Perekonomian

Indonesia Lana Soelistianingsih Zhafirah N. Shabrina

Fiscal Federalism Journal Review Devin (DV) 1406640985 - Management

1. Introduction
As the starting point to begin this paper, we would analyze, discuss, and compare about the fiscal
federalism in Europe and Unites States in Section 2. Then linking the relationship between public goods-
services investment and infrastructure investment contribution to the economic growth in Section 3.Then,
infrastructure investment in Indonesia in Section 4, before concluding in Section 5.

2. Fiscal Federalism in European and United States Context

Fiscal federalism itself is a study to analyze how the vertical allocation of money input from the
center to the regionals can boost the economic growth. By analyzing the revenues it generates and
expenditures on local public goods and investment.
Fiscal Federalism in United States
In United States, fiscal federalism theory turns to the actual division of responsibility for providing
public capital. The responsibility shared across all levels of government, vertically and horizontally, the fed
government that provides its lower level with a wide range of infrastructure grants, up to the benefits from
public capital investment in one jurisdiction into other jurisdiction.
The public sector has the responsibility to provide various kinds of infrastructure, the facilities that
the consumption of its goods will be able to provide benefits in equal quantities to all member of the society,
or at least to a limited group of people. The government should act at its best in the best interest of the
citizens, which the distribution of people is already fixed. Form of government would be exists in a level of
government for each of the population that already fixedly defined. The jurisdiction determines the level of
provision of each public goods, and the people who consume it. By applying this system, the government
decisions would lead to efficiency. But, as the constantly changing of public sector demand, it is important
to develop a theory of fiscal federalism that would be perfectly applied in this imperfect world.
Also, in an imperfect world, sometimes the government may not be worry about the welfare of the
people outside their community; we only could expect that public goods be under provided. And how about
this? There are two possible solutions, first rely on a system of grants from higher to lower levels of
government, or called as Intergovernmental grants. Using the logic of Pigouvian taxes and subsidies.
Which the higher level of government pays a share of the cost, is equal to external benefits.
Information issues probably strengthen the case for federalism, since the regional government is more
capable to determine what local wants, compared to the center.
Second, the Coase solution draws on analysis of externalities by Ronald Coase. This theory
explained that if communities are allowed to bargain with one another and if bargaining is costless, then
bargaining will lead to an efficient outcome (Coase, 1960). And if the transaction costs are too high, the
gain from the bargaining will be less than the cost, thus, the coase theory wouldn't be the solution. The
Coase solution is attractive in situations where the costs of negotiations are low.
Perekonomian Indonesia Lana Soelistianingsih Zhafirah N. Shabrina
Fiscal Federalism Journal Review Devin (DV) 1406640985 - Management

Then, the responsibility for public investment should divide properly. Based on the CBO report over
the 1956-1989, federals grants and broke the data into eight categories: highways, mass transit, rail, aviation,
water transport, water resources, water supply and sewage treatment.

In the graph above, shows the trend in capital expenditures and other infrastructure spending a
percent of GDP. It also shows that around 1950s-1960s public investment was increase up to two percent of
GDP, and since that point on, spending declined dramatically to 1.1 percent of GDP in 1984. Some
advocates argued that shortsighted government policies that allowed the countrys infrastructure to
deteriorate are resulting to the failure to invest in public capital.
Aschauer in 1991 argued that the decline in infrastructure investment was a key factor to the low
performance of the U.S. economy in the last two decades.
Perekonomian Indonesia Lana Soelistianingsih Zhafirah N. Shabrina
Fiscal Federalism Journal Review Devin (DV) 1406640985 - Management

The graph above shows the distribution of spending across: direct federal spending, federal grants to
state and local governments, and spending by state and local governments from their own revenue. It does
clearly suggest that infrastructure is an important fiscal federalism issue. State and local revenues was the
major sources for spending at the major element in infrastructure investment around 1956-1989.
Comparing graph (a) and (b) that placed bellow, both offer perspectives on the distribution of the
responsibility to build public capital. Higher level of government should pay a share of costs of
infrastructure investment equal to external benefits. Hence, the graph (a) and (b) shows an estimation of
implicit value that embedded in fed. Infrastructure programs. In graph (a) clearly explained that the federal
government always been willing to subsidize the public capital than the maintenance of that capital. While
in graph (b) focuses only on grants for capital expenditures since, in graph (a) maintenance and operating
grants were always negligible.

The performance of state and regionals governments rapidly growing through states and suburb and
some cities that strapped has struggled to meet the demands of public goods before it placed. Hence, they
concentrated more on the geographically problem.
Perekonomian Indonesia Lana Soelistianingsih Zhafirah N. Shabrina
Fiscal Federalism Journal Review Devin (DV) 1406640985 - Management

The competition between state and regionals government discourages subnational governments from
making adequate investments in public capital. It actively competes one another to attract more investors
and doing more business. The federal government as the central of all of the regionals governments should
be responsible for providing infrastructure since it is less susceptible to such destructive competition.
Based on Oats and Schwab (1988) two main conclusions, first, if many local governments compete
against one another, then all local taxes become benefit taxes. Second, the outcome definitely would be
efficient.
It is difficult to square theory and actual practice, while the national infrastructure policy is
inconsistent with the principles of fiscal federalism in number of important aspects.
Fiscal Federalism in Europe
There is a great deal of infrastructure investment that is not public, and there is a great deal of
public investment that is not infrastructure investment. (T. Vlil, 2008).

The data above provided by Eurostat, breakdown about the public investment of European countries,
which the variable is the gross capital formation of the government. The aggregations are divided into four
different types that affect the economy through various channels; it seeks to measure public investments.
Investment in public goods affects the economy allocative efficiency indirectly through framework
conditions for productive activity. Redistribution affects the economy's income distribution rather than
allocative or productive efficiency per-se.
The theory of fiscal federalism, doesn't deal directly to the compositions of investment. It
distinguishes between consumption-oriented public expenditure and public expenditure that established to
produce public inputs for the production processes of private firms. Consider various types of public
investment as enhancements of production potential for different public services, hence, investment in
infrastructure will be considered to produce more services and redistribution investment is considered to
produce. And this will help to link the theory of fiscal federalism to the kind of data of the composition of
public investment in Europe.
Fiscal decentralization is measured by two variables, first, the share of tax revenue attributed to sub-
national levels of government. Second, control for investment grants from the central government to sub-
national levels of government; measured in relation to trend GDP. The tax variable reflect the fact that
Perekonomian Indonesia Lana Soelistianingsih Zhafirah N. Shabrina
Fiscal Federalism Journal Review Devin (DV) 1406640985 - Management

investment decisions are often taken a year before and based on knowledge about the revenue situation at
that time, while in contrast, capital transfers are contemporaneous with investment, as they finance
investment the same year it is undertaken (Rodden, 2003). The control variable takes a wider scope to the
general economic, fiscal, and demographic developments of significant determination of public investment.

Table above presents the results of one-step difference-GMM estimation. The Sargan test for over-
identifying restrictions is used to determine the instrument set, which includes further lags of the dependent
variable and also three lags of the real GDP and the capital transfers variables. From the table above, we can
understand that there is a possible trade-off between bias and efficiency when the number of moment
conditions is increased with small samples. The choice of a large set of moment conditions is based on the
residual autocorrelation and the sargan test result.
Considering the result in table above concluded that higher sub-national tax share increases the
aggregate level of investment in infrastructure, hospital and school, and public goods. But at the other side,
it has no statistically significant impact on the aggregate public investment in redistribution.
Suggest that this decentralization and this fiscal federalism would increases economically productive
in public investment, in public spillover goods, local public goods, and global public goods.
Decentralization has changes the composition of public investment by reducing the relative share of
redistribution in public investment.

3. Relationship between Infrastructure Investment Contributions to the Economic Growth

In this section, most likely discussed about electrification as an infrastructure investment that will
contribute to the economic growth. The electrification up to the rural area is an important part of
infrastructure, while most of developing countries don't put it into its infrastructure planning. Up until now,
it also still debated whether the government or private sector should provide these facilities. More questions
follows, whether infrastructures should be developed to boost economic growth? Or does the economics
Perekonomian Indonesia Lana Soelistianingsih Zhafirah N. Shabrina
Fiscal Federalism Journal Review Devin (DV) 1406640985 - Management

growth that increase the demand for more infrastructure facilities?. Many political ideologies have played
their part in arguing issues related to infrastructure. In recent years, there has been a belief that the
differences in growth between the successful East Asian economies and other parts of the developing world
can be explained by failure to invest sufficiently in infrastructure (Estache and Fay, 2007).
This relationship has been debated arena, as both the quantity and quality of infrastructure that affect
growth. The ability of infrastructure to boost economic growth can be through a number of ways direct and
indirect. Most of the time, the direct linked through the productivity framework, where an increase in the
quantity of infrastructure facilities provided would raise the productivity of other factors.
Electricity infrastructure is one of several infrastructures that believed as the most important to boost
the economic growth. Changes in income leads to changes in demand for electricity and electrification. The
causality between electricity and economic growth has preoccupied energy economists for a number of
years. Four types of causal relationship between electricity and economic growth have been postulated in
the recent literature (Ozturk, 2010).
Recent studies by Huang et al (2008), investigate the relationship between energy consumption and
growth, and grouped several countries by its income. In lower-income countries theres no causal
relationship. In middle-income countries, there is significantly positive growth to energy consumption.
Surprisingly, negatively in higher-income countries, implies that there have already undertaken conservation
policies to protect the environment.
The inclusive nature of the empirical result on the causality maybe caused by the statistical
inappropriate methodologies for measuring the relationship of electricity consumption to the economic
growth in comparative countries. Some argued that it caused by the electricity that put into areas with
greatest potential for growth, thus the results can be distorted, since developed country will concerning in
creating energy efficiency and having protective regulation for the environment.
However, electrification enables livelihoods in several ways, its stimulating employment and income
generating activities. It also argued that electrification enables people to use surplus resources to contribute
to the emergence of credit and saving schemes based on the newly available cash.
In that ways, many of the benefits from electrification have gone to the non-poor. Rural
electrification has not yet provided for everyone and for universal access, it have been unaffordable for the
most poor people.
The solution portrayed as argued by Estache and Fay, that it should involves 3 aspects. First, its
required the service operators provide access. Second, its required to reduce connection costs (through tariff
design). Third, required to increase range of suppliers.
Perekonomian Indonesia Lana Soelistianingsih Zhafirah N. Shabrina
Fiscal Federalism Journal Review Devin (DV) 1406640985 - Management

4. Infrastructure Investment in Indonesia
This section will be focused energy sector of the Republic of Indonesia, and especially its
electrification. Before that, heres a brief introduction about Indonesias economy, Indonesias economy is
the largest in Southeast Asia, estimated GDP at $878.3 billion in 2013. The economic growth has reduced
poverty by creating working opportunities and by increasing public expenditures in the areas of health,
education, and infrastructure.
Perusahaan Listrik Negara (PLN) as Indonesias government owned Electricity Company, tasked to
build more and more electrification to all over country. As stated on law no.30 year 2009 about electricity,
government objective to ensure the availability of electricity in sufficient quantity, good quality, and in
reasonable price, in order to improve the welfare of the people. Moreover the distribution of the electricity
is focused in Java-Bali (72%), majority of the rest is concerned in Sumatra (17%), and for the whole east
Indonesia is only (11%). Electrification imbalance will be the toughest work that PLN must complete!.
Recently, It has been tasked the Fast Track Program (FTP) to established more electricity. This
program divided into 2 phases, the first one targeted to fulfill 10,000 MW that has realized as much as 63%
of the total planned by the end of 2013, and completed by 2015. And the second phase was to build a 17,900
MW, which was scheduled to be complete by this year, 2016. However, the delays are unsolved, but yet
various projects are estimated to begin its operation in 2016.
All of those plan, are established to be able fulfill its responsibility to secure the electricity supply to
the people, and to fulfill the demand. PLN supplied up to 206-TWh in 2014 and aims to supply over 383-
TWh in 2022 to meet projected demand over the three geographical regions; Java-Bali, Sumatera, and East
Indonesia.
Thus, to reach that, PLN is now committed to implementing the 35 GW or equal to 35,000 MW
program, as they plan to construct 46,000 km of transmission lines and 103,000-MVA of electrical relay
stations across over 1,000 locations in the country. As stated on RUKN 2010-2029 that, the development of
power generation is to meet the realistic demand growth, address the electricity crisis in some areas,
increase reserve capacity and to fulfill reserve margin by prioritizing the utilization of local energy sources,
and avoid of oil-fired power generation.
But before that, PLN has to be able fix it delays problem, that are due to several aspect that shouldn't
be exist:
Licensing issues
Financing, delay in government-backed loan
Land clearing
Construction and various technical difficulties
Perekonomian Indonesia Lana Soelistianingsih Zhafirah N. Shabrina
Fiscal Federalism Journal Review Devin (DV) 1406640985 - Management

5. Conclusion
Fiscal decentralization is measured by two variables, first, the share of tax revenue attributed to sub-national
levels of government. Second, control for investment grants from the central government to sub-national
levels of government; measured in relation to trend GDP.
In the United States, its fiscal decentralization is focused on the first variables, which the share of regional
tax revenue weighed to fund the regional expenditure itself. The role of fiscal federalism is not much
contributed to the regional infrastructure investment and to the economic growth of the regional. Thus, their
local/regional governments compete against one another, as an impact.
The similar things happened in Europe, where studies show higher sub-national tax share increases the
aggregate level of investment in infrastructure, hospital and school, and public goods. But at the other side,
it has no statistically significant impact on the aggregate public investment in redistribution. Suggest that
this decentralization and this fiscal federalism would increases economically productive in public
investment, in public spillover goods, local public goods, and global public goods, if decentralization has
changes the composition of public investment by reducing the relative share of redistribution in public
investment.
Furthermore, It is still been questioned that whether infrastructures should be developed to boost economic
growth? Or does the economics growth that increase the demand for more infrastructure facilities?. The
needs of investing in infrastructures are still questioned. It is also been argued that both the quantity and
quality of infrastructure that affect growth. These probably be the reasons behind lack of allocation from the
central to the regional, that the central is not sure its significantly beneficial to the aggregate economic
growth.
Also, in developing countries that depended to the infrastructure investment allocation from the central, or in
this case, Indonesia, the impact of infrastructure investment to economic growth is not yet proved. The
significant result showed that this system is inefficient, the investment only focused on area that densely
populated, that causing significantly imbalance of infrastructure investment.
The need of doing more research about relationship of infrastructure investment to the economic growth is
high, due to the lack of data recently, and hereafter the data from the research whished to be able support the
research for Fiscal Federalism impact to the aggregate economic growth. Because this deserve far more
attention than they have received
Refferences:
1. Hulten, Charles R. and Robert M. Schwab. "A Fiscal Federalism Approach To Infrastructure Policy". Regional Science and Urban
Economics 27.2 (1997): 139-159. Web.
2. Kappeler, Andreas and Timo Vlil. "Fiscal Federalism And The Composition Of Public Investment In Europe". European Journal of
Political Economy 24.3 (2008): 562-570. Web.
3. Cook, Paul. "Infrastructure, Rural Electrification And Development". Energy for Sustainable Development 15.3 (2011): 304-313.
Web.
4. Jarman, Director General of Electricity at Ministry Energy and Mineral Resources, Directorate General of Electricity"Indonesia
Electricity Infrastructure Development". 2012. Asia Pasific Ministers and Regional Governors Conference (APM-RGC). Presentation.
5. "Indonesia Electricity Show 2015 | PJB Services". Pjbservices.com. N.p., 2015. Web.
6. EY advisory. Opportunities And Challenges Of The Indonesian Electrification Drive. 2015. Print.
Perekonomian Indonesia Lana Soelistianingsih Zhafirah N. Shabrina
Fiscal Federalism Journal Review Devin (DV) 1406640985 - Management