Analysis of institutions and convergence in decentralising Indonesia

Efforts to understand growth disparities among the regions in Indonesia are still progressing. The emphasis is no longer only on the growth of physical and human capital and population, but rather on how productivity is affected by institutions and social infrastructure. This study examines the role of institutions, governance, regulations and corruption on income growth and the speed of convergence. Cross-section, static panel, and dynamic panel methods are applied to data for regencies/cities (kabupaten/kota) for the period 2009–15. The study reveals that the balance of power between heads of local government and the legislatures influences growth rates and the speed of convergence. Institutions’ influence reflects the combined impact of fiscal policies, governance effectiveness (of politicians and bureaucrats), and the quality of regulations, as well as efforts to eradicate corruption. Improper relations and interactions may result in political conflict and ineffective governance that hinders local economic performance.