Sustainable Regional Economic Development by Developing Villages

This paper aims to analyze the relationships between village (desa) and regional economic activities. The government of Indonesia introduces the concept of building Indonesia from the periphery. The government put more effort into strengthening regions and villages within the framework of a unitary state. We estimate the relationships between village resources, village development, and economic growth controlled by capital and the size of the municipalities. All 434 municipalities receiving village funds from 2019 to 2021 are included in this study, grouped by the main islands of Indonesia. We use panel methods with various approaches such as Common Effects Model (CEM), Fixed Effects Model (FEM), Random Effects Model (REM), and Generalized Estimating Equation (GEE) to estimate the relationships. Village development contributes to local economic activities in two ways. The resource available for the village will improve economic activities, while the level of development might have different behavior. In the beginning, increasing the level of village development improves economic growth. However, in Jawa and Bali islands, at the higher level of village development, the growth might be slower. The result implies that government may put more effort into developing villages to improve economic development. To improve regional economic growth, putting more resources into the village might be beneficial. The objective of the development may differ for villages with different levels of the index. Higher growth should be targeted for villages with a lower level of developing index. On the other hand, villages with a higher level of index might be more advantageous to have social and ecological objectives. Sustainable regional economic development might be achieved by developing villages. The results provide positive views on the concept of building Indonesia from the periphery.