Fiscal Dynamics and Financial Capacity in South Sulawesi Province
Abstract
This study examines the effects of the flypaper effect, fiscal stress, and tax effort on the financial capacity of South Sulawesi Province over the period 2002 to 2024 using the VECM method. In the short term, none of the identified factors exerts a significant influence on fiscal capacity. However, in the long term, the flypaper effect and fiscal stress are found to negatively affect financial capacity, whereas tax effort is found to have a positive effect. The flypaper effect indicates dependence on central transfers, reducing fiscal efficiency. Fiscal stress arises from imbalances that weaken capacity, while tax effort enhances fiscal autonomy by maximizing local revenue. These findings emphasize the importance of reducing fiscal dependence, improving spending efficiency, and promoting good governance to strengthen financial sustainability. The quality of institutions and governance also plays a crucial role in determining the success of fiscal policy at the regional level
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Tran, C. T. T., & Dollery, B. (2021). All in the Mind: Citizen Satisfaction and Financial Performance in the Victorian Local Government System. Australian Accounting Review, 31(1), 51–64. https://doi.org/10.1111/auar.12317
Turley, G., Di medio, R., & McNena, S. (2020). A reassessment of local government’s financial position and performance: The case of Ireland. Administration, 68(2), 1–35. https://doi.org/10.2478/admin-2020-0009
Uhoda, M. (2020). Which competences for sub-national jurisdictions and how to finance them? The economic theory of fiscal federalism from the foundations to nowadays. Journal of Social and Economic Development, 22(1), 91–112. https://doi.org/10.1007/s40847-020-00099-w
Usman, M., Warsono, W., Widiarti, W., & Kurniasari, D. (2020). Dynamic Modeling Data Time Series by Using Constant Conditional Correlation-Generalized Autoregressive Conditional Heteroscedasticity.
Xing, W., & Zhang, Q. (2018). The effects of vertical and horizontal incentives on local tax efforts: evidence from China. Applied Economics, 50(11), 1222–1237. https://doi.org/10.1080/00036846.2017.1355546
Zamzami, F., & Rakhman, F. (2023). Determinants of Local Government Financial Performance in Indonesia. Academic Journal of Interdisciplinary Studies, 12(5), 332. https://doi.org/10.36941/ajis-2023-0148
Zárate-Marco, A., & Vallés-Giménez, J. (2019). Regional tax effort in Spain. Economics, 13(1), 20190031.
Aldag, A. M., Warner, M. E., & Kim, Y. (2019). Leviathan or Public Steward? Evidence on Local Government Taxing Behavior from New York State. Publius: The Journal of Federalism, 49(4), 671–693. https://doi.org/10.1093/publius/pjy035
Bastida, F., Estrada, L., & Guillamón, M.-D. (2022). Flypaper effect and partisanship theories best explain municipal financial performance in Latin America. Policy Studies, 43(6), 1298–1321. https://doi.org/10.1080/01442872.2021.1982887
Bird, R. M., & Zolt, E. M. (2008). Technology and taxation in developing countries: From hand to mouse. National Tax Journal, 61(4), 791–821.
Chigome, J., & Robinson, Z. (2021). Determinants of Tax Capacity and Tax Effort in Southern Africa: an Empirical Analysis. Applied Economics, 53(60), 6927–6943. https://doi.org/10.1080/00036846.2021.1954593
Chung, I. H., & Williams, D. (2021). Local governments’ responses to the fiscal stress label: the case of New York. Local Government Studies, 47(5), 808–835. https://doi.org/10.1080/03003930.2020.1797693
Cruz, T., & Silva, T. (2020). Minimum Spending in Education and the Flypaper Effect. Economics of Education Review, 77(May), 102012. https://doi.org/10.1016/j.econedurev.2020.102012
Hanif, I., Wallace, S., & Gago-de-Santos, P. (2020). Economic Growth by Means of Fiscal Decentralization: An Empirical Study for Federal Developing Countries. Sage Open, 10(4). https://doi.org/10.1177/2158244020968088
Jaén-García, M. (2021). Displacement Effect and Ratchet Effect: Testing of Two Alternative Hypotheses. Sage Open, 11(1). https://doi.org/10.1177/21582440211003577
Kim, Y., Aldag, A. M., & Warner, M. E. (2020). A Balanced View: Us Local Government Managers’ Perceptions of Fiscal Stress. Public Administration Quarterly, 44(2), 172–200. https://doi.org/10.37808/paq.44.2.2
Kimhi, O., Beeri, I., & Reingewertz, Y. (2022). The Political Economy of Local Governments’ Requests for Permission to Override Central Fiscal Limitations: Insights from Israel. Publius: The Journal of Federalism, 52(4), 605–631.
Martinez‐Vazquez, J., Lago‐Peñas, S., & Sacchi, A. (2017). The impact of fiscal decentralization: A survey. Journal of Economic Surveys, 31(4), 1095–1129.
Nguyen-Hoang, P., & Yinger, J. (2020). The Flypaper Effect: Methods, Magnitudes, and Mechanisms. Journal of Education Finance, 46(2), 158–188. https://doi.org/10.1353/jef.2020.a784651
Oliveira, E. A. B. de, & Rossignoli, M. (2019). Federalismo Fiscal No Brasil: Da Teoria Federalista À Crise Econômica. Revista Juridica, 1(54), 395. https://doi.org/10.21902/revistajur.2316-753X.v1i54.3315
Panao, R. A. L. (2021). Beyond Flypaper: Unconditional Transfers and Local Revenue Generation in the Philippines, 1992–2016. International Journal of Public Administration, 44(15), 1341–1354. https://doi.org/10.1080/01900692.2020.1759628
Perangin-Angin, P. G. B., Natalian, E. A., & Bharata, R. W. (2023). Analisis Rasio Keuangan Untuk Mengukur Kinerja Keuangan Pemerintah Daerah Provinsi Jawa Tengah Tahun Anggaran 2019-2022. Manajemen Kreatif Jurnal, 1(3), 173–183.
Prado, P. H. M., & da Silva, C. G. (2020). Wagner’s Law and Fiscal Illusion: An analysis of state government finances in Brazil. Review of Development Economics, 24(2), 628–643. https://doi.org/10.1111/rode.12662
Rios, V., Hortas-Rico, M., & Pascual, P. (2022). What shapes the flypaper effect? The role of the political environment in the budget process. Local Government Studies, 48(5), 793–820. https://doi.org/10.1080/03003930.2020.1866555
Ruan, M., & Zhao, X. (2022). Fiscal Pressure, Policy Choices and Regional Economic Disparity: Evidence from a Natural Experiment in China. Sustainability, 14(19), 12402. https://doi.org/10.3390/su141912402
Russel, E., Wamiliana, W., Saibi, N., Warsono, W., Usman, M., & Daoud, J. I. (2022). Dynamic Modeling and Forecasting Data Energy Used and Carbon Dioxide (CO2). Science and Technology Indonesia, 7(2), 228–237. https://doi.org/10.26554/sti.2022.7.2.228-237
Sijabat, M. Y. (2014). Analisis kinerja keuangan serta kemampuan keuangan pemerintah daerah dalam pelaksanaan otonomi daerah (studi pada dinas pendapatan daerah dan badan pengelola keuangan dan aset daerah Kota Malang tahun anggaran 2008-2012). Brawijaya University.
Sutherland, D., Price, R., & Joumard, I. (2005). Sub-central government fiscal rules. OECD Economic Studies, 41(2), 141–181.
Tran, C. T. T., & Dollery, B. (2021). All in the Mind: Citizen Satisfaction and Financial Performance in the Victorian Local Government System. Australian Accounting Review, 31(1), 51–64. https://doi.org/10.1111/auar.12317
Turley, G., Di medio, R., & McNena, S. (2020). A reassessment of local government’s financial position and performance: The case of Ireland. Administration, 68(2), 1–35. https://doi.org/10.2478/admin-2020-0009
Uhoda, M. (2020). Which competences for sub-national jurisdictions and how to finance them? The economic theory of fiscal federalism from the foundations to nowadays. Journal of Social and Economic Development, 22(1), 91–112. https://doi.org/10.1007/s40847-020-00099-w
Usman, M., Warsono, W., Widiarti, W., & Kurniasari, D. (2020). Dynamic Modeling Data Time Series by Using Constant Conditional Correlation-Generalized Autoregressive Conditional Heteroscedasticity.
Xing, W., & Zhang, Q. (2018). The effects of vertical and horizontal incentives on local tax efforts: evidence from China. Applied Economics, 50(11), 1222–1237. https://doi.org/10.1080/00036846.2017.1355546
Zamzami, F., & Rakhman, F. (2023). Determinants of Local Government Financial Performance in Indonesia. Academic Journal of Interdisciplinary Studies, 12(5), 332. https://doi.org/10.36941/ajis-2023-0148
Zárate-Marco, A., & Vallés-Giménez, J. (2019). Regional tax effort in Spain. Economics, 13(1), 20190031.
Published
2025-11-06
How to Cite
RAHMAN BATO, Aulia; BULUTODING, Lince; SUDARWINTI, Sudarwinti.
Fiscal Dynamics and Financial Capacity in South Sulawesi Province.
Eko-Regional: Jurnal Pembangunan Ekonomi Wilayah, [S.l.], v. 20, n. 2, p. 188-201, nov. 2025.
ISSN 2620-8849.
Available at: <https://jos.unsoed.ac.id/index.php/er/article/view/16244>. Date accessed: 14 dec. 2025.
doi: https://doi.org/10.32424/er.v20i2.16244.
Section
Articles
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