The Effect of Fiscal Decentralization on Local Economic Growth in Sumatera Barat Province

The main objective of this paper is to examine the effect of fiscal decentralization implementation on local economic growth in Sumatera Barat Province. A sample of cross section data which covers 15 city (kota) and regency (kabupaten) in Sumatera Barat during ten year (the period 2001-2010) is employed to test whether fiscal decentralization affect on economic growth positively and significantly. The result from panel data estimation yields evidence that there is positive relationship between fiscal decentralization and local economic growth in Sumatera Barat. The findings suggest that the increase change of fiscal decentralization degree will contribute to stimulate local economic growth. The further analysis also confirms that other variables which are considered as determinant of economic growth influence local economic growth significantly. Relevance to Development Studies Generally, fiscal decentralization is considered play important role to improve economic development. This is because there is devolution of fiscal power from higher level government to lower level government. It could provide public service and infrastructure efficiently. There are some evidences which indicate fiscal decentralization affect growth positively. However, this claim could not be generalized for all country or regions. In Indonesia, fiscal decentralization is given to second level government (city and regency). It could be a possibility that there is a different effect of fiscal decentralization on economic growth. Therefore, this paper tries to seek the effect of fiscal decentralization on specific region in Indonesia (this case is Sumatera Barat). This will contribute in analyzing a fiscal policy implementation in Indonesia. In turn, a central government could consider a better policy to increase development in terms of local regions in Indonesia