Poverty, Income Inequality, and Economic Growth : The Moderating Role of Central Fiscal Transfers in West Java, 2018–2023

Abstract

This study examines the effects of poverty and income inequality on real GRDP growth, and the moderating role of central government fiscal transfers (general and special allocation funds) on these relationships, across 27 regencies/cities in West Java during 2018–2023. Using an explanatory quantitative approach with balanced panel data regression (162 observations) estimated through a Fixed Effect Model (EViews 12), the study includes the Human Development Index and investment as control variables, with POV×Z and GINI×Z interaction terms testing the moderating effect. Results show poverty has a significant negative effect on real GRDP growth (? = -2.89; p = 0.000), while income inequality shows a significant positive effect (? = 42.02; p = 0.031), contrary to the hypothesized direction. Central fiscal transfers significantly moderate the poverty–growth relationship (POV×Z; ? = 0.0073; p = 0.017) in a positive direction, indicating a flypaper-effect pattern in which high transfer dependency fails to strengthen poor regions' capacity to offset poverty's negative impact. In contrast, the moderating effect of fiscal transfers on income inequality (GINI×Z) is not significant (p = 0.402), reflecting inequality's roots in longer-term structural factors. Mediation tests for M1 and M2 do not meet statistical criteria. These findings provide empirical grounds for evaluating Indonesia's 2022 Fiscal Relations Law and suggest strengthening performance-based transfer mechanisms alongside the financial intermediation role of regional development banks and microfinance institutions in high-poverty, transfer-dependent regions.