This study analyses the relationship between fiscal decentralisation and urban agglomeration across Indonesia’s regencies and municipalities from 2010 to 2022. The analysis takes place in the context of Indonesia’s decentralised system, which transfers spending responsibilities to subnational governments while leaving many regions continue to be significantly dependent on central government transfers. Using a estimated dynamic panel model with the two-step system generalised method of moments, the study assesses whether fiscal decentralisation is associated with higher urban concentration and whether this relationship varies across territorial contexts, including island group, city size, elevation, and terrain ruggedness. The results indicate that urban agglomeration is highly persistent over time. Fiscal dependency exhibits a positive conditional association with urban agglomeration, suggesting that transfer-financed fiscal capacity enables local governments to provide infrastructure, public services, and administrative functions associated with greater urban concentration. Fiscal autonomy is also positively associated with urban agglomeration, though its role appears more limited and context-dependent. In contrast, local own-source revenue intensity does not emerge as a strong predictor across model specifications. The analysis of heterogeneity also shows that the relationship between fiscal decentralisation and urban agglomeration varies among island groups, cities, elevation levels, and terrain hardness. Overall, the study highlights that fiscal decentralisation in Indonesia is positively associated with urban agglomeration. However, this relationship is shaped by the local public finance structure and the territorial context in which decentralisation operates.
Khoirunurrofik et al. (Tue,) studied this question.