​Determinants of Regional Economic Growth in Indonesia: A Literature Review and Policy Implications

Abstract

This study synthesizes empirical literature on the determinants of regional economic growth in Indonesia to identify consistent patterns and remaining gaps for policy design. Regional growth disparities between Java and the outer islands remain a persistent structural challenge despite steady national growth of around five percent per year. A narrative literature review method is applied to peer-reviewed studies published mainly between 2020 and 2026 that examine the relationship between investment, government expenditure, fiscal decentralization, infrastructure, human capital, the digital economy, and regional inequality using panel data, spatial econometric, or convergence-club approaches. The review shows that investment and regional government expenditure consistently exert a positive effect on Gross Regional Domestic Product growth, although capital expenditure sometimes shows a delayed or even negative short-run effect. Human capital, particularly health and years of schooling, is repeatedly identified as one of the strongest determinants, while fiscal decentralization is not automatically translated into growth unless mediated by adequate human development quality. Studies employing convergence-club and spatial models find persistent multiple equilibria across Indonesian districts, indicating that catch-up growth is far from automatic. The digital economy and micro, small, and medium enterprises emerge as increasingly important but spatially uneven drivers of growth. This study's contribution lies in synthesizing dispersed empirical findings into a coherent thematic framework; its main limitation is the narrative, non-systematic nature of the review, which restricts the strength of causal inference across studies. The findings imply that regional development policy should integrate fiscal, infrastructure, human capital, and digital strategies rather than relying on any single instrument.

Keywords

Digital Economy Fiscal Decentralization Human Capital Regional Economic Growth Regional Inequality