Download Year 2002 2003 2004 2005 2006 2007 2008 2009 Balanced Fund

Are Regions Getting Alike or Diverged
Issues of Autonomous Kabupaten/Kota
By Muhammad Nanang Nugroho
Economic Development in the long term
involves structural changes which can be
identified into four process: accumulation,
allocation, demographic transition, and
distribution (Chenery & Syrquin;1975)
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Income Disparity as a result of
development process which is mainly
caused by unequal distribution process in
a country or even in the world.
 Therefore, there are some poor regions
and others are rich regions.

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Some Factors That Cause Income Disparity as A
Result of Development (Indonesia Case)
•
•
•
•
•
Income is concentrated on non agricultural sector, it is
caused non agricultural sector has higher turnover than
agricultural sector, it will also lead income disparity among
regions which mostly the regions count on agricultural
sector.
The Differences of Factor Endowment Among Regions such
as natural resources like oil which are produced more in
some island.
Education
Social Mobility, Population
Government Policy or Administration, for long time more 30
years Indonesia experienced centralistic government
– Almost all resources are managed by central government, less
distribution to local government
– Having big power to make policies which benefit only some
regions (Focus only on some regions)
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PDRB Distribution Based on Main Island, 1983-2007
1971
1980
1990
2008
Jawa
54,5
46,5
56,8
60,7
Sumatera
29,0
32,3
25,2
21,6
Bali and Nusa Tenggara
3,4
2,5
2,9
2,7
Kalimantan
5,4
11,3
9,1
8,8
Sulawesi
6,0
4,8
4,1
4,6
Maluku and Papua
1,7
2,6
1,9
1,6
Source: BPS, compiled by Suahasil Nazara
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Decentralization
Decentralization become a policy to remedy income
disparity in Indonesia .
• There are three kinds of decentralization implemented in
Indonesia, political, administrative and fiscal decentralization.
The last one should be used as a way toward economic
decentralization. (Brodjonegoro, 2006).
• Decentralization refers to more discretion for local
government to manage their priority by using their own
budget which can support in boosting regional growth, so
that can reduce income disparity among regions or even
make convergence of income.
• Therefore, in proving whether there is a convergence or not
it also should be check the significance of local government’s
fiscal policy which is represented in budget allocation in
convergence process.
•
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Allocation of Balanced Fund 2002-2009
(fiscal decentralization policy)
Year
2002
2003
2004
2005
2006
2007
2008
2009
Balanced 94.532,0 109.927,0 112.187,0 124.310,0 216.592,0 250.342,0 266.780,0 279.313,3
Fund
(billionRp)
Fiscal Decentralization has made an impact to local government by increasing in
transfer allocation from central government to local governments. The money
transferred is used by local governments to finance in implementing the
authorities or responsibilities they have. The table above shows that money
transferred increase every year which means that local governments have more
capacity in term of money to boost their regional economic growth through their
fiscal policies (APBD).
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Statement Question
Does allocation of local budget has
significant effect on convergence of
regional income? (represented by
allocation on physical capital or human
capital) compared to private investment?
 Which is more significant, budget
allocation on physical capital or human
capital?

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Theory of Convergence
•
•
The existence of convergence is mostly based on the standard
neoclassical growth model which assumes that economies move
toward steady state. If Some economies have the same path toward
the same steady state, their economy will converge at steady state
point with different speed of convergence which depend on initial
point (state of economy or income) to move. (Solow, 1956)
The neoclassical growth theory distinguishes between
unconditional (sometimes also called absolute) convergence and
conditional convergence. The former assumes that all concerned
economies have the same steady state, so that convergence will
lead all economies to a common (per capita) income level. On the
other hand, the concept of conditional convergence assumes that
the economies concerned have different steady states, and
convergence will lead these economies to their respective steady
state levels of per capita income.
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Literature Review
By using provincial data, many researchers
found that there is a convergence of
income in Indonesia.
 Researchers tried to find the role of
some growth factors in supporting
convergence process. They put some
variables related to growth in their
models.

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Literature Review
List of conditional variables in Indonesia convergence studies (using β - conditional convergence analysis)
reseacher
data
variables
result
Garcia & Sulistianingsih
1973-1993 (provincial data) birth rate, level of education, level of education
teacher & student ratio, oil
is significant
and gas
Resosudarmo & Vidyattama
1993-2002 (provincial
income per capita, physical physical capital
data)
capital accumulation, human accumulation is
capital accumulation,
significant, human
population growth,
capital investment
development of financial
is not significant
agency, FDI, Gini Index,
openness,role oil & gas
sector
Wibisono
1984-2000 (provincial
investment, role labor force, human capital is
data)
technology, human capital
not significant
Sukadana Sufii & Suahasil
1985-2006 (provincial
income per capita, physical in 1995-2006 level
Nazara
data)
capital accumulation, human of education is not
capital invesment (SLTA),
significant, in
population growth, role of
2000-2006 level of
industrial sector, role of
education is not
agricultural sector, role of
significant
export and import
Jamzani Sodik
1993-2003 (provincial
allocation of local budget on education and
data)
education, allocation of local health are not
budget on health, density,
significant
FDI, openness, local inflation
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