Assessing the Impact of Regional Government Loans on Human Development Index: An Empirical Analysis from Indonesia

Articles in Press

Document Type : Research Paper

Authors

Faculty of Economics, University of Bangka Belitung, Kepulauan Bangka Belitung 33172, Indonesia

10.22059/ier.2024.373910.1007969

Abstract

This study analyzes the impact of regional government loans and expenditures on Human Development Index (HDI) components across Indonesian provinces and regencies/cities from 2013 to 2022. Utilizing panel data from 1441 observations, Ordinary Least Squares (OLS) with panel-corrected standard errors (PCSE) was applied to account for heteroskedasticity and serial correlation. The findings reveal significant positive effects of government economic expenditures on per capita income, as well as strong correlations between government spending and education expectancy, as well as between health expenditure and life expectancy. Conversely, regional government loans exhibit ambiguous or adverse effects on these indicators, highlighting the complex dynamics of fiscal policy impacts over time. To enhance robustness, an Instrumental Variables (IV) regression using a two-stage least squares (2SLS) approach was employed to address potential endogeneity. The results indicate that while government loans and expenditures positively influence socioeconomic metrics, their effectiveness depends on strategic allocation and management. This underscores the necessity for sustained and targeted investments in the economic, educational, and health sectors to improve HDI components. This rigorous econometric framework and robust methodologies provide valuable insights into public finance and regional development. The findings suggest that well-targeted fiscal policies and prudent management of public borrowing are crucial for enhancing socioeconomic outcomes and achieving sustainable development, emphasizing a balanced approach to regional financing that prioritizes long-term human development goals.

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Iranian Economic Review

Articles in Press, Accepted Manuscript
Available Online from 16 June 2024

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