research Working Paper No. 2613, World Bank.

  • Lim D (1983) Government recurrent expenditure and economic growth in less developed countries. World Dev 11(4):377–380

    Article  Google Scholar 

  • Mishra S, Islam I (2000) Towards a Poverty Reduction Strategy for Indonesia. UNSFIR Policy Paper, ILO Area Office, Indonesia

    Google Scholar 

  • Prud’Homme R (1995) The dangers of decentralizations. World Bank Res Obs 10(2):201–220

    Article  Google Scholar 

  • Rodriguez-Pose A, Ezcurra R (2010) Does decentralization matter for regional disparities? a cross-country analysis. J Econ Geogr 10(5):619–644

    Article  Google Scholar 

  • Rodriguez-Pose A et al (2009) Fiscal decentralisation, efficiency, and growth. Environ Plan Econ Space 41(9):2041–2062

    Article  Google Scholar 

  • Salvatore P (2004) Growth and poverty in globalizing world. J Policy Model 26(4):543–551

    Article  Google Scholar 

  • Sepulveda CF, Martinez-Vazquez J (2011) The consequences of fiscal decentralization on poverty and income equality. Environ Plann C: Pol Space 29(2):321–343

    Article  Google Scholar 

  • Son HH, and Kakwani N (2004) Economic Growth and Poverty Reduction: Initial Conditions Matter. Working Paper No. 2, UNDP.

  • Suryadarma D, and Suryahadi A (2007) The Impact of Private Sector Growth on Poverty Reduction: Evidence from Indonesia. Development Economics Working Papers 21914, East Asian Bureau of Economic Research.

  • Suryahadi A et al (2012) Economic growth and poverty reduction in indonesia before and after the Asian financial crisis. Bull Indones Econ Stud 48(2):209–227

    Article  Google Scholar 

  • Talitha T et al (2019) Welcoming two decades of decentralization in indonesia: a regional development perspective. Territory, Pol, Gov 8(5):690–708

    Article  Google Scholar 

  • Thorat S, Fan S (2007) Public investment and poverty reduction: lessons from China and India. Econ Pol Wkly 42(8):704–710

    Google Scholar 

  • Tirtosuharto D (2010) The impact of fiscal decentralization and state allocative efficiency on regional growth in Indonesia. J Int Econ Commer Policy 1(2):287–307

    Article  Google Scholar 

  • Treismann D (2006) explaining fiscal decentralisation: geography, colonial history, economic development and political institutions. Commonw Comp Pol 44(3):289–325

    Google Scholar 

  • Wilhelm V, and Fiestas I (2005) Exploring the Link Between Public Spending and Poverty Reduction: Lessons from the 90s. WBI Working Paper, World Bank.

  • World Bank (2000) Poverty Reduction and Global Public Goods: Issues for the World Bank in Supporting Global Collective Action. World Bank Development Committee Report.

  • Yao GA (2007) Fiscal Decentralization and Poverty Reduction Outcomes: Theory and Evidence. Dissertation Works at the Department of Economics, Georgia State University.

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Darius Tirtosuharto.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

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.

Appendices

Appendix 1

See Figures 12 and 13.

Fig. 12
figure 12

Regional poverty map of 2001–2008

Fig. 13
figure 13

Regional poverty map of 2009–2016

Appendix 2

See Table 6.

Table 6 Yearly regional fiscal efficiency scores

Appendix 3

See Table 7.

Table 7 Dynamic panel data estimation, two-step difference generalized method of moments (GMM)

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

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

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10109-021-00359-1

Keywords

JEL Classification

Navigation