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Village fund (Dana
Desa) has been introduced in Indonesia since 2015 following the implementation of
Law no 6 Year 2014.
The amount is increasing year to year in line with the rise of transfer
fund to regions. The total amount for 2017 is Rp. 60 trillion and expected to
become about Rp 80 trillion in 2018. There are about 74,954 registered villages
in 2017 that eligible to receive such fund throughout Indonesia.

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fund is intended to
help the village to finance the village government activities, village development,
community empowerment and society activities. The amount is designed to keep up
with the amount of transfer to regions and allocated to villages on the basis
of village needs represented by the number of population, the poor, the area
and the level of geographical difficulties (Law 6/2017, explanation to article
72). As we know that the level of poverty in rural area are relatively
higher than in urban area. In the last five years, it was recorded that about
62 percent of poor people lived in rural areas. Therefore, if the distribution
and the use of village fund are well designed and implemented, there will be a
reduction of poverty in rural area and an increase of access of rural
population to local services.


the fund was just introduced shortly three years ago, there is a limited number
of research have been done in this area. One of them is Lewis (2015) that initiated the analyzing the
problems of village fund allocation in Indonesia. He advocated that the allocation of
village fund is likely to lead to unequally distributed village revenue where
the poor villages (high poverty) will receive less money than they need and the
rich village will get more funds than they require. Then, Handra et. all (2016)
analyzed the formula of village fund in relation to poverty alleviation
programs concluded that the formula has no relation at all with the need of
village to address the poverty and the access of villagers to the basic


This research is basically the continuation of
previous research about the relation of formula and poverty alleviation
program, extend the analysis on the impact of village fund distribution to
poverty in Indonesia. Therefore, this study examines (1) the distribution of
village fund by region in regard to the level of poverty in region, (2) how the
village fund is used and allocated (3) what is the impact of village fund to
level of poverty in rural area. Descriptive and inferential methods are used in
this study based on secondary data collected from various sources such as BPS,
Ministry of Finance, and studies done by various agencies in Indonesia.


Village Fund as a Second Wave
of Fiscal Decentralization


The second wave of fiscal decentralization1
is probably the most appropriate term to describe what has happened in
Indonesia since 2015 following the implementation of Law no 6 Year 2014 about
Village. The Law has determined that the Central Government should allocate to
the villages 10% on top of transfer to regions. Moreover, the regencies/cities
should transfer 10% of their revenue from general grant (DAU) and share revenue
(DBH) to village governments. Such policy has guaranteed a substantial amount
of fund for village governments.


Fiscal decentralization policy can be implemented
in two approaches. The first is the decentralization of authorities to raise
taxes. The second is the decentralization of expenditures when the lowest level
of governments has the responsibility for implementing expenditure functions. In
case of village governments in Indonesia, the first approach is unlikely to
happened since there is no taxes assigned to villages. This is just a
decentralization of expenditure functions in. The broad functions of
villages are mentioned in the Law following the provision of fund, but the
detail is not clear. Further policies are needed to clearer the detail
assignments to village governments.


From economics point of view, the main objective of
fiscal decentralization is to enhance economic efficiency through efficient and
effective provision of local services. The first approach will achieve the
objective through the Tiebout’s model of local public good provision which
assumes the households are mobile and deciding where to live according to their
preferences about tax and public goods (Tiebout, 1956). The model says that locality
compete in offering a mix of tax and public goods, and citizens “choose by
their feet”.


The second approach of fiscal decentralization is influenced
by Oates’s Decentralization Theorem that says a decentralized provision maximizes
social welfare when preferences differ across regions and spill-over effects
are absent (Oates, 1972). The assumptions of Oates’ theorem is that the
centralization provides a uniform public goods and the governments operate in
order to maximize social welfare. Nevertheless, both offer a theoretical
framework to achieve an efficient allocation of resources through fiscal decentralization


Method of Analysis


Descriptive and inferential methods are used in this study based on
secondary data collected from various sources such as BPS, Ministry of Finance,
and studies done by various agencies in Indonesia. The analysis can be done at
any level, region (island), province, regency/city and village. However, the
availability of the data is the main constraint. Financial data can be
downloaded from the formal website of DJPK Ministry of Finance (MOF). The data
is available at the regency/city level and can be calculated for the province
and the region. However, the poverty data in 2016 is available only at the
provincial level. Therefore, the analysis on the impact of village fund on
poverty is doing at the provincial level. Correlation and regression analysis
is conducted to learn a relationship between village fund and the reduction of
poverty at the rural area.


The Research Context


In managing the country, Indonesia is divided into provinces, then the
provincial area comprises Regencies/cities. Each regency/city is divided into
administrative district. Finally, the lowest division of the country is
villages (desa) or administrative sub-district (kelurahan). Currently there are
34 provinces, 508 regencies, 7160 districts and 74,954 villages and about 8350





In Indonesia, village is the third level of autonomous government
below provinces and regencies/cities since the district is just an
administrative part of the regencies/cities. Therefore, the village is
basically under the supervision of the district government. The village has its
own budget and the revenues mainly coming from the upper level of government. Village
level of Government has been practiced in Indonesia even since the colonial
era. After the independence, the first regulation about village was the Law 5
Year 1979. Then, the village was regulated in the law of local governances (Law
No 22 Year 1999 and then Law No 32 Year 2004). Finally, the village is
regulated by a specific law about village.


Village fund is one of several types of village revenues (table 1). It
is a grant from Central Government for Villages through
municipalities/regencies. Other than that, there are at least 6 types of other
village revenues. Those are (i) village owned revenues (ii) Allocation Village
Fund from Regencies/Cities, which is 10 percent of DAU (general purposed grant and DBH
(shared revenues) received by Regencies/Cities from Central Government (iii) Shared
10 percent local taxes and charges collected by Regencies/Cities, (iv) Grants
from Regencies/Cities, (v) Grants from Provinces, (vi) other legal village


Table 1. Flow of Funds from Central Government to Villages


Analysis and Discussion


(1) the distribution of village
fund by region in regard to the level of poverty in region,


Table 1 shows that the distribution of village fund by region. Comparing
the distribution of fund with the concentration of poor population, there are
looser and gainer. Java-Bali and Maluku-NT are the looser, while others are the
gainer. The biggest looser is Java-Bali in which 53.5% of poor population was
located but only received 32% of village fund in 2016. Maluku-NT was also
slightly loosed. Papua and Kalimantan are the biggest gainer in the
distribution of fund followed by Sumatra and Sulawesi. Basically, the table
shows that the distribution of fund is not in line with the proportion of poor
population. The regions mostly needed to address the poverty at rural area does
not receive the fund in proportion to the number of poor people in such region.


Table 1. Distribution of village fund in 2016 and 2017


Fund 2017

Fund 2016


2016 (Sem I)




































































Source: writer’s calculation based on the Data provided by the
Ministry of Finance and BPS Indonesia


(2) how the village fund is
used and allocated


Based on Law No 6/2014 about village, the total budget of
village fund that should be fulfilled gradually by Central Government is ten
percent (on top) of the budgeted transfer fund to all sub-national government
(explanation to article 72). Central Government started to allocate about 20.8
Trillion rupiah to villages in 2015, which was only about 3.2% of the budgeted transfer
fund. Then in 2016, the amount of fund increased to about 47 Trillion rupiah
which was about 6.4% of budgeted transfer fund. The amount has risen to 60 Trillion
rupiah in 2017 (about 8.5% of the budgeted transfer fund). It is likely that
the Government will fulfill the requirement of 10% by 2018.  In order to fulfil such a big amount of fund,
the Government scrutinized the budget of relevant Ministries/Agencies that have
also financed programs related to village development and shifted the fund to
village funds.

The fund is distributed in a
formula basis and in two stages. The first stage is from Central Government to
all Regencies and Cities that have villages. The second stage is from each
Regency or City to villages. According to Law No 6/2014 (the explanation of article
72), the calculation of village fund is based on the number of villages.
Meanwhile the allocation for each village should be based on population, the
number of poor people, area, and geographical condition. The Law also describes
the objectives of village fund allocation, which are (1) to increase the welfare
and (2) to equalize the village development.

Further regulation on the formula to distribute the fund is the
Government Regulation No 60 Year 2014 which have been amended by the Government
Regulation No 22 Year 2015 and the Government Regulation No 8 Year 2016.  Then, there is also a Finance Minister
Regulation No 49 Year 2016 about the procedure of allocation, transferring the
fund, the use of fund, and monitoring and evaluation of fund.

The formula of fund distribution,
in 2015, 2016 and 2017, allocates 90 percent of fund at the same amount for
each village called Basic Allocation (Alokasi Dasar: AD), while 10 percent of
fund allocated on the basis of formula using four variables: population, area,
poor population, geographical condition (Alokasi Formula: AF). The difference
of formula between the first stage (the formula for each regency/city) and the
second stage (the formula for each village) is at the data uses to represent
the geographical condition. At the first, the construction price index (IKK) is
used, while at the second stage the geographical condition is represented by
geographical difficulty index (IKG).

Government interpret that equalization of
village development is to distribute an equal amount for each village. Meanwhile
the differences between villages are only accommodate by 10 percent of fund. High
diversity between villages is almost ignored. It is ignored the variation of
village size such as village population that varies from 13 to 89,050 people
per village and the area which is ranging from 0.01 to 3901 km2 (Data Pokdes,
2014). Most villages in Aceh and Papua have population less than 500 people,
while most villages in Java are densely populated with more than 5000
population. So that, there is a possibility that a big village will receive a
relatively same amount of fund as a small village.

Table 2 The
formula to distribute village fund to Regencies/Cities and to Villages


of Village Fund per Regency/City

per Villages

Basic Allocation

Basic allocation per Regency/City is
The number of villages x Basic
allocation per village

Basic allocation per village is
determined by the 90% of fund divided by the total number of villages in

Formula Allocation

Formula allocation per Regency/City
(a part of 10% of the total village funds) is determined by the following
Population (weighted 25%)
Area (weighted 10%)
Poor Population (weighted 35%)
Construction Price Index (weighted

Formula allocation per village (a
proportion of formula allocation for Regency/City) is determined by the following
Population (weighted 25%)
Area (weighted 10%)
Poor Population (weighted 35%)
Geographical difficulty index
(weighted 30%), an index represents the difficulty of villagers to access the
basic services.

The Decision

Finance Minister Decree

The Decree of Bupati/Walikota

Sources: Government Regulation No 22 Year 2015 and Finance
Minister Regulation No 49 Year 2016.


The formula shows that fiscal need variables will not play an
important role in the allocation since they only distribute ten percent of
fund. The variable of poor population will only determine about 3.5 percent of
allocation. Therefore, it is surprised if the distribution of fund showed in
table 1 does not meet the proportion of poor population.


Analyzing the use of fund in some regencies, it confirms that the
poverty has not been paid an appropriate attention since the village governments
spend more on physical development rather than social and economic empowerment.
The data in three regencies (table 3) shows that the people empowerment
programs only share about 7 to 23 percent of total village expenditure in those
regencies. This data is in line with the Ministry of Finance monitoring on the
use of village fund in 2015, in which the village fund was 83 percent used for
development (DJPK-MoF, 2016).









Table 3. The Structure of Village Revenue and Expenditure in Three
Regencies 2016

Revenue and Expenditure (Budgeted) 2016





Village Owned Revenues

Shared Taxes and Charges



Allocation from General Revenue of Kabupaten




Village Funds from Central Government




Other Revenues








Village Government Salaries and Adm. Cost




Village Development




People Empowerment Program




Society Activities








Sources: Writer’s calculation from KOMPAK monitoring and evaluation
program 2017





(3) what is the impact of
village fund to level of poverty in rural area


Table 4. Correlation Between
Village Fund and Poverty Reduction

Correlation Analysis at provincial level shows that the village fund
(2015) has a positive correlation with the percentage reduction of poor
population in rural area (the reduction from Semester I 2015 to Semester I


Table 5. Output of  Regression Analysis

The result of correlation analysis is confirmed by the regression
result using two independent variables (village fund and local government
expenditure) and percentage reduction of rural poor population as dependent
variable. It shows that the poverty reduction is only influenced by the village
fund. The local government expenditure does not significantly affect the
poverty reduction in the rural area.



















Table 6. Matrix of Provincial classification on the distribution of
village fund and

the reduction of poor population


VF Per capita below
national average

VF per capita above
national average

Percentage reduction of
poor population above national average (2016)

Sulawesi Selatan
Jawa Barat
Jawa Timur

Sulawesi Utara
Kalimantan Tengah
Sulawesi Tenggara
Sulawesi Barat
Kalimantan Barat
Sumatera Utara

Percentage reduction of
poor population below national average (2016)

Nusa Tenggara Barat
Jawa Tengah
Kalimantan Timur
DI Yogyakarta
Kepulauan Riau                           
Bangka Belitung
Sumatera Barat

Kalimantan Selatan
Sumatera Selatan
Nusa Tenggara Timur
Papua Barat
Sulawesi Tengah
Maluku Utara
Kalimantan Utara

Source: Author’s calculation from the Data of BPS and





The analysis confirms that the formula and the distribution of village
fund is not in proportion with the poor population. The regions mostly needed
to address the poverty at rural area does not receive the fund in proportion to
the number of poor people in such region. Analysis on the formula also confirm
that fiscal need variables including poor population will not play an important
role in the allocation since the variables only allocate ten percent of total
fund. Moreover, the use of village fund is not relevant with the poverty
alleviation program in the rural area since it is mainly used for village infrastructure
development. Nevertheless, the correlation and regression analysis at
provincial level does shows the distribution of village fund has a positive
correlation with the reduction of poverty in rural areas.






Handra, Hefrizal, 2016,
The implication of Village Fund on Distribution of Fund Between Region
in Indonesia, a paper presented at the 13th IRSA International
Conference, 25-26 July 2016, Malang.

Handra, Hefrizal, 2015,
A Study of Indonesia’s Fiscal Equalisation Mechanism in the Early Stages of
Decentralization, Ph.D Thesis, Flinders University of South Australia.

Handra, Hefrizal; Sidik,
Machfud; Satria, Sentot; Suhirman; Murniasih, Erny; Suryani, Devi, 2016, Dana
Desa dan Penanggulangan Kemiskinan, KOMPAK.

Lewis, Blane
D., 2015, Decentralising to Villages in Indonesia: Money (and Other) Mistakes,
Administration and Development 2015, Published online in Wiley Online Library

Lewis, Blane D., 2002.
Indonesia. In Intergovernmental Fiscal Transfers in Asia: Current Practice and
Challenges for the Future, Smoke P, Kim YH

Martinez-Vazquez J,
Vaillancourt F (eds). 2011. Decentralisation in Developing Countries. Global Perspectives on
the Obstacles to Fiscal Devolution. Edward Elgar: Cheltenham.

Oates, Wallace, 1972, Fiscal
Federalism, Harcourt Brace Jovanovich.

Francesco, 2009,  Fiscal Decentralisation
and efficiency of government: A brief literature review, Department of
Economics – University of Warwick (UK), accessed by June 2017 at:

Tiebout, Charles M., 1956, ‘A Pure
Theory of Local Expenditure’,
the Journal of Political Economy, Vol.64
Page 416-424.


The first “big bang” fiscal decentralization began in 2001, when the central
government started to double the grant to regencies/cities to match the need
for financing the transfer of authorities. in 2001, there were about 1.1
million civil servants transferred to local government in line with
decentralized functions (Handra, 2005).

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