Do Village Funds Promote Rural Development and Alleviate Poverty in Indonesia? Implications for Village Funds Policies

The rural-urban poverty gap in Indonesia remains a significant concern. The government implemented village funds as part of fiscal decentralisation, but their impact on rural development and poverty reduction has shown mixed results. Additionally, no study has yet examined the effect of external shocks on the funds. This study integrates the Village Development Index and village real income as indicators of rural development, offering a comprehensive analysis of the impacts of village funds before and during a global crisis. By utilising panel data and analysis from 435 regencies/cities to analyse the effect of village funds from 2018 to 2022, the study findings reveal that, prior to the pandemic, village funds significantly enhanced rural development, especially in non-Java regions. However, during the pandemic, the funds could not alleviate poverty, highlighting the importance of implementing adaptive measures that prioritise crisis response while sustaining rural development efforts. The results provide critical insights for policymakers to refine fiscal decentralisation strategies and ensure resilient rural development.