The Role of Fiscal Decentralization in Promoting Regional Economic Convergence

Abstract

The development of fiscal ability remains essential under fiscal decentralization models. The operational power to handle public funds efficiently allows municipalities to meet local requirements while developing the regions effectively. Regional economic development receives stronger preferential treatment from local governments because their strong fiscal capacity allows active involvement. The study conducted how fiscal capabilities at the regional level influence economic development convergence in all of Indonesia's 30 provinces. We use conditional beta convergence tests to analyze the Inclusive Economic Development Index given its major parameter of financial decentralization levels and local autonomy powers alongside revenue performance quality and both direct and indirect budget allocations. Results showed distinct convergence patterns exist among all Indonesian provinces. The findings showed substantial improvements toward achieving economic development that includes all sectors as well as the reduction of regional disparities. The study revealed that fiscal capacity especially decentralization levels and direct spending distribution determine economic convergence results between provinces. The research adds comprehension to the strategies of utilizing fiscal policies to promote sustainable economic development with equality across regions at the regional level.