The Dynamics of Economic Growth in Underdeveloped Regions: A Case Study in Indonesia

This study aims to determine the response of regional economic growth to the financial performance of regional economies in regard to the liquidity conditions, saving-investment gaps, trade openness, inflation, as well as the national economic growth. The basic logic theory of research uses the principles of open economics and financial intermediary systems. The data used in this study are secondary data, and the form of data is a quarterly time series for the period from 2008 to 2019. The data were obtained from various publications, such as the Central Statistics Agency (CSA), Regional Financial Economics Statistics (RFES), Indonesian Banking Statistics (IBS), and the Financial Services Authority (FSA). Data processing was done through VAR/VECM analysis; short-term and long-term equilibrium analyses were carried out. The results of the analysis illustrate that regional economic growth and the conditions of liquidity, saving-investment gaps, trade openness, inflation, and national economic growth are related and lead to significant impact variations in the provinces of Papua and West Papua. In conclusion, the findings of this research support the leading supply hypothesis and reformulate the strategy and policy of economic development, bearing in mind that there are still many underdeveloped districts in these two provinces.