Government infrastructure investment stimulation through booming natural resources: Evidence from a lower-middle-income country

Abstract

The dynamics of central government funding to regions depend on local investments. In regional autonomy, local governments are encouraged to be more self-reliant from the central government. For regions with high natural resource yields, they will not encounter difficulties in meeting their fiscal needs. Community welfare can be realized through fulfilling basic needs, one of which is infrastructure development. High-quality infrastructure will be able to contribute to further progress in trade, thus enhancing production efficiency. The objective of this research is to analyze the extent of the influence of central government transfer funds, especially the Natural Resource Revenue Sharing Funds (DBH SDA), on local government investments in infrastructure across 508 districts/cities in Indonesia. The method used is dynamic panel regression using the Generalized Method of Moment (GMM) Arellano-Bond approach. This study finds that the role of DBH SDA is still low in infrastructure spending. The role of the central government remains significant in determining infrastructure spending at the district/city level in Indonesia. This indicates that local governments rely more on other sectors in infrastructure investment. By enhancing the role of DBH SDA through technological advancements, it is hoped that the market value of natural resources can be higher through resource downstreaming. This strategy will have broader impacts, as labor needs can be absorbed not only in raw material production activities but also in the processing technology sector. Furthermore, the utilization of natural resources with modern technology can increase extraction efficiency, support sustainable development, and minimize environmental impacts.