Fiscal decentralisation and inequality in Indonesia:1999-2008

This paper investigates the evolution of expenditure inequality in Indonesia during 1999-2008, a period that coincides greatly with the implementation of fiscal decentralisation policy. In general, the results show increasing expenditure inequality evident in a decreasing share of income in the bottom 10 percent, and an increasing share in the top 10 percent. Further examination employing the two-step system GMM confirms increasing expenditure inequality as a result of fiscal decentralisation. This might be due to the implementation of the hold-harmless clause that was not accompanied by proper income distribution policy within the region. Furthermore, real per capita gross regional product (GRP) and average years of schooling have also contributed toward higher expenditure inequality. In contrast, expenditure inequality may ease in the long term with an improvement in education services. Lastly, expenditure inequality can also be addressed by enhancing public health services.