The Impact of Fiscal Decentralization on Human Development Index Convergence in Indonesia: An Arellano-Bond GMM Dynamic Panel Data Estimation

The main purpose of human development is to expand people’s choices and capabilities in order to improve human welfare in an equitable, inclusive, and sustainable manner. In the Indonesian context, the implementation of fiscal decentralization has been regarded as an effective approach to promoting equity and reducing disparities across regions. This paper examines whether fiscal decentralization affects the human development index convergence across 34 Indonesian provinces (2011–2020). Using Arellano–Bond GMM on a panel of 302 observations, evidence of convergence is found. The finding shows that the degree of fiscal decentralization (in revenue base), the degree of regional financial dependence, and government spending in education and economy significantly accelerate convergence, while government spending in health is linked to a negative effect. Furthermore, poverty and unemployment as control variables hinder human development index improvements. In contrast, the degree of fiscal decentralization (in output base) is insignificant.