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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) 2 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. 3 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) 4 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 5 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. • 6 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). 7 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? 8 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. 9 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. 10 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 11