Does Government Expenditure Affect Regional Inclusive Growth? An Experience of Implementing Village Fund Policy in Indonesia

Abstract

The village fund allocation is a policy strategy of the government of Indonesia for development in rural areas. Each village has funds sourced from the State Revenue and Expenditure Budget. The uniqueness of this strategy is the community’s involvement in determining the allocation expenditure of funds. Therefore, the program is carried out in line with the needs of the community. Rural areas generally rely on agriculture, which has lower productivity than other sectors, so they need support to achieve inclusive growth. This study analyzes whether the village fund allocation is a pro-poor, pro-equality, and pro-job policy. It uses secondary data from the Ministry of Finance, Statistics Indonesia, and the National Development Planning Agency from the period of 2015–2019 for 33 provinces of Indonesia. The data were analyzed using panel regression with three models: income inequality, poverty levels, and unemployment rates. Other variables supporting inclusive growth, including economic growth, infrastructure, and the expansion of public services, were examined. The results showed that government expenditure through village fund allocation encourages inclusive growth as a policy that is pro-poor and pro-job but not pro-equality. Economic growth, on the other hand, reduces income inequality but increases poverty. Economic infrastructure increases income inequality, while increasing access to public services reduces poverty levels and increases unemployment.