LAUSR

In many developing countries with a decentralized system, the effectiveness of subnational expenditures to support local economy and improve public welfare is constrained by institutional issues. This study is to determine the impact of subnational fiscal efficiency as one measure of institutional quality on poverty reduction in Indonesia. A relative efficiency score is computed with the data envelopment analysis (DEA) method for 26 Indonesian regions from 2001 until 2016. The empirical analysis using panel generalized method of moments (GMM) confirms a negative correlation between fiscal efficiency and poverty rate. Impact of capital expenditure on poverty reduction is found to be more dominant than current expenditures, which suggests the importance of public infrastructure investments in reducing poverty. The study also finds that despite a declining trend of fiscal efficiency, its impact on lowering poverty rate is stronger after the global financial crisis 2008. Furthermore, geographical differences also affect the level of impact of fiscal efficiency on poverty reduction in Indonesia.