In 2015, the Indonesian Government rolled a new scheme of transfer called ‘Village Fund’, based on the Law 6/2014 (known as the Village Law). The scheme requires the Central Government to allocate funding of at least 10 per cent on top of inter-governmental transfers to provinces and districts. The objective is to help the village governments finance development, community empowerment and other social activities at the regional level. It is expected to reduce infrastructure gaps between rural and urban areas, increase the access of rural population to local services, and finally improve social welfare and reduce poverty in rural areas. Since it involves a big amount of money, this program marked the beginning of what is known as the ‘second wave of fiscal decentralisation’. The fund has increased every year and reached Rp 60 trillion in 2018.

In this paper, I discuss the implementation of this Village Fund program and its impact on social welfare and poverty eradication in rural Indonesia. In particular, I examine (1) the formula of village fund allocation and its distribution by region as well as by districts, (2) how the village fund is actually allocated and utilized, and (3) the extent to which the village fund affects poverty and welfare of rural people.

The findings suggest that the way village funds have been allocated and distributed has so far been ineffective in alleviating poverty in rural areas. Although the BPS data shows that 60 per cent of poor households live in rural areas and 50 per cent of them work in the agriculture sector, I find that increasing the funds to rural areas has no correlation with a reduction in rural poverty. This is likely due to the fact that the funds are mainly directed towards village infrastructure development that may not directly provide access to decent work for poor households in rural areas.

Bio-note:

Hefrizal Handra is a senior lecturer at Faculty of Economics, Andalas University, Indonesia.