FISCAL CAPACITY AND INCLUSIVE ECONOMIC GROWTH: EVIDENCE FROM EAST KALIMANTAN

Abstract

This study examines the relationship between fiscal capacity and inclusive economic growth in East Kalimantan, a resource-rich province in Indonesia undergoing a gradual transition away from dependence on non-renewable natural resource revenue. Using an annual panel dataset covering 10 regencies/cities over a 10-year period (100 observations), the study employs a fixed-effects panel regression model to control for unobserved, time-invariant regional heterogeneity, while cluster-robust standard errors are used to address heteroskedasticity and serial correlation within regions. Three dimensions of regional fiscal capacity are examined: fiscal independence, fiscal dependence, and capital expenditure. The empirical results show that neither fiscal independence (coefficient = 13.05; p > 0.10) nor fiscal dependence (coefficient = 4.90; p > 0.10) has a statistically significant association with economic growth. In contrast, capital expenditure exhibits a positive and statistically significant effect on growth (coefficient = 2.94; p < 0.05). These findings indicate that the composition of regional revenue alone is insufficient to explain differences in regional economic performance. Rather, it is the productive allocation and effective execution of public expenditure, particularly capital spending on infrastructure and productive assets, that plays the more decisive role in fostering sustainable and inclusive economic development in resource-dependent regions such as East Kalimantan. The study offers policy implications for strengthening capital budget planning and execution as fiscal decentralization matures.