Narrowing the gap: Dynamics of Indonesia's public expenditure performance in economically lagging districts

Ardi Sugiyarto, Boon L. Lee and Clevo Wilson

Economic Analysis and Policy, 2025, vol. 85, issue C, 2299-2318

Abstract: This study investigates public expenditure efficiency in Indonesia's economically lagging districts within a framework of fiscal decentralization from 2005 to 2019. Using Data Envelopment Analysis (DEA) and the Färe-Primont Productivity (FPP) index, it assesses spending efficiency and productivity changes in lagging districts compared to non-lagging ones. The results reveal significant regional disparities, with eastern Indonesia, particularly Papua and Maluku, underperforming compared to more developed areas such as Java and Sumatra, though some lagging regions have improved over time. The declining productivity of spending underscores the need to anticipate public service costs in newly established, often underdeveloped districts, while also emphasizing the importance of cooperation and close coordination with parent districts. The socio-economic factors influencing efficiency include urbanization, density, literacy rates, local tax revenue, and grant allocations, with reliance on central government grants reducing efficiency. While the Pembangunan Daerah Tertinggal (PDT) program has improved expenditure efficiency since its implementation in 2005, it has not necessarily led to all districts graduating from lagging to non-lagging status. Continued central support and targeted interventions are crucial to addressing infrastructural and socio-economic challenges. Reassessing the ‘lagging’ status policy and providing complementary support are essential for sustaining regional development while maintaining improvements in public expenditure efficiency.

Keywords: Decentralization; Lagging region; Efficiency; Public expenditure; Local government (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:85:y:2025:i:c:p:2299-2318

DOI: 10.1016/j.eap.2025.03.014

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