Perpustakaan Digital ITB

The implementation of fiscal decentralization in Indonesia gave greater freedom to the local governments, the local governments have greater authority and responsibility over its resource allocation and budgeting decisions. The change from a centralized system to a decentralized system of government established by the UU No.22 Year 1999 and UU No.25 Year 1999 and amended with UU No.32 Year 2004 and UU No.33 Year 2004 was due to the need for democracy and better deliverance of public goods and services at a local government level that was not able to be fulfilled by the centralized government regime.In this new system, the local governments are expected to be self-sufficient and independent in its resource allocation decisions and sources of funding (dependency of sources funding from central government minimized). This changing role of the local government implicates the need of the local government to manage its budget efficiently as to induce economic development. One of the purposes of fiscal decentralization is to stimulate economic development. The funding from the central government as to support the local economy is limited due to fiscal decentralization. The economic development of the cities/kabupatens can no longer be dependent on sources of funding from the central government. The local governments are then forced to make smart resource allocation decisions and deliver goods and services in accordance with local preferences while also facing increasing inter-jurisdictional competition. This becomes the foundation of this paper; with all this conditions enforced due to decentralized local finance does it lead to local economic development.The localities which are subject to the study are localities (cities/kabupatens) within the Jakarta Metropolitan Area, these localities are chosen as case studies since the workings of fiscal decentralization and local economic development should be more observable in this area. These localities are part of a metropolitan area which have a main role as centers of trade and business which means that the economic development that occurs in these localities should be more prominent. The assumptions behind fiscal decentralization should be able to be adopted since citizens in urbanized localities are highly literate which means that the transfer of information is unrestricted and is highly mobile since transportation costs are lower (they have similar characteristics of people in developed countries), citizens can exit localities that are not compatible with their preferences/voting by foot.The analyses used as to answer the research are regional economic and finance analysis, Pearson’s coefficient analysis, LQ and shift-share analysis. These analyses were done towards a set of indicators as to obtain the conditions of fiscal decentralization and local economic development. The indicators for analyses were the level of fiscal decentralization and decentralization as well as local economic development indicators. Local economic development indicators encompassed economic growth (economic growth further explained with relative increase of economic output and government contribution in promoting economic growth), sustainability of economic growth, level of welfare, and structural change of development. As to obtain the impact of fiscal decentralization on local economic development descriptive comparative analysis were done, synthesizing the indicators.Based on the analyses done, it was found that fiscal decentralization positively impacts the economic growth, relative economic output, and structural change of the economy or in other words the productivity of the economy. It does not however necessarily lead to local economic development since it does not necessarily lead to a better standard of living. Meanwhile, determinant factors in local economic development are the changes in the level of welfare and sustainability of the economy. Therefore, there is no clear relationship between fiscal decentralization and local economic development.