When Growth Outpaces the State: Fiscal Capacity Constraints in a Resource-Based Industrial Growth Pole, Evidence from Morowali, Indonesia
DOI:
https://doi.org/10.36574/jpp.v10i1.840Keywords:
industrialization, jobless growth, employment elasticity, labor market transformation, resource-based industrialization, global value chains, labor formalization, skill upgrading, wage dynamics, Indonesia, Morowali, nickel industryAbstract
Rapid industrialization is widely expected to strengthen fiscal capacity by expanding the economic base and increasing public revenues. However, this assumption remains underexplored at the subnational level, particularly in the context of resource-based industrialization. This paper examines the relationship between industrialization and fiscal transformation using the case of Morowali Regency, Indonesia—one of the fastest-growing industrial regions in the Global South driven by nickel downstreaming.
Using subnational data for the period 2011–2025, the study combines longitudinal analysis, fiscal ratio evaluation, and a Difference-in-Differences approach with Central Sulawesi Province as a benchmark. The results reveal a striking divergence: while gross regional domestic product (GRDP) increased more than fortyfold, local government revenue grew only fourfold. Consequently, the revenue-to-GRDP ratio declined sharply from 14.93 percent to 1.35 percent, with similar patterns observed in expenditure ratios. Econometric estimates confirm a statistically significant decline in fiscal capacity relative to the regional benchmark following the onset of industrialization.
To explain this pattern, the paper introduces the concept of fiscal effort collapse, defined as a sustained decline in the relative fiscal capacity of the state in the context of rapid economic growth. The findings challenge the conventional view that industrialization inherently strengthens state capacity, and instead suggest that, under certain institutional and structural conditions, growth can outpace the fiscal system’s ability to capture and redistribute economic value.
The paper contributes to the literature by extending growth pole theory to include fiscal dynamics, highlighting limitations in fiscal federalism, and reframing state capacity as a relative concept. The findings have important policy implications for countries pursuing resource-based industrialization, emphasizing the need to align fiscal systems with the scale and structure of economic transformation.
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Copyright (c) 2026 Muhyiddin, Muhammad Dio Rhiza Amrizal, Nugroho Habibi, Achmanto Mendatu
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