The Effect of Fiscal Decentralization on Economic Development Performance in Indonesia

Muhamad Armawaddin, Wali Aya Rumbia, Ahmad Ahmad


The purpose of this study is to test and analyze the influence of fiscal decentralization on development performance in Indonesia using the structural equation model approach. The data uses panel data, from 34 provinces and in 2015-2019 sourced from the Ministry of Finance of the Republic of Indonesia and the Central Bureau of Statistics (BPS). Data analysis using structural equation model approach with the help of Smart-PLS 3.3.3 software. The outer model evaluation results concluded that all indicators of fiscal decentralization variables and economic development performance variables are valid. The most powerful indicator reflecting the latent variable of fiscal decentralization is the ratio of regional income and economic development performance is an indicator of economic growth.  The results of the evaluation of the inner model found that fiscal decentralization performance has a positive and significant influence on development performance. The existence of fiscal inequality among provinces in Indonesia causes uneven ratios of capital expenditures and public incomes as seen from the low indicator in reflecting decentralization of fiscal and economic performance


Fiscal Decentralization; Economic Development Performance; SEM-PLS

Full Text:



Akai, N., & Sakata, M. (2002). Fiscal decentralization contributes to economic growth: Evidence from state-level cross-section data for the United States. Journal of Urban Economics, 52(1), 93–108.

Aulia, N. (2014). Hubungan Desentralisasi Fiskal Terhadap Pertumbuhan Ekonomi, Tingkat Kemiskinan, Dan Kesenjangan Pendapatan Kabupaten/Kota Di Provinsi Jawa Tengah Tahun 2012. Economics Development Analysis Journal, 3(2), 327–336.

Bashir, A. (2011). Dampak Desentralisasi Fiskal Terhadap Perekonomian Daerah Kabupaten/Kota Di Provinsi Sumatera Selatan. KAjian Ekonomi, 10(2), 1–35.

Bird, R. M. (1993). Threading the fiscal labyrinth : Some issues in fiscal decentralization. National Tax Journal, 46(2), 207–227.

Bird, R. M., Ebel, R. D., & Wallich, C. I. (1995). Decentralization of the socialist state.

Davoodi, H., & Zou, H. F. (1998). Fiscal Decentralization and Economic Growth: A Cross-Country Study. Journal of Urban Economics, 43(2), 244–257.

Geladi, Paul & Kowalski, B. R. (1986). Partial Least Square Regression: A Tutorial. Elsevier Science Publishers B. V. Amsterdam.

Gramlich, E. M. (1993). A Policymaker’s Guide to Fiscal Decentralization. National Tax Journal, 46(2), 229–235.

Hair, J. F. J., Black, W. C., Babin, B. J., & Anderson, R. E. (2009). Multivariate Data Analysis (7th Edition) by Joseph F. Hair, William C. Black, Barry J. Babin, Rolph E. Anderson ( (p. 761).

Hariyanto, D. T. (2012). Dampak Desentralisasi Fiskal. Tesis. Tidak Dipublikasikan. Institut Pertanian Bogor, Bogor. Retrieved from

Jensen, M. C., & Meckling, W. H. (1976). Theory of Firm: Managerial Behavior, Agency Costs, and Ownership Structure. Journal of Financial Economics, 3, 305–360.

Khusaini, M. (2006). Ekonomi Publik: Desentralisasi Fiskal Dan Pembangunan Daerah. Badan Penerbit Fakultas Ekonomi (BPFE) Unibraw.

Litvack, J. I., & Seddon, J. (2002). Decentralization Briefing Notes: Strengthening Operational Skills in Community Driven Development. In World Bank Institute Working Paper.

Liu, L. C. (2017). Fiscal Decentralization, Public Governance and Economic Performance Examination of Two PLS-SEM Models. Taiwan Journal of Democracy, 13(2), 55–72.

Martinez-Vazquez, J., & McNab, R. (1992). Urban public finance in developing countries. Oxford, New York, Toronto.

Martinez-Vazquez, J., & Mcnab, R. M. (1997). Fiscal Decentralization, Economic Growth, and Democratic Governance. Working Paper 97-7.

Oates, W. E. (1993). Fiscal Decentralization Economic Development. National Tax Journal, 46(2), 237–243.

Peterson, H. C., & Anderson, B. L. (1995). The dangers of decentralization. The World Bank Research Observer, 10(2), 201–220.

Sato, M. (2002). Intergovernmental transfers, governance structure, and fiscal decentralization. Japanese Economic Review, 53(1), 55–76.

Woller, G. M., & Phillips, K. (1998). Fiscal decentralization and LDC economic growth: An empirical investigation. Journal of Development Studies, 34(4), 139–148.

Zhang, T., & Zao, H. (2001). Fiscal Decentralization and Economic Growth. In SSRN Electronic Journal.

Zhang, T., & Zou, H. F. (2001). The growth impact of the intersectoral and intergovernmental allocation of public expenditure: With applications to China and India. China Economic Review, 12(1), 58–81.

Zhang, T., & Zou, H. (1998). Fiscal decentralization, public spending, and economic growth in China. Journal of Public Economics, 67(2), 221–240.



  • There are currently no refbacks.

ISSN (Print) 2086-1575       ISSN (Online) 2502-7115

View My Stats


Creative Commons License
This work is licensed under a Creative Commons Attribution-NoDerivatives 4.0 International License.