LOCAL GOVERNMENT EXPENDITURES, INSTITUTIONAL QUALITY AND THE INCLUSIVE ECONOMIC DEVELOPMENT INDEX (IEDI) IN INDONESIA

Abstract

The purpose of this study was to determine the effect of local government spending and institutional quality on the inclusive economy in Indonesia. To avoid the problems of endogeneity and omitted variable bias, the method used in this study is the system generalized method of moments (GMM). It was found that local government spending on housing and social functions positively and significantly affected the Inclusive Economic Development Index (IEDI). In contrast, government spending on health had a significant negative effect. Spending on education had an insignificant negative effect, while investment had a positive and significant effect on IEDI. The corruption rate as a proxy for the quality of institutional processes had a significant adverse impact on IEDI. This study provides an overview of the role and influence of local government policies and institutional quality that affect the region’s development and inclusive economic growth.