THE IMPACT OF FISCAL DECENTRALIZATION ON GDPPER CAPITA IN PROVINCES OF INDONESIA

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1 THE IMPACT OF FISCAL DECENTRALIZATION ON GDPPER CAPITA IN PROVINCES OF INDONESIA Jurni Hayati 1) Whinarko Julipriyanto 2) 1)2) Universitas Tidar ABSTRACT Fiscal decentralization policy in Indonesia has been implemented since The purpose of fiscal decentralization is to improve the welfare of local communities because local governments know the needs of their region. Provinces in Indonesia has different resources, thereforelocal government must determine some policies to use their potentials optimally so that the region can be developed quickly and does not depend on the central government. This research uses descriptive analysis with quantitative data. The data are panel data of the provinces in Indonesia period from the BPS Indonesia. The independent variables are PAD ratio, DBH SDA ratio, DAU ratio, domestic invesment, unemployment, and HDI, while the dependent variable is GDP per capita. The analysis tooluses GLS FEM method with EViews 9.The results of this research show the impact of fiscal decentralization on GDP per capita in terms of PAD ratio showsa negative and significant effect and in terms of DBH SDA ratio showsa negative and significant effect. Keywords: fiscal decentralization, GDP per capita, GLS FEM. INTRODUCTION Cheema and Rondinelli (1983), Turner and Hulme (1997) states that decentralization is the transfer of authority, responsibility, planning, decision-making, and the functions of government from central government to local government, semigovernment institutions, as well as to the private sector. Smith (1986), Barzelay (1991), Turner and Hulme (1997) explains that decentralization is a way of government closer to the people. If the government in public outreach, services faster, saving, responsive, accommodating, and innovative. In the provinces of Indonesia has different potential of natural and human resources. The difference in these resources can be seen from the level of revenue (PAD) and revenue-sharing of natural resources (DBH SDA). In this study the role of PAD and DBH SDA can be seen from the ratio of PAD (RPAD) and SDA DBH ratio (RBHS) to TPD. 148 ISBN

2 Kalimantan Timur Riau Aceh Sumatera Selatan Kalimantan selatan Jambi Kalimantan Tengah Papua Lampung Nusa Tenggara Barat Sulawesi Tenggara Jawa Barat Maluku Jawa Timur Kalimantan Barat Bali Sulawesi Selatan Sulawesi Tengah Bengkulu Sumatera Utara DKI Jakarta Sumatera Barat DI Yogyakarta Jawa Tengah Sulawesi Utara Nusa Tenggara Timur Jawa Barat Jawa Timur Bali Jawa Tengah DKI Jakarta Sumatera Utara Sulawesi Selatan Kalimantan selatan DI Yogyakarta Sumatera Barat Lampung Jambi Sumatera Selatan Kalimantan Barat Nusa Tenggara Barat Sulawesi Utara Kalimantan Timur Riau Bengkulu Sulawesi Tengah Kalimantan Tengah Nusa Tenggara Timur Sulawesi Tenggara Maluku Aceh Papua Proceeding 2nd Sriwijaya Economics, Accounting, and Business Conference 2016 Graph 1.1 RPAD in Provinces of Indonesia, Note: BPS, 2016 (edited). The higher RPAD than the national average are mostly located in all provinces of the Java island (see Graph 1.1). It is because the percentage of the population and industry on the island of Java is bigger than the other islands so that receipts taxes, levies, and corporate profits obtained will be greater. The highest RPAD is in the West Java province and the lowest RPAD is in the Papua province.it is because in the West Java province has a large population, many large companies, and small industries are growing rapidly, while in the province of Papuais still verylittle Graph 1.2 RBHS in Provinces of Indonesia, Note: BPS, 2016 (edited) ISBN

3 DKI Jakarta Kalimantan Timur Riau Papua Sumatera Utara Jawa Timur Kalimantan Tengah Kalimantan selatan Sumatera Barat Sulawesi Utara Bali Jawa Barat Sumatera Selatan Kalimantan Barat Aceh Sulawesi Tengah Sulawesi Selatan DI Yogyakarta Jawa Tengah Jambi Sulawesi Tenggara Lampung Bengkulu Nusa Tenggara Barat Maluku Nusa Tenggara Timur Proceeding 2nd Sriwijaya Economics, Accounting, and Business Conference 2016 Based on Graph 1.2, it shows that the province has a high RBHS, which is in the East Kalimantan, Riau, Aceh, South Sumatra, South Kalimantan and Jambi province. Abundance of natural resources can increase RBHS that received by the provincial government. Lowest RBHS is in the East Nusa Tenggara province, it is because at least the at least natural resources so RBHS that received by the provincial government is a little bit. Increased local revenues would not be meaningful if it is not followed by an increase in economic growth. To measure the actual economic growth can be seen from PDRBPK because more emphasis on the ability of the region to increase the GDP in order to exceed the rate of population growth (Garspersz and Feonay, 2003). Graph 1.3 PDRBPK in Provinces of Indonesia, Note: BPS, 2016 (edited). Based on the Graph 1.3, higher PDRBPK than the national average which is located in the province who have high RPAD and high RBHS. It is because RPAD and RBHS can be used to develop economic activities in the province so it is can improve PDRBPK in the province. High PDRBPK is in the DKI Jakarta, East Kalimantan, Papua, and Riau province. The other provinces are under the national average PDRBPK. Lowest PDRBPK is in the East Nusa Tenggara province. Based on the data, there are many PDRBPK in provinces of Indonesia which is lower than the national average. This is contrasts with the various of decentralization theories that the decentralization can increase economic growth and welfare of the community. Therefore, the authors want to analyze how the impact of fiscal decentralization in terms of RPAD and RBHS on PDRBPK in provinces of Indonesia. METHODOLOGY OF RESEARCH Types of Research and Data Sources This research uses descriptive analysis with quantitative data. The data are GDP per capita, PAD, DBH SDA, DAU, domestic invesment, unemployment, HDI of the provinces in Indonesia period that were obtained from the BPS Indonesia. The analysis tool uses EViews ISBN

4 Panel Data Estimation Method a. Test of Panel Data Estimation Method Before determining the panel data estimation methods that will be used in this study, we must do some testing. To determine whether the panel data can be regressed with PLS method or methods of FEM using Chow Test. To determine whether the panel data can be regressed with FEM method or methods REM using Hausman Test. b. Test of Classic Assumption To forming the regression equation is necessary to test classic assumptions to obtain equations that are BLUE (best linear estimator unbias). In this study, there are three classic assumption test done, it is homoskedastisity, no serial auto correlation, and no multicollinearity. Estimation of the Research Model The impact offiscal decentralization onpdrbpkrefersjumadi and Ghozali research (2013).Models areconstructedasfollows: pdrbpk it = α it +β 1 rpad it +β 2 rbhs it +β 3 rdau it +β 4 pmdn it +β 5 tpgrn it +β 6 ipm it +ε it Table 2.1 Independent Variables and Hypothesis No Variable Explain Hypotheses 1 rpad it Share PAD ratio on TPD in i province and on t year 2 rbhs it Share DBH SDA ratio on TPD in i province and on t year 3 rdau it Share DAU ratio on TPD in i province and on t year Based on theory of Neoklasik, Bird and Vaillancourt (1998), and research of Jumadi et al. (2013), show positive impact of rpad on pdrbpk. Based on theory of Adam Smith, and research of Jumadi et al. (2013), show positive impact of rbhs on pdrbpk. Based on theory of Neoklasik, and research of Jumadi et al. (2013), show positive impact of rdau on pdrbpk. 4 pmdn it Domestic invesment in i province and on t year 5 tpgrn it Unemployment in i province and on t year 6 Ipm it Human development index in i province and on t year Based on theory of Neoklasik and Solow, and research of Jumadi et al. (2013), show positive impact of invesment on pdrbpk. Based on theory of Neoklasikshows negative impact of Unemployment on pdrbpk. Based on theory of Neoklasik and Solow, and research of Jumadi et al. (2013), show positive impact of ipm on pdrbpk. ISBN

5 RESULTS AND DISCUSSION The Results of Estimation and Hypothesis The estimation results will be discussed is the estimation results of GLS FEM method. Because the method has been free from the problem homoskedastisity, no serial autocorrelation, and no multicollinearity so that it can deliver BLUE results. Table 3.1 The results of GLS FEM Variabel dependen: PDRBPK Variabel independen GLS FEM Koefisien variabel C *** Rpad Rbhs ** Rdau Pmdn 9.87E-08*** Tpgrn ** Ipm *** R-squared Adjusted R-squared F-statistic *** DW Note: **signifikan α=5%, ***signifikan α=1% DETERMINATION COEFFICIENT TEST (R2) The determination coefficient (R2) have utility as a measure of the accuracy of a regression line which is applied to a set of data on the observation (a measure of the goodness of fit). In this study, the determination coefficient (R2) of RPAD, RBHS, RDAU, PMDN, TPGRN, and IPM variable on PDRBPK in the amount of It is meaning that the independent variables are able to explain the dependent variable around 72 percent and 28 percent is explained by other variables outside this research model. PARTIAL TEST (T-STAT) Base on partial test, there are two independent variables regression results are consistent with the hypothesis of research. First, PMDN have a positive and significant effect on PDRBPK (t-stat probability <α = 1 percent). Second, IPM have a positive and significant effect on PDRBPK (t-stat probability <α = 1 percent). There are four independent variables regression results are not consistent with the hypothesis of research, it is RPAD, RBHS, RDAU, and TPGRN. RPAD have a negative and significant effect on PDRBPK (t-stat probability <α = 10 percent). RBHS have a negative and significant effect on PDRBPK (t-stat probability <α = 5 percent). RDAU have a negative and insignificant on PDRBPK (t-stat probability >α = 10 percent). TPGRN have a positive and significant effect on PDRBPK (t-stat probability <α = 5 percent). SIMULTANEOUS TEST (F-STAT) Simultaneous test is used to test the significant effect of the independent variables together with dependent variable. Simultaneously, the independent variable of 152 ISBN

6 RPAD, RBHS, RDAU, PMDN, TPGRN, IPM show a positive and significant effect on PDRBPK with f-stat probability<α = 1 percent. THE IMPACT OFFISCAL DECENTRALIZATIONONPDRBPK The results of this researchusefemglsmethod: pdrbpk it = it rpad it rbhs it rdau it +9.87E- 08pmdn it tpgrn it ipm it +ε it 1. THE EFFECT OF RPAD ON PDRBPK The effect of RPAD on PDRBPK shows a negative effect in the amount of It is meaning that every 1 percent RPAD increase, PDRPK will decrease billion rupiah, and otherwise. The results are contrast to Neoclassical theory that decentralization can affect economic growth both directly and indirectly through efisiesnsi public sector and macroeconomic stabilization. It is contrast to the Bird and Vaillancourt theory (1998) that decentralization can increase revenue for local governments can decide for regional policymakers. And contrast to the research of Jumadi et al. (2013) explains that there is a positive effect of RPAD on PDRBPK. 2. THE EFFECT OF RBHS ON PDRBPK The effect of RBHS on PDRBPK shows a negative effect in the amount of It is meaning that every 1 percent RBHS increase, PDRBPK will decrease billion rupiah, and otherwise. The results are contrast to Adam Smith theory which states that natural resources can boost economic growth. And contrast to the research of Jumadi et al. (2013) also explains that there is a positive effect of RBHS on PDRBPK. 3. THE EFFECT OF DAU ON PDRBPK The effect of RDAU on PDRBPK shows a negative effect in the amount of It is meaningthat every 1 percent RDAUincrease, PDRPK will decrease billion rupiah, and otherwise. The results are contrast to Neoclassical theory that decentralization can affect economic growth both directly and indirectly through efisiesnsi public sector and macroeconomic stabilization. And contrast to the research of Jumadi et al. (2013) explains that there is a positive effect of RDAU on PDRBPK. 4. THE EFFECT OF PMDN ON PDRBPK The effect of PMDN on PDRBPK shows a positive effect in the amount of 9.87E- 08. It is meaning that every 1 percent PMDN increase, PDRBPK will increase 9.87E-08 billion rupiah, and otherwise. The results are consistent with Neoclassical theory that explains the capital increase can boost economic growth. Solow theory also explains that the output produced in the economy depends on the stock of capital and labor. And research of Jumadi et al. (2013) explains that there is a positive effect of PMDN on PDRBPK. 5. EFFECT OF TPGRN ON PDRBPK The effect of TPGRN on PDRBPK showsa positive effect in the amount of It is meaningthat every 1 percent TPGRN increase, PDRBPK will increase billion rupiah, and otherwise. The results are contrast to Neoclassical theory that economic growth can be through the increase in the quantity and quality of labor. ISBN

7 6. THE EFFECT OF IPM ON PDRBPK The effect of IPM on PDRBPK showsa positive effect in the amount of It is meaningthat every 1 percent IPM increase, PDRBPK will increase billion rupiah, and otherwise. These results are consistent with Neoclassical theory that economic growth can be through increasing the quantity and quality of labor. Likewise Solow theory that the output produced in the economy depends on the stock of capital and labor.and research of Jumadi et al. (2013) explains that there is a positive effect of IPM on PDRBPK. CONCLUSION The impact of fiscal decentralization on GDP per capita in terms of the PAD ratio shows a nagative and significant effect. The results are contrast to Neoclassical theory, Bird and Vaillancourt research (1998), and research of Jumadi et al.(2013). The impact of fiscal decentralization on GDP per capita in terms of the DBH SDA ratio shows a negative and significant effect. The results are contrast to Adam Smith theory, and research of Jumadi et al. (2013). REFERENCES Barzelay, M., 1991, Managing Local Development, Lesson from Spain, Policy Sciences, Vol 24, PP Bird, R.M., and Vaillancourt, F., 1998, Fiscal Decentralization in Developing Countries, Cambridge University Press, New York. BPS, 2016, Indonesian Statistics, the Central Bureau of Statistics, Jakarta. Cheema, G.S. and Rodinelli, D.A., 1983, Planning Theory, Working Paper 581, The World Bank. Gaspersz, v., and Foenay, E L., 2003, Macro level manpower planning, Annual Report, Nusa Tenggara Timur. Jumadi, Pudjiharjo, M., Maski, Ghozali., and Khusaini, Moh., 2013, The Impact of Fiscal Decentralization on Local Economic Development in East Java, IOSR Journal Of Humanities And Social Science (IOSR-JHSS), Vol 13, PP Gujarati, D.N., 2010, Basic Econometrics, The McGraw-Hill Companies, New York. Smith, B.C., 1986, Decentralization: The Territorial Dimension of The State, Journal of Political Science, Vol 38, PP Turner, M. and Hulme, D., 1997, Governance, Administration and Development: Making the State Work,Basingstoke, Macmillan. 154 ISBN