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Reassessing the Causal Impact of Fiscal Decentralization on Poverty Severity in Indonesia

Author

Listed:
  • . Ahmad

    (Halo Oleo University, Indonesia)

  • Muhamad Armawaddin

    (Halo Oleo University, Indonesia)

Abstract

This study reassesses the causal impact of fiscal decentralization on poverty severity in Indonesia using province-level panel data for the post-decentralization period. While existing studies largely focus on poverty incidence and rely on conventional estimators, this paper emphasizes poverty severity and explicitly addresses fiscal endogeneity. An instrumental-variable approach is employed to identify the causal effects of own-source revenue, intergovernmental transfers, and expenditure composition. The results show that fiscal decentralization has a limited and highly conditional impact on poverty severity. Once endogeneity is controlled for, only own-source revenue exhibits a statistically significant poverty-reducing effect, whereas transfers and sectoral expenditure shares have no robust causal impact. These findings suggest that strengthening local revenue capacity and fiscal accountability matters more than relying predominantly on transfer-based decentralization.

Suggested Citation

  • . Ahmad & Muhamad Armawaddin, 2026. "Reassessing the Causal Impact of Fiscal Decentralization on Poverty Severity in Indonesia," Journal of Economic Development, The Economic Research Institute, Chung-Ang University, vol. 51(2), pages 1-11, June.
    • Handle: RePEc:ris:jecdev:023034
    DOI: 10.35866/caujed.2026.51.2.001
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    Keywords

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    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • R58 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Regional Development Planning and Policy

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