Do Democracy and Investment Promote Regional Economic Performance? Evidance from Panel Data Analysis
DOI:
https://doi.org/10.35877/454RI.qems4483Keywords:
democracy, investment, regional economic performance, panel data analysisAbstract
This study investigates whether democracy and investment promote regional economic performance in Indonesia. It employs panel data for 34 provinces over the period 2021–2023, modelling real GRDP per capita as a function of provincial democracy, investment, central government transfers per capita, and population. The empirical analysis is conducted using EViews 13, comparing pooled OLS, random effects, and fixed effects specifications; Chow, Breusch–Pagan LM, and Hausman tests consistently indicate that the fixed effects model is the most appropriate. The estimation results show that provincial democracy, as measured by the Indonesian Democracy Index, does not exert a statistically significant direct effect on regional economic performance within the short observation window. By contrast, investment displays a positive and robust association with real GRDP per capita across specifications, confirming its role as the main proximate driver of regional growth. Central government transfers per capita and population do not exhibit a stable growth-enhancing effect and, in some cases, are weakly or negatively associated with regional output. The findings of this study indicate that, in the short run, investment is the key channel through which regional economies respond to institutional and fiscal environments, while democracy operates more as a deep institutional background whose economic impokact is not immediately visible in annual growth outcomes.
References
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Maryam, S., Hailuddin, H., & Endri, E. (2025). Demographic dividend, economic and employment growth in Indonesia. International Journal of Innovative Research and Scientific Studies, 8(3), 3365–3372. https://doi.org/10.53894/ijirss.v8i3.7244
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Nuzulman, N., Masbar, R., Nazamuddin, B. S., & Majid, M. S. A. (2023). Does democracy matter for economic growth? Empirical evidence from Indonesia. Economic Studies (Ikonomicheski Izsledvania), 32(7), 34–50.
Ortega, J. T., De La Rosa, J. O., & Isaza, Y. I. (2022). Data Science: Panel data analysis to determine the effect of intergovernmental transfers on Colombian territorial tax collection. Procedia Computer Science, 203, 639-643. https://doi.org/10.1016/j.procs.2022.07.093
Paulina, & Adiawaty, S. (2025). Fiscal transfers and the persistence of regional inequality: A critical review of Indonesia’s intergovernmental funding system. Moneta: Journal of Economics and Finance, 3(4), 283–296. https://doi.org/10.61978/moneta.v3i4.822
Persson, T., & Tabellini, G. (2009). Democratic capital: The nexus of political and economic change. American Economic Journal: Macroeconomics, 1(2), 88–126. https://doi.org/10.1257/mac.1.2.88
Rezki, J. F. (2022). Political competition and economic performance: Evidence from Indonesia. Economics of Governance, 23(1), 1–28. https://doi.org/10.1007/s10101-022-00272-3
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Talitha, T., Firman, T., & Hudalah, D. (2020). Welcoming two decades of decentralization in Indonesia: a regional development perspective. Territory, Politics, Governance, 8(5), 690-708. https://doi.org/10.1080/21622671.2019.1601595
Telaumbanua, Y. (2023). The influence of fiscal decentralization of regional economic growth. International Journal of Multidisciplinary Sciences, 4(2), 112–121.
Trinugroho, I., Achsanta, A. F., Pamungkas, P., Saputro, N., & Yuniarti, S. (2023). Democracy, economic growth, and income inequality: Evidence from province level data. Cogent Economics & Finance, 11(1), 2220244. https://doi.org/10.1080/23322039.2023.2220244
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Wirandana, P. A., & Khoirunurrofik, K. (2024). Educational inequality in Indonesia: Are intergovernmental fiscal transfers effective in reducing the gap? Educational Studies, 50(6), 1424–1443. https://doi.org/10.1080/03055698.2022.2103647
Yangailo, T. (2025). Foreign Aid-Economic Growth Nexus: A Systematic Literature Review. Economia Aziendale Online-, 16(2), 361-388. http://dx.doi.org/10.13132/2038-5498/16.2.361-388
Yuliana, S., Bashir, A., & Rohima, S. (2019). The Effect of Investment Toward Economic Growth in The Local Economy. Jurnal Ekonomi Dan Studi Pembangunan, 11(1), 28-39. http://dx.doi.org/10.17977/um002v11i12019p028
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Zein, M. H. M., Muhtarom, M., Mulyadi, M., & Septiani, S. (2024). Examining the role of local government’s financial performance and capital expenditure in increasing economic growth in Banten Province, Indonesia (2018–2022). Journal of Risk and Financial Management, 17(10), 456. https://doi.org/10.3390/jrfm17100456
Acemoglu, D., & Robinson, J. A. (2012). Why nations fail: The origins of power, prosperity, and poverty. Crown Business.
Acemoglu, D., Naidu, S., Restrepo, P., & Robinson, J. A. (2019). Democracy does cause growth. Journal of Political Economy, 127(1), 47–100.
Adib, A., Idris, I., & Triani, M. (2019). Analisis pengaruh demokrasi, indeks gini dan upah minimum provinsi terhadap pertumbuhan ekonomi di Indonesia. Ecosains: Jurnal Ilmiah Ekonomi dan Pembangunan, 8(1), 67–76. https://doi.org/10.24036/ecosains.11519657.00
Ahmed, M., Khan, M. A., Attique, A., Khan, M. A., Haddad, H., & Al-Ramahi, N. M. (2024). Democracy’s limited impact on innovation: Panel data evidence from developing countries. PLOS ONE, 19(3), e0297915. https://doi.org/10.1371/journal.pone.0297915
Amri, P. D., & Amri, M. (2021). What Influences Subnational Competitiveness in a Decentralized Indonesia?. Journal of Southeast Asian Economies, 38(3), 336-357.
Arum, D. P. S., & Kaluge, D. (2025). Foreign and domestic investments as the economic growth determinants in 34 Indonesian provinces in the 2015–2023 period. Contemporary Studies in Economic, Finance and Banking, 4(2). https://doi.org/10.21776/csefb.2025.04.2.02
Badan Pusat Statistik. (2025). Indeks Demokrasi Indonesia menurut provinsi, 2018–2024 [Data set]. Badan Pusat Statistik (BPS). https://www.bps.go.id/id/statistics-table/2/MjE1OSMy/-metode-baru-indeks-demokrasi-indonesia-menurut-provinsi.html?utm_source=chatgpt.com
Bardhan, P. (2016). State and development: The need for a reappraisal of the current literature. Journal of Economic Literature, 54(3), 862-892. https://doi.org/10.1257/jel.20151239
Basuki, A. T., Purwaningsih, Y., Soesilo, A. M., & Mulyanto, M. (2020). The Effect of Fiscal Policy and Foreign Direct Investment on Regional Economy in Indonesia. Jurnal Ekonomi & Studi Pembangunan, 21(1), 53-68. https://doi.org/10.18196/jesp.21.1.5031
Chizema, D. (2025). The Impact of Foreign Direct Investment on Economic Development in South Asia and Southeastern Asia. Economies, 13(6), 157. https://doi.org/10.3390/economies13060157
Fadli, F. (2016). Fiscal decentralization and regional disparity in east and west Indonesia’s provinces. Jurnal Ekonomi Pembangunan, 14(1), 1-17. https://doi.org/10.22219/jep.v14i1.3840
Fauji, Z., & Syafitri, W. (2024). The impact of local governance and regional own-source revenue on economic growth at the district level in Indonesia. Jurnal Ekonomi dan Bisnis, 27(2), 153–174. https://doi.org/10.24914/jeb.v27i2.11606
Fazaalloh, A. M. (2024). FDI and economic growth in Indonesia: A provincial and sectoral analysis. Journal of Economic Structures, 13(1), 3. https://doi.org/10.1186/s40008-023-00323-w
Firmansyah, D. (2025). Demographic dividend: Age structure, education and economic growth – A systematic literature review. SSRN Working Paper.
Gonschorek, G. J. (2021). Subnational favoritism in development grant allocations: Empirical evidence from decentralized Indonesia. World Development, 139, 105378. https://doi.org/10.1016/j.worlddev.2020.105299
Hasan, S. A., Haider, A., & Ullah, S. (2023). Democracy, political stability and economic growth nexus in Asian countries: Evidence from panel ARDL. Journal of Economic Impact, 5(3), 167–178. https://doi.org/10.52223/jei5032306
Hidayat, S., & Prabowo, P. (2024). The Effect of Demographic Dividend, HDI, and Population Growth on Economic Growth in East Java. Independent: Journal of Economics, 4(2), 102–113. https://doi.org/10.26740/independent.v4i2.60918
Iskandar, A., & Subekan, A. (2019). Democracy and growth nexus in Indonesia. Jurnal Ekonomi Pembangunan: Kajian Masalah Ekonomi dan Pembangunan, 20(2), 208–221. https://doi.org/10.23917/jep.v20i2.7581
Jamil, H., Ananda, C. F., & Prasetyia, F. (2022). It takes two to tango: The joint effect of democracy and fiscal capacity on economic growth in Indonesia. Jurnal Perspektif Pembiayaan dan Pembangunan Daerah, 10(5), 271–286. https://doi.org/10.22437/ppd.v10i5.20816
Jamil, H., Ananda, C. F., & Prasetyia, F. (2022). One size does not fit all: The heterogenous impact of democracy on economic growth in Indonesia. MIMBAR: Jurnal Sosial dan Pembangunan, 38(2), 361–370. https://doi.org/10.29313/mimbar.v0i0.10114
Kis-Katos, K., & Sjahrir, B. S. (2017). The impact of fiscal and political decentralization on local public investment in Indonesia. Journal of Comparative Economics, 45(2), 344–365. https://doi.org/10.1016/j.jce.2017.03.003
Maryam, S., Hailuddin, H., & Endri, E. (2025). Demographic dividend, economic and employment growth in Indonesia. International Journal of Innovative Research and Scientific Studies, 8(3), 3365–3372. https://doi.org/10.53894/ijirss.v8i3.7244
North, D. C. (1990). Institutions, institutional change and economic performance. Cambridge University Press.
Nur, M., Tambunan, R., & Paluala, K. (2025). Analisis Determinan Pertumbuhan Ekonomi Regional dengan Menggunakan Model Panel Data. Journal of Economics, Management, and Accounting, 1(1), 48-56. https://doi.org/10.65310/36w7bh55
Nurosidah, S., Khusaini, M., & Prasetyia, F. (2025). Intergovernmental transfers reduction policy and flypaper effect: Case of Covid-19 pandemic in Indonesia. Jurnal Ekonomi Dan Studi Pembangunan, 15(1), 1-18.
Nuzulman, N., Masbar, R., Nazamuddin, B. S., & Majid, M. S. A. (2023). Does democracy matter for economic growth? Empirical evidence from Indonesia. Economic Studies (Ikonomicheski Izsledvania), 32(7), 34–50.
Ortega, J. T., De La Rosa, J. O., & Isaza, Y. I. (2022). Data Science: Panel data analysis to determine the effect of intergovernmental transfers on Colombian territorial tax collection. Procedia Computer Science, 203, 639-643. https://doi.org/10.1016/j.procs.2022.07.093
Paulina, & Adiawaty, S. (2025). Fiscal transfers and the persistence of regional inequality: A critical review of Indonesia’s intergovernmental funding system. Moneta: Journal of Economics and Finance, 3(4), 283–296. https://doi.org/10.61978/moneta.v3i4.822
Persson, T., & Tabellini, G. (2009). Democratic capital: The nexus of political and economic change. American Economic Journal: Macroeconomics, 1(2), 88–126. https://doi.org/10.1257/mac.1.2.88
Rezki, J. F. (2022). Political competition and economic performance: Evidence from Indonesia. Economics of Governance, 23(1), 1–28. https://doi.org/10.1007/s10101-022-00272-3
Rodrik, D., Subramanian, A., & Trebbi, F. (2004). Institutions rule: The primacy of institutions over geography and integration in economic development. Journal of Economic Growth, 9(2), 131–165. https://doi.org/10.1023/B:JOEG.0000031425.72248.85
Rostiana, E., & Rodesbi, A. (2020). Demographic transition and economic growth in Indonesia. Jurnal Economia, 16(1), 1–17. https://doi.org/10.21831/economia.v16i1.29846
Setiawan, A., Tjiptoherijanto, P., Mahi, B. R., & Khoirunurrofik, K. (2022). The impact of local government capacity on public service delivery: Lessons learned from decentralized Indonesia. Economies, 10(12), 323. https://doi.org/10.3390/economies10120323
Sijabat, R. (2022). The association of economic growth, foreign aid, foreign direct investment, and gross capital formation in Indonesia. Economies, 10(4), 93. https://doi.org/10.3390/economies10040093
Sijabat, R. (2024). Democracy, Human Development, Income Distribution and Regional Economic Performance: A Panel Data Analysis of 34 Provinces in Indonesia. Jurnal Ilmu Sosial dan Ilmu Politik, 28(1), 73-93. https://doi.org/10.22146/jsp.76139
Sima, D., & Huang, F. (2023). Is democracy good for growth?—Development at political transition time matters. European Journal of Political Economy, 78, 102355. https://doi.org/10.1016/j.ejpoleco.2022.102355
Sofilda, E., Zilal Hamzah, M., & Kusairi, S. (2023). Analysis of fiscal decentralisation, human development, and regional economic growth in indonesia. Cogent Economics & Finance, 11(1), 2220520. https://doi.org/10.1080/23322039.2023.2220520
Sugiyarto, A., Lee, B. L., & Wilson, C. (2025). Narrowing the gap: Dynamics of Indonesia's public expenditure performance in economically lagging districts. Economic Analysis and Policy, 85, 2299-2318. https://doi.org/10.1016/j.eap.2025.03.014
Talitha, T., Firman, T., & Hudalah, D. (2020). Welcoming two decades of decentralization in Indonesia: a regional development perspective. Territory, Politics, Governance, 8(5), 690-708. https://doi.org/10.1080/21622671.2019.1601595
Telaumbanua, Y. (2023). The influence of fiscal decentralization of regional economic growth. International Journal of Multidisciplinary Sciences, 4(2), 112–121.
Trinugroho, I., Achsanta, A. F., Pamungkas, P., Saputro, N., & Yuniarti, S. (2023). Democracy, economic growth, and income inequality: Evidence from province level data. Cogent Economics & Finance, 11(1), 2220244. https://doi.org/10.1080/23322039.2023.2220244
Utomo, J. K., & Soetjipto, W. (2025). Pengaruh demokrasi terhadap pertumbuhan ekonomi daerah di Indonesia. Jurnal Ekonomi dan Pembangunan Indonesia, 25(2), 200–216. https://doi.org/10.7454/jepi.v25i2.1619
Wirandana, P. A., & Khoirunurrofik, K. (2024). Educational inequality in Indonesia: Are intergovernmental fiscal transfers effective in reducing the gap? Educational Studies, 50(6), 1424–1443. https://doi.org/10.1080/03055698.2022.2103647
Yangailo, T. (2025). Foreign Aid-Economic Growth Nexus: A Systematic Literature Review. Economia Aziendale Online-, 16(2), 361-388. http://dx.doi.org/10.13132/2038-5498/16.2.361-388
Yuliana, S., Bashir, A., & Rohima, S. (2019). The Effect of Investment Toward Economic Growth in The Local Economy. Jurnal Ekonomi Dan Studi Pembangunan, 11(1), 28-39. http://dx.doi.org/10.17977/um002v11i12019p028
Yuwono, T., Haryanto, T., & Arifin, F. (2025). The effect of regulatory governance system on investment growth in Indonesia. Frontiers in Political Science, 7, 1630368. https://doi.org/10.3389/fpos.2025.1630368
Zein, M. H. M., Muhtarom, M., Mulyadi, M., & Septiani, S. (2024). Examining the role of local government’s financial performance and capital expenditure in increasing economic growth in Banten Province, Indonesia (2018–2022). Journal of Risk and Financial Management, 17(10), 456. https://doi.org/10.3390/jrfm17100456
Published
2025-12-07
How to Cite
Isma, A., Fitrianti, R., Alisyahbana, A. N. Q. A., & Diarra, S. (2025). Do Democracy and Investment Promote Regional Economic Performance? Evidance from Panel Data Analysis. Quantitative Economics and Management Studies, 6(6). https://doi.org/10.35877/454RI.qems4483
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