POTENTIAL LINK PATTERNS OF FISCAL DECENTRALIZATION TO POVERTY REDUCTION IN INDONESIA

Abstract

Fiscal decentralization is considered to give positive as well as negative impacts for development policy such as poverty reduction. The implementation of fiscal decentralization in Indonesia has changed the patterns of local governments’ budget allocation for poverty reduction. Local governments have wider discretion to allocate their budget for poverty reduction strategy. This study aims at observing the potential link patterns of fiscal decentralization to poverty reduction in Indonesian provinces before and in the period of fiscal decentralization implementation. This study applies a descriptive analysis as a method for identifying the potential link patterns of fiscal decentralization to poverty reduction in Indonesia. Firstly, this study identifies the trend of several poverty indicators in Indonesia, namely 1) the percentage rate of poverty; 2) poverty gap index (P1) and poverty severity index (P2); and 3) Human Development Index (HDI). Secondly, the link of fiscal decentralization to poverty reduction in Indonesia is elaborated using the share of government budget expenditure on relevant sector to total expenditure and the percentage rate of poverty. This study shows that there is no clear link pattern of fiscal decentralization to poverty reduction in Indonesia. Three link patterns, namely positive link, negative link, and no link appear differently among provinces and regions. Several factors that support the conditions need to be elaborated more.