The Impacts of Regional Governments’ Expenditures on the Agricultural Sector and Economic Performance in Indonesia

Abstract

The amount and composition of government expenditure in fiscal operations has a significant impact on aggregate demand and national output and affects resource allocationin an economy. Therefore, in order to achieve effective economic development, regional government spending has to be allocated appropriately according to the potentials of each area. The purpose of the study is to examine the impacts of regional government spending on investment, employment, economic growth, and poverty in the areas where the contribution of the agricultural sector to GRDP is high and low. This Study utilizes an econometric model of simultaneous equations system using panel data of 20 provinces in Indonesia for the period of 2003-2011. Several simulations (counter-factual experiments) were conducted. The 20 sampled provinces were classified into two groups based on the contribution of agricultural sector to the respective regional economy. In provinces where the agricultural sector is dominant, an increase in government spending on agriculture-- subject to a constant total government expenditure--increases the total investment, total employment, the total GRDP, and decreases poverty rate. On the other hand, in provinces where agriculture is not dominant, it decreases the total investment.