Introduction well designed and implemented, there will

Introduction Village fund (DanaDesa) has been introduced in Indonesia since 2015 following the implementation ofLaw no 6 Year 2014.The amount is increasing year to year in line with the rise of transferfund to regions. The total amount for 2017 is Rp. 60 trillion and expected tobecome about Rp 80 trillion in 2018.

There are about 74,954 registered villagesin 2017 that eligible to receive such fund throughout Indonesia. Thefund is intended tohelp the village to finance the village government activities, village development,community empowerment and society activities. The amount is designed to keep upwith the amount of transfer to regions and allocated to villages on the basisof village needs represented by the number of population, the poor, the areaand the level of geographical difficulties (Law 6/2017, explanation to article72). As we know that the level of poverty in rural area are relativelyhigher than in urban area.

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In the last five years, it was recorded that about62 percent of poor people lived in rural areas. Therefore, if the distributionand the use of village fund are well designed and implemented, there will be areduction of poverty in rural area and an increase of access of ruralpopulation to local services.  Sincethe fund was just introduced shortly three years ago, there is a limited numberof research have been done in this area.

One of them is Lewis (2015) that initiated the analyzing theproblems of village fund allocation in Indonesia. He advocated that the allocation ofvillage fund is likely to lead to unequally distributed village revenue wherethe poor villages (high poverty) will receive less money than they need and therich village will get more funds than they require. Then, Handra et. all (2016)analyzed the formula of village fund in relation to poverty alleviationprograms concluded that the formula has no relation at all with the need ofvillage to address the poverty and the access of villagers to the basicservices  This research is basically the continuation ofprevious research about the relation of formula and poverty alleviationprogram, extend the analysis on the impact of village fund distribution topoverty in Indonesia. Therefore, this study examines (1) the distribution ofvillage fund by region in regard to the level of poverty in region, (2) how thevillage fund is used and allocated (3) what is the impact of village fund tolevel of poverty in rural area. Descriptive and inferential methods are used inthis study based on secondary data collected from various sources such as BPS,Ministry of Finance, and studies done by various agencies in Indonesia. Village Fund as a Second Waveof Fiscal Decentralization  The second wave of fiscal decentralization1is probably the most appropriate term to describe what has happened inIndonesia since 2015 following the implementation of Law no 6 Year 2014 aboutVillage.

The Law has determined that the Central Government should allocate tothe villages 10% on top of transfer to regions. Moreover, the regencies/citiesshould transfer 10% of their revenue from general grant (DAU) and share revenue(DBH) to village governments. Such policy has guaranteed a substantial amountof fund for village governments.  Fiscal decentralization policy can be implementedin two approaches. The first is the decentralization of authorities to raisetaxes. The second is the decentralization of expenditures when the lowest levelof governments has the responsibility for implementing expenditure functions. Incase of village governments in Indonesia, the first approach is unlikely tohappened since there is no taxes assigned to villages. This is just adecentralization of expenditure functions in.

The broad functions ofvillages are mentioned in the Law following the provision of fund, but thedetail is not clear. Further policies are needed to clearer the detailassignments to village governments. From economics point of view, the main objective offiscal decentralization is to enhance economic efficiency through efficient andeffective provision of local services.

The first approach will achieve theobjective through the Tiebout’s model of local public good provision whichassumes the households are mobile and deciding where to live according to theirpreferences about tax and public goods (Tiebout, 1956). The model says that localitycompete in offering a mix of tax and public goods, and citizens “choose bytheir feet”.  The second approach of fiscal decentralization is influencedby Oates’s Decentralization Theorem that says a decentralized provision maximizessocial welfare when preferences differ across regions and spill-over effectsare absent (Oates, 1972). The assumptions of Oates’ theorem is that thecentralization provides a uniform public goods and the governments operate inorder to maximize social welfare.

Nevertheless, both offer a theoreticalframework to achieve an efficient allocation of resources through fiscal decentralizationpolicy. Method of Analysis  Descriptive and inferential methods are used in this study based onsecondary data collected from various sources such as BPS, Ministry of Finance,and studies done by various agencies in Indonesia. The analysis can be done atany level, region (island), province, regency/city and village. However, theavailability of the data is the main constraint.

Financial data can bedownloaded from the formal website of DJPK Ministry of Finance (MOF). The datais available at the regency/city level and can be calculated for the provinceand the region. However, the poverty data in 2016 is available only at theprovincial level. Therefore, the analysis on the impact of village fund onpoverty is doing at the provincial level. Correlation and regression analysisis conducted to learn a relationship between village fund and the reduction ofpoverty at the rural area. The Research Context In managing the country, Indonesia is divided into provinces, then theprovincial area comprises Regencies/cities. Each regency/city is divided intoadministrative district. Finally, the lowest division of the country isvillages (desa) or administrative sub-district (kelurahan).

Currently there are34 provinces, 508 regencies, 7160 districts and 74,954 villages and about 8350kelurahan.     In Indonesia, village is the third level of autonomous governmentbelow provinces and regencies/cities since the district is just anadministrative part of the regencies/cities. Therefore, the village isbasically under the supervision of the district government. The village has itsown budget and the revenues mainly coming from the upper level of government. Villagelevel of Government has been practiced in Indonesia even since the colonialera. After the independence, the first regulation about village was the Law 5Year 1979.

Then, the village was regulated in the law of local governances (LawNo 22 Year 1999 and then Law No 32 Year 2004). Finally, the village isregulated by a specific law about village.  Village fund is one of several types of village revenues (table 1). Itis a grant from Central Government for Villages throughmunicipalities/regencies.

Other than that, there are at least 6 types of othervillage revenues. Those are (i) village owned revenues (ii) Allocation VillageFund from Regencies/Cities, which is 10 percent of DAU (general purposed grant and DBH(shared revenues) received by Regencies/Cities from Central Government (iii) Shared10 percent local taxes and charges collected by Regencies/Cities, (iv) Grantsfrom Regencies/Cities, (v) Grants from Provinces, (vi) other legal villagerevenues.  Table 1. Flow of Funds from Central Government to Villages  Analysis and Discussion (1) the distribution of villagefund by region in regard to the level of poverty in region,  Table 1 shows that the distribution of village fund by region. Comparingthe distribution of fund with the concentration of poor population, there arelooser and gainer. Java-Bali and Maluku-NT are the looser, while others are thegainer. The biggest looser is Java-Bali in which 53.5% of poor population waslocated but only received 32% of village fund in 2016.

Maluku-NT was alsoslightly loosed. Papua and Kalimantan are the biggest gainer in thedistribution of fund followed by Sumatra and Sulawesi. Basically, the tableshows that the distribution of fund is not in line with the proportion of poorpopulation. The regions mostly needed to address the poverty at rural area doesnot receive the fund in proportion to the number of poor people in such region.

 Table 1. Distribution of village fund in 2016 and 2017 Region Village Fund 2017 Village Fund 2016 Population 2015 Poor 2016 (Sem I) Rp (000) % Rp (000) % (000) % (000) % Sumatra  17.997.265.

476 30,0  30,0  55.273  22,5  6.274  22,7 Java-Bali  19.186.845.

102 32,0  32,0  139.119  56,7  14.

766  53,5 Kalimantan  5.258.364.196 8,8  8,7  15.

343  6,3  975  3,5 Sulawesi  6.872.788.

713 11,5  5.355.842.

053  11,4  18.724  7,6  2.113  7,7 Maluku-NT  5.019.376.600 8,4  3.

934.942.530  8,4  12.805  5,2  2.

357  8,5 Papua  5.665.359.913 9,4  4.459.

806.696  9,5  4.021  1,6  1.137  4,1 Total  60.000.

000.000 100,0  46.982.080.

000 100,0  245.284  100,0  27.621  100,0 Source: writer’s calculation based on the Data provided by theMinistry of Finance and BPS Indonesia (2) how the village fund isused and allocated  Based on Law No 6/2014 about village, the total budget ofvillage fund that should be fulfilled gradually by Central Government is tenpercent (on top) of the budgeted transfer fund to all sub-national government(explanation to article 72). Central Government started to allocate about 20.8Trillion rupiah to villages in 2015, which was only about 3.

2% of the budgeted transferfund. Then in 2016, the amount of fund increased to about 47 Trillion rupiahwhich was about 6.4% of budgeted transfer fund. The amount has risen to 60 Trillionrupiah in 2017 (about 8.5% of the budgeted transfer fund). It is likely thatthe Government will fulfill the requirement of 10% by 2018.  In order to fulfil such a big amount of fund,the Government scrutinized the budget of relevant Ministries/Agencies that havealso financed programs related to village development and shifted the fund tovillage funds. The fund is distributed in aformula basis and in two stages.

The first stage is from Central Government toall Regencies and Cities that have villages. The second stage is from eachRegency or City to villages. According to Law No 6/2014 (the explanation of article72), the calculation of village fund is based on the number of villages.

Meanwhile the allocation for each village should be based on population, thenumber of poor people, area, and geographical condition. The Law also describesthe objectives of village fund allocation, which are (1) to increase the welfareand (2) to equalize the village development. Further regulation on the formula to distribute the fund is theGovernment Regulation No 60 Year 2014 which have been amended by the GovernmentRegulation No 22 Year 2015 and the Government Regulation No 8 Year 2016.  Then, there is also a Finance MinisterRegulation No 49 Year 2016 about the procedure of allocation, transferring thefund, the use of fund, and monitoring and evaluation of fund.The formula of fund distribution,in 2015, 2016 and 2017, allocates 90 percent of fund at the same amount foreach village called Basic Allocation (Alokasi Dasar: AD), while 10 percent offund allocated on the basis of formula using four variables: population, area,poor population, geographical condition (Alokasi Formula: AF).

The differenceof formula between the first stage (the formula for each regency/city) and thesecond stage (the formula for each village) is at the data uses to representthe geographical condition. At the first, the construction price index (IKK) isused, while at the second stage the geographical condition is represented bygeographical difficulty index (IKG).Government interpret that equalization ofvillage development is to distribute an equal amount for each village. Meanwhilethe differences between villages are only accommodate by 10 percent of fund.

Highdiversity between villages is almost ignored. It is ignored the variation ofvillage size such as village population that varies from 13 to 89,050 peopleper village and the area which is ranging from 0.01 to 3901 km2 (Data Pokdes,2014). Most villages in Aceh and Papua have population less than 500 people,while most villages in Java are densely populated with more than 5000population. So that, there is a possibility that a big village will receive arelatively same amount of fund as a small village.

Table 2 Theformula to distribute village fund to Regencies/Cities and to Villages   Calculation of Village Fund per Regency/City Calculation per Villages Basic Allocation Basic allocation per Regency/City is The number of villages x Basic allocation per village Basic allocation per village is determined by the 90% of fund divided by the total number of villages in Indonesia Formula Allocation Formula allocation per Regency/City (a part of 10% of the total village funds) is determined by the following variables: –    Population (weighted 25%) –    Area (weighted 10%) –    Poor Population (weighted 35%) –    Construction Price Index (weighted 30%)   Formula allocation per village (a proportion of formula allocation for Regency/City) is determined by the following variables: –    Population (weighted 25%) –    Area (weighted 10%) –    Poor Population (weighted 35%) –    Geographical difficulty index (weighted 30%), an index represents the difficulty of villagers to access the basic services. The Decision Finance Minister Decree The Decree of Bupati/Walikota Sources: Government Regulation No 22 Year 2015 and FinanceMinister Regulation No 49 Year 2016. The formula shows that fiscal need variables will not play animportant role in the allocation since they only distribute ten percent offund.

The variable of poor population will only determine about 3.5 percent ofallocation. Therefore, it is surprised if the distribution of fund showed intable 1 does not meet the proportion of poor population.  Analyzing the use of fund in some regencies, it confirms that thepoverty has not been paid an appropriate attention since the village governmentsspend more on physical development rather than social and economic empowerment.The data in three regencies (table 3) shows that the people empowermentprograms only share about 7 to 23 percent of total village expenditure in thoseregencies.

This data is in line with the Ministry of Finance monitoring on theuse of village fund in 2015, in which the village fund was 83 percent used fordevelopment (DJPK-MoF, 2016).        Table 3. The Structure of Village Revenue and Expenditure in ThreeRegencies 2016 Village Revenue and Expenditure (Budgeted) 2016 Pangkep Bieruen Pemalang Revenue Village Owned Revenues Shared Taxes and Charges 1% 1% Allocation from General Revenue of Kabupaten 27% 22% 35% Village Funds from Central Government 73% 77% 52% Other Revenues 0% 13% Total 100% 100% 100% Expendi-ture Village Government Salaries and Adm. Cost 23% 24% 23% Village Development 49% 69% 67% People Empowerment Program 23% 7% 10% Society Activities 4% 1% 1% Total 100% 100% 100% Sources: Writer’s calculation from KOMPAK monitoring and evaluationprogram 2017    (3) what is the impact ofvillage fund to level of poverty in rural area  Table 4.

Correlation Between Village Fund and Poverty Reduction Correlation Analysis at provincial level shows that the village fund(2015) has a positive correlation with the percentage reduction of poorpopulation in rural area (the reduction from Semester I 2015 to Semester I2016).  Table 5. Output of  Regression Analysis The result of correlation analysis is confirmed by the regressionresult using two independent variables (village fund and local governmentexpenditure) and percentage reduction of rural poor population as dependentvariable. It shows that the poverty reduction is only influenced by the villagefund. The local government expenditure does not significantly affect thepoverty reduction in the rural area.                   Table 6. Matrix of Provincial classification on the distribution ofvillage fund and the reduction of poor population   VF Per capita below national average VF per capita above national average Percentage reduction of poor population above national average (2016)                  I      Bali      Riau      Sulawesi Selatan      Jawa Barat      Banten      Jawa Timur                 II      Sulawesi Utara      Kalimantan Tengah      Sulawesi Tenggara      Jambi      Sulawesi Barat      Kalimantan Barat      Sumatera Utara Percentage reduction of poor population below national average (2016)                III      Nusa Tenggara Barat      Jawa Tengah      Kalimantan Timur      DI Yogyakarta      Lampung      Kepulauan Riau                                 Bangka Belitung      Sumatera Barat                     IV      Kalimantan Selatan      Aceh      Sumatera Selatan      Gorontalo      Nusa Tenggara Timur      Papua Barat      Bengkulu      Maluku      Sulawesi Tengah      Papua      Maluku Utara      Kalimantan Utara Source: Author’s calculation from the Data of BPS andDJPK-MoF  Conclusion The analysis confirms that the formula and the distribution of villagefund is not in proportion with the poor population. The regions mostly neededto address the poverty at rural area does not receive the fund in proportion tothe number of poor people in such region.

Analysis on the formula also confirmthat fiscal need variables including poor population will not play an importantrole in the allocation since the variables only allocate ten percent of totalfund. Moreover, the use of village fund is not relevant with the povertyalleviation program in the rural area since it is mainly used for village infrastructuredevelopment. Nevertheless, the correlation and regression analysis atprovincial level does shows the distribution of village fund has a positivecorrelation with the reduction of poverty in rural areas.

   References Handra, Hefrizal, 2016,The implication of Village Fund on Distribution of Fund Between Regionin Indonesia, a paper presented at the 13th IRSA InternationalConference, 25-26 July 2016, Malang. Handra, Hefrizal, 2015,A Study of Indonesia’s Fiscal Equalisation Mechanism in the Early Stages ofDecentralization, Ph.D Thesis, Flinders University of South Australia.Handra, Hefrizal; Sidik,Machfud; Satria, Sentot; Suhirman; Murniasih, Erny; Suryani, Devi, 2016, DanaDesa dan Penanggulangan Kemiskinan, KOMPAK.Lewis, BlaneD.

, 2015, Decentralising to Villages in Indonesia: Money (and Other) Mistakes,PublicAdministration and Development 2015, Published online in Wiley Online LibraryLewis, Blane D., 2002.Indonesia. In Intergovernmental Fiscal Transfers in Asia: Current Practice andChallenges for the Future, Smoke P, Kim YHMartinez-Vazquez J,Vaillancourt F (eds).

2011. Decentralisation in Developing Countries. Global Perspectives onthe Obstacles to Fiscal Devolution. Edward Elgar: Cheltenham.Oates, Wallace, 1972, FiscalFederalism, Harcourt Brace Jovanovich.Porcelli,Francesco, 2009,  Fiscal Decentralisationand efficiency of government: A brief literature review, Department ofEconomics – University of Warwick (UK), accessed by June 2017 at:

pdfTiebout, Charles M., 1956, ‘A PureTheory of Local Expenditure’,the Journal of Political Economy, Vol.64Page 416-424.

 1The first “big bang” fiscal decentralization began in 2001, when the centralgovernment started to double the grant to regencies/cities to match the needfor financing the transfer of authorities. in 2001, there were about 1.1million civil servants transferred to local government in line withdecentralized functions (Handra, 2005).


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