Special Autonomy Funds and Regional Economic Convergence in Indonesia: Panel Evidence from Special Autonomy Areas
Special Autonomy Funds and Regional Economic Convergence in Indonesia: Panel Evidence from Special Autonomy Areas

Summary/Abstract: Persistent regional disparities and limited developmental progress in Indonesia's special autonomy regions, despite substantial fiscal transfers, raise important questions about the effectiveness of Special Autonomy Funds as an instrument for accelerating regional economic convergence and growth. This study examines the role of these funds in reducing regional disparities and stimulating economic growth in special autonomy regions. Although designed as an affirmative fiscal instrument, their capacity to achieve long-term macroeconomic goals remains in question. Prior research has largely focused on development indicators such as poverty reduction and infrastructure improvement, with few studies explicitly examining whether Special Autonomy Funds contribute to faster regional economic convergence. This study addresses that gap by evaluating both the convergence process and the direct impact of Special Autonomy Funds on growth. Drawing on unbalanced panel data from 496 cities and regencies in Indonesia, including 59 special autonomy areas, over the period 2007–2020, the study employs two econometric models: the Hausman–Taylor Estimator for convergence analysis and the Fixed Effects Model for growth estimation. Both models incorporate fiscal transfer variables and control for sectoral economic structure. The results indicate that while interregional economic convergence exists at the national level, convergence in special autonomy regions proceeds more slowly than in other provinces. Moreover, the positive effects of Special Autonomy Funds appear limited to the short term and do not generate a sustained growth stimulus, suggesting that fund utilization has yet to translate into productive capacity. The study concludes that long-term effectiveness requires both improved fund management and a reorientation of allocations toward strategic infrastructure, education, and health. Future research should examine micro-level impacts and governance mechanisms to further strengthen the developmental impact of these funds.

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