How important are health and education in boosting sub-national economic growth?

Abstract

Development of the global economy is marked by increasing attention towards the health sector due to Covid-19 outbreak. This research contributes by examining how important is health and education for provincial economic growth, and connect it with foreign direct investments, and infrastructure spending. Taking Indonesia as a case study, and employing GMM and Fixed Effects methods, the analysis found that improving health and education outcomes are key for sub-national economic growth. However, foreign direct investment, domestic direct investment and public spending on infrastructure failed to support growth in the sub-national level. The finding is robust against alternative specifications. For policy suggestions, in order to dampen the negative economic effects of Covid-19 and to boost growth at post-pandemic period, government at all levels must maintain or even increase public spending in health and education which directly target improvements of health and educational outcomes. To ensure the improvements, public spending must be directed to provide good quality health and educational services; services which enhance health outcomes and develop students’ cognitive skills. In addition, good quality health and educational services must be evenly distributed across sub-nationalities. This is aligned with achieving the UN Sustainable Development Goals number 10; reducing inequality within a country.JEL Classification H51; H52; O15

Full text

Journal of Socioeconomics and Development. 2021. 4(1): 33-45
Journal of Socioeconomics and Development
https://publishing-widyagama.ac.id/ejournal-v2/index.php/jsed
How important are health and education in boosting sub-
national economic growth?
Verazulianti, Taufiq Carnegie Dawood* and Teuku Zulham
Faculty of Economic and Business, Syiah Kuala University, Banda Aceh, Indonesia
*Correspondence email: taufiq.dawood@unsyiah.ac.id
INTRODUCTION
Indonesia is a large country, but the economic
development among its regions are not evenly
distributed. Based on data from World Development
Indicators, Indonesia is the fourth most populated
country in the world, the third largest nation in the
Asia-Pacific, and the largest country in Southeast Asia
in terms of population. According to OECD database,
Indonesia is a member of the Organization of
Economic Cooperation and Development (OECD).
Equitable distribution of regional economic
development within a country is an important
economic objective for a developing economy like
Indonesia. However, economic development among
regions in the country has not been evenly
distributed (Panjawa, Samudro, & Soesilo, 2018).
Economic development is influenced by
developments in the social sector. The social sector
includes the health sector (Umar, 2017) and the
education sector (Ogundari & Awokuse, 2018). In
addition, development is also influenced by the
availability of financing (Dawood, Pratama, Masbar, &
Effendi, 2019) and public spending (Ambya, 2020;
Elia, Yulianto, Tiawon, Sustiyah, & Indrajaya, 2020).
ABSTRACT
Recent development of the global economy is marked by increasing attention
towards the health sector. This research contributes to how important are
health and education for provincial economic growth, and connects it with
foreign direct investments and public infrastructure spending. Taking Indonesia
as a case study and employing GMM method, the analysis found that improving
health and education outcomes is key for sub-national economic growth.
However, foreign direct investment, domestic direct investment, and public
spending on infrastructure failed to support growth in the sub-national level.
The finding is robust against alternative specification. For policy suggestions, in
order to dampen the negative effects of the recent global economic downturn
and to boost growth at post-downturn period, government at all levels must
maintain or even increase public spending in health and education which
directly target improvements of health and educational outcomes. To ensure
the improvements, public spending must be directed to provide good quality
health and educational services, i.e. services which enhance health outcomes
and develop students’ cognitive skills. In addition, good quality health and
educational services must be evenly distributed across sub-nationalities.
ARTICLE INFO
►Research Article
Article History
Received 28 November 2020
Accepted 19 January 2021
Published 1 April 2021
Keywords
education outcome; GMM;
health outcome; sub-national
growth
JEL Classification
H51; H52; O15
To cite this article: Verazulianti, Dawood, T. C., & Zulham, T. (2021). How important are health and education in
boosting sub-national economic growth? Journal of Socioeconomics and Development, 4(1), 33-45.
https://doi.org/10.31328/jsed.v4i1.1762
ISSN 2615-6075 online; ISSN 2615-6946 print
©UWG Press, 2021

34
Verazulianti et al.,
How important are health and education...
There were studies which showed that health
outcomes affected a country’s economic growth.
Ogundari & Awokuse (2018) found that health
outcome was positively related to economic growth
in Sub-Saharan African countries. Similarly, Spiteri &
Von Brockdorff (2019) found that health outcome
had a positive relationship with economic growth in
European countries. Biyase & Maleka (2019) found
that health outcome (as measured in life expectancy)
contributed positively to economic growth in
Southern African Development Community countries.
Likewise, He & Li (2020) found a positive relationship
between health outcome (as measured in life
expectancy) and economic growth in a panel study of
65 countries. The health sector is a means of
investment to create human capital (Collin & Weil,
2020). Previous studies show that human capital is
needed for the acceleration of economic growth
(Teixeira & Queirós, 2016a). The presence of high
quality human resources can be allocated and utilized
to create added value in the economy (Yudawisastra,
Garlinia, Manurung, & Husnatarina, 2018).
In addition to health, educational outcome is also
essential for economic growth of a country. There
was a positive relationship between educational
outcome and economic growth in European Union
member countries (Pribac & Anghelina, 2015), the
OECD countries (Teixeira & Queirós, 2016b), Sub-
Saharan African countries (Ogundari & Awokuse,
2018), and Azerbaijan (Ismayilov, Kasumov, &
Ahmadova, 2020). On the contrary, Afzal, Farooq,
Ahmad, Begum, & Quddus (2010) found a short-run
negative relationship between education and growth
in Pakistan. In the same light, Adawo (2011) found
that secondary and tertiary education actually
reduced economic growth in Nigeria. Whereas,
Mendy & Widodo (2018) found that the relationship
between secondary education and economic growth
in Indonesia was negative. Like health, education is
an investment channel to create human capital.
Likewise, human capital is a key determining factor
for economic growth in a country via allocation of the
human capital to economic sectors to create added
value (Teixeira & Queirós, 2016a).
In addition, bank credit is also important for
growth. Such studies discovered in many countries as
Nigeria (Judith, Ugwuegbe, & Ugwuoke, 2014), India
(Sehrawat & Giri, 2015a), and United States
(Hartarska, Nadolnyak, & Shen, 2015) showed that
bank credit had a positive and significant impact on
economic growth. The reason that bank credit is
pivotal for a country’s economic growth is that the
development of various economic sectors requires
financing services (Dawood et al., 2019). Meanwhile,
bank credit is the most important source of financing
for developing countries (Dawood, 2018).
Furthermore, the role of banking in economic growth
is very crucial because it is a source of financing for
economic activities both in the national scope
(Benczúr, Karagiannis, & Kvedaras, 2019) and in the
sub-national level (Soedarmono, Hasan, & Arsyad,
2017).
A positive relationship between government
spending and economic growth has been widely
studied. Chu, Hölscher, & McCarthy, 2020; Musa &
Jelilov (2016) found a positive relationship between
government spending and economic growth.
Whereas, Ambya (2020) found that local government
spending had a positive effect on the economic
growth in these areas. However, Sáez, Álvarez-
García, & Rodríguez (2017) found that government
expenditures had no significant impact on growth in
European Union countries.
Table 1. Government Spending in Indonesia, 2018
Spending
Expenditure Budget
trillion rupiah
%
Government Spending
2,220.7
Total Regional Government
Spending
1,107.6
49.87
Central Government Spending
1,113.1
50.13
Source: Ministry of Finance of Indonesia (and authors’
calculations)
Government spending tends to be followed by
growth, while sub-national level governments’
spending makes up half of total public spending.
Public spending has an important impact on national
economic growth (Chu et al., 2020) and also toward
sub-national economies (Ambya, 2020). As a note,
public spending by sub-national governments is a
significant portion of total government spending and
accounts for half of nation-wide public spending in
Indonesia (Table 1).
Government spending supports a variety of
development financing such as infrastructure,
investment climate and quality of human resources.
This prompts economic growth at the national and
sub-national levels. Studies were conducted by
researchers (Ansar, Flyvbjerg, Budzier, & Lunn, 2016;
Saidi, Shahbaz, & Akhtar, 2018; Shi, Guo, & Sun,

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Journal of Socioeconomics and Development, Vol 4, No 1, April 2021
2017) found relationship between road construction
spending and economic growth. Meanwhile, other
studies found a positive relationship between Foreign
Direct Investment (FDI) and economic growth (Ali &
Mna, 2019; Bakari, 2017; Hlavacek & Bal-Domanska,
2016; Bakari, 2017; Ali & Mna, 2019). Research by
Lubis (2014) found that the number of workers had
positive and significant effect on economic growth in
Indonesia. Similarly, Putri (2014) found that the
number of workers had positive impact on economic
growth in provinces in the island of Java, Indonesia.
Likewise, Ahmed, Mahalik, & Shahbaz (2016) found a
positive relationship between the number of workers
and economic growth in Iran. In addition, a positive
relation was found between labor and growth in
Malaysia (Ramli, Hashim, & Marikan, 2016).
Current development of the global economy is
marked by increasing attention towards the health
sector as the result of the Covid-19 pandemic. Like
many countries in the world, Indonesia suffers from
increasing rates of Covid-19 cases (Nugroho, 2020).
Likewise, Indonesia increased its attention to the
health sector as shown by the sizeable increase in
government spending in this sector (Silalahi &
Ginting, 2020). This trend in government spending
has important impact on Indonesia's economic
development both in the national (Hadiwardoyo,
2020) and sub-national level (Maryanti, Netrawati, &
Nuada, 2020).
Based on the arguments, apart from existing
research which analyzed the effect of health,
education and other variables towards economic
growth in the national level, there is yet to be a
study assessing how important are health and
education outcomes, compared to other variables, in
boosting economic growth in the sub-national level,
particularly for Indonesia. This question has
important practical implications, specifically for
developing countries like Indonesia. Policy makers
both in the central and sub-national levels, in the
effort to develop their areas, currently face intricate
policy choices due to constrained public budget,
especially when confronted with the current Covid-19
pandemic.
This research aims to fill this gap in the literature
by analyzing how important are health plus education
outcomes, compared to other variables, for sub-
national economic growth, in the context of
Indonesia.
RESEARCH METHOD
The data used in this study is a panel of 33
provinces in Indonesia spanning from 2010 to 2018.
As a note, starting from 2012, there are 34 provinces
in Indonesia (statistical data since 2013). One
addition is North Kalimantan, which previously was a
part of East Kalimantan. However, to maintain a
balanced panel data set, North Kalimantan was not
included in the analysis.
The variables used in the current study were
transformed to growth rates to ensure stationarity of
the data. The abbreviation for economic growth rate
of provinces in Indonesia is gPDRB, growth of bank
credit is gCB, growth of FDI is gFDI, growth of
provincial government expenditure is gGE, growth of
provincial government infrastructure expenditure is
gGEin, growth of health outcome (measured by life
expectancy) is gHl, growth of education outcome
(measured by years of schooling) is gEdu, and
growth of labor is gL. 𝛾1 is defined as constant term,
𝛾𝑖 as the estimated coefficients,
𝑒𝑖,𝑡 as the error
term;
i
as the index for province
i
, and
t
as the year.
Following Gujarati & Porter (2009), the empirical
model for this study was written as follows.
gPDRBit = 𝛾1 + 𝛾2gCB1it + 𝛾3gFDII2it + 𝛾4gGE3it
+𝛾5gGEin4it +𝛾6𝑔Hl5it + 𝛾7gEdu6it
+ 𝛾8gL7it +
e
it .…………………...…(1)
The choice of variables was adapted from the
previous work (Ambya, 2020) by adding health and
education outcomes, bank credit, and investment.
The data used were annual data from 33 provinces in
Indonesia. Data on PDRB, health outcomes (Hl),
educational outcome (Edu), government
expenditures (GE), and labor (L) were obtained from
the Central Statistical Bureau of Indonesia (BPS),
data on bank credit (CB) were obtained from The
Indonesian Authority of Financial Services (OJK),
data on Government spending for infrastructure
(GEin) were obtained from The Ministry of Finance of
Indonesia, and data on FDI were obtained from The
Investment Coordination Agency of Indonesia.
This study applies the panel difference
Generalized Method of Moments (GMM) estimates.
The reason to apply the panel GMM method is to
handle issues of endogeneity. For the panel GMM
method, one-period lag of the regressors were used
as instruments.

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Verazulianti et al.,
How important are health and education...
The data are stationary in growth form. Table 2
shows the unit root stationarity test using various
approaches; LLC, IPS, ADF-Fisher, and PP-Fisher.
Table 2. Panel Unit Root Test
Ta
Individual Intercept
LLC
IPS
ADF-Fisher
PP-Fisher
gPDRB
-15.782
-3.374
121.053
128.594
p-value
0.000
0.000
0.000
0.000
gCB
-6.237
-0.178
85.536
284.255
p-value
0.000
0.430
0.053
0.000
gFDI
-9.200
-2.735
101.905
211.382
p-value
0.000
0.003
0.001
0.000
gGE
-23.358
-2.954
108.515
173.794
p-value
0.000
0.002
0.001
0.000
gGEin
-10.865
-1.206
88.483
192.870
p-value
0.000
0.114
0.034
0.000
gHl
0.577
-0.670
97.441
99.863
p-value
0.718
0.252
0.007
0.005
gEdu
-7.646
-1.450
93.156
172.028
p-value
0.000
0.074
0.016
0.000
gL
-12.506
-3.676
118.697
307.596
p-value
0.000
0.000
0.000
0.000
Values of the statistics and their respective p-
values in Table 2 shows that growth of PDRB
(gPDRB), bank credit (gCB), FDI, health (gHl),
education (gEdu), government spending (gGE),
infrastructure spending (gGEin) and labor (gL) are
stationary.
Table 3. Variance Inflation Factor
EDU
Hl
Gein
FDI
L
GE
CB
R2
0.17
0.14
0.70
0.55
0.23
0.42
VIF
1.20
1.16
3.32
2.24
1.31
1.73
EDU
R2
0.22
0.18
0.05
0.02
0.02
VIF
1.28
1.21
1.06
1.02
1.02
Hl
R2
0.08
0.13
0.14
0.02
VIF
1.08
1.14
1.16
1.03
Gein
R2
0.25
0.03
0.33
VIF
1.33
1.03
1.49
FDI
R2
0.35
0.25
VIF
1.55
1.33
L
R2
0.15
VIF
1.18
Table 4. Autocorrelation Test for GMM
Test order
m-
Statistic
rho
SE(rho)
P-value
AR(1)
-2.04050
-0.03770
0.01848
0.041
AR(2)
0.89054
0.00480
0.00539
0.373
To test the multicollinearity, Variance Inflation
Factor test (VIF) was employed. As displayed in
Table 3, the values of VIF is less than 10 in all cases.
Thus, the model did not suffer from multicollinearity.
The panel GMM estimated if the choice of
instruments was appropriate and did not suffer from
autocorrelation. For the panel difference GMM
estimates it was found that the probability value of
the Hansen J-statistic is 0.267 (Table 5). Since the p-
value of the J-statistic was greater than 0.05, the
choice of instruments (one-period lagged regressors)
was appropriate. While for autocorrelation, based on
the Arellano-Bond serial correlation test, the errors
did not suffer from autocorrelation for the
autoregressive of order 2 (AR(2)) (Table 4).
RESULT AND DISCUSSION
Health, Education and Economic Growth in
Sub-nationalities in Indonesia
Equitable distribution of regional economic
development within a country is an important
economic objective for a developing economy like
Indonesia. However, economic development among
regions in the country has not been evenly
distributed (Panjawa et al., 2018). This is as
indicated by the share of Gross Regional Domestic
Product (PDRB) of the provinces, where the national
economy are dominated by provinces in the islands
of Java and Sumatra. Figure 1 shows that in the first
quarter of 2019, the PDRB of provinces in the island
of Java% was 59.03% of total Indonesia's Gross
Domestic Product. This share is followed by PDRB
shares of the provinces on the islands of Sumatra
(21.36%), Kalimantan (8.26%); Sulawesi (6.14%),
Bali and Nusa Tenggara (3.02%), and lastly Maluku
and Papua (2.19%).
Sub-national economic growth tends to follow
growth in health outcomes. The health sector is a
means of investment to create human capital (Collin
& Weil, 2020). Meanwhile, human capital is needed
for the acceleration of economic growth (Teixeira &
Queirós, 2016a). The presence of high quality human
capital can be allocated and utilized to create added
value in the economy (Yudawisastra et al., 2018).
The trend of PDRB growth and growth in health
outcome (measured by life expectancy) in Indonesia
is presented in Figure 2. As illustrated in Figure 2,
PDRB growth and health outcome growth in
Indonesia tend to follow each other. Since 2011, the
growth in health outcomes has shown a downward
trend. Likewise, PDRB growth rate has shown a
downward and stagnant trend since 2012.

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Journal of Socioeconomics and Development, Vol 4, No 1, April 2021
Figure 1. Regional contribution to the national GDP of Indonesia in the 1st quarter of 2019
Source: Central Statistical Bureau of Indonesia and authors’ calculations.
Figure 2. Economic growth and health outcome growth, 2010-2018
Source: Central Statistical Bureau of Indonesia and authors’ calculation
Figure 3. Economic growth and year of schooling growth, 2010-2018
Source: Central Statistical Bureau of Indonesia and authors’ calculations.
%GDP
Y e a r
Y e a r

38
Verazulianti et al.,
How important are health and education...
Educational outcome tends to grow overtime,
however economic growth in the sub-national level
did not follow suit. Like health, education is an
investment channel to create human capital.
Meanwhile, human capital is a key determining factor
for economic growth in a country (Teixeira &
Queirós, 2016a) and in the sub-national level
(Faggian, Modrego, & McCann, 2019). Figure 3
shows the development of PDRB and growth in
education outcome (measured by years of schooling)
in Indonesia. In this figure, it can be viewed that
growth of education outcome has had an increasing
trend since 2011. However, unlike education, PDRB
growth rate has tended to be stagnant since 2012.
Estimation Results
This section presents estimation results in the
study. As shown in Table 5, bank has a positive and
significant effect on economic growth (gPDRB) of
provinces in Indonesia. This result is in line with the
findings in the case of Turkey (Önder & Özyıldırım,
2013), Indian states (Sehrawat & Giri, 2015b) and
Cameroon (Belinga, Zhou, Doumbe-Doumbe, Gahe,
& Koffi, 2016).
Table 5. The Estimated Findings and Robustness
Check
Variable
GMM 1
GMM 2
Coeff
p-value
Coeff
p-value
gPDRB(-1)
0.0721
0.000
0.0765
0.000
gCB
0.0673
0.000
0.0700
0.000
gEdu
0.1992
0.044
0.1867
0.089
gHl
2.7820
0.000
2.6486
0.000
gGEin
-0.0000
0.000
-0.0000
0.000
gFDI
-0.0002
0.529
gDDI
0.0002
0.260
gL
0.0004
0.005
0.0003
0.000
gGE
0.0002
0.080
0.0001
0.183
J-statistic
16.806
15.415
Prob(J-statistic)
0.267
0.350
AR(1) p-value
0.041
0.050
AR(2) P-value
0.373
0.438
Health sector also has positive impact in spurring
the sub-national economy, plus it is highly important
for boosting growth. As shown in Table 5 (GMM1),
the panel GMM estimates found that health outcome
(gHl) has a positive and statistically significant
influence on economic growth in the sub-national
level (gPDRB). This finding is in line with the
conclusion obtained by He & Li (2020) in a cross-
country panel data study, in Southern African
Development Community member countries (Biyase
& Maleka, 2019) and for the provinces in Indonesia’s
Kalimantan Island (Safira, Djohan, & Nurjanana,
2019). In addition, Table 5 (GMM1) shows that the
impact of growth in health outcomes on economic
growth in the provinces in Indonesia is approximately
40 times larger than the effect of bank credit on sub-
national economic growth.
Education has a positive and significant impact on
sub-national economic growth. Based on the GMM
estimation result, the study finds that the growth of
education outcome (measured in years of schooling)
(gEdu) has a positive and statistically significant
impact on growth in the sub-national level (Table 5
(GMM1)). This finding is similar to that of Hanushek
(2016) in developing countries, Teixeira & Queirós
(2016b) in OECD countries, and Ogundari & Awokuse
(2018) in Sub-Saharan African countries.
Government spending has contributed positively
towards regional economic growth. As shown in
Table 5 (GMM1), government expenditures (gGE)
have positive and statistically significant impact on
sub-national growth. The finding is in line with the
results found in OECD countries (Connolly & Li,
2016), in European Union countries (Sáez et al.,
2017), in high-income and low-income countries (Chu
et al., 2020) and in Indonesian provinces (Ambya,
2020).
Public spending on infrastructure is still not
supportive towards sub-national growth. In contrary
to the previous variables, public spending on
infrastructure (gGEin) has a negative and significant
impact towards growth in the sub-national level.
(Table 5, GMM1). This indicates that public
infrastructure spending has not yet contributed to
sub-national growth. This result is in line with the
conclusions by Ansar et al. (2016) in China and Shi et
al. (2017) in sub-national areas in China.
Both foreign direct investments (FDI) and
domestic investment (DDI) do not have a positive
impact on growth in the sub-national areas. The
estimates of the effect of FDI (gFDI) on sub-national
economic growth are negative but insignificant
(Table 5, GMM1). As a robustness check, GMM
estimates are performed by replacing FDI with DDI
(Table 5, GMM2). The estimates still show that DDI
has insignificant impact on sub-national growth
(Table 5, GMM2). This result is in accordance with
that of Alvarado, Iniguez, & Ponce (2017) in lower-

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Journal of Socioeconomics and Development, Vol 4, No 1, April 2021
middle income Latin American countries, Bakari
(2018) for Algeria, Hayat (2018) in low and middle-
income countries with a large natural resource
sector, Asamoah, Mensah, & Bondzie (2019) in Sub-
Saharan African Countries, Bakari & Sofien (2019) in
Asian developing countries, Sokhanvar (2019) in five
European Union member countries, and Faizah,
Fasa, Suharto, Rahmanto, & Athief (2019) in
Indonesian provinces.
Labor has a positive and significant impact on
growth in the sub-national level. The GMM estimates
for the effect of labor (gL) on regional economic
growth are positive and statistically significant (Table
5). This result is in line with the findings by Abubakar
& Bala (2016) in India, Ramli et al. (2016) in
Malaysia, and Bakari, Mabroukib, & Othmani (2018)
in Nigeria.
Research Implication
The main purpose of this analysis is to examine
how important are health and education in boosting
economic growth in the sub-national level. This issue
is significant for a developing country such as
Indonesia which achieved significant economic
development, but it is still not evenly distributed
among its regions. On the other hand, sub-national
level governments’ spending makes up half of total
public spending in Indonesia.
The estimation results show that bank credit has
a positive effect on economic growth in the sub-
national level. As shown in Table 5, bank has a
positive and significant effect on economic growth
(gPDRB) of provinces in Indonesia. The reason for
this result is that bank credit provides funding for
investment, which can increase the amount of capital
stock in the economy, and thus increase economic
growth (Sehrawat & Giri, 2015b). In addition, banks
provide funding for entrepreneurs, which enables
them to implement innovative ideas, products and
production processes. Ultimately this will increase
innovation in the economy and boost economic
growth (Belinga et al., 2016).
Health sector has positive impact in spurring the
sub-national economy. As shown in Table 5, based
on the panel GMM estimates, health outcome (gHl)
has a positive and statistically significant influence on
economic growth in the sub-national level (gPDRB).
The rationale for this result is that improvement in
health sector implies extending life expectancy
(Leung & Wang, 2010), and extended life expectancy
increases savings as well as physical and human
capital formation. In turn, higher physical and human
capital stock in the economy implies higher economic
growth (Sharma, 2018). Furthermore, better health
outcomes increases labor market participation and
workers’ productivity (Bloom, Canning, Kotschy,
Prettner, & Schünemann, 2019).
In addition, it was also found that health sector is
highly important for boosting growth in the sub-
national economy. The panel GMM estimates in Table
5 shows that the impact of growth in health
outcomes on economic growth in the provinces in
Indonesia is approximately 40 times larger than the
effect of bank credit on regional economic growth.
This result highlights that public investment in human
capital, in particular improving health outcomes is
key to boosting sub-national growth. According to
McCalman et al. (2018), this objective can be
achieved by providing good quality public health
services which targets improvements in health
outcomes.
Similarly, education was found to have a positive
and significant impact on sub-national economic
growth. Based on the estimation results, the study
found that the growth of education outcome
(measured in years of schooling) (gEdu) has a
positive and statistically significant impact on growth
in the sub-national level (Table 5). A justification for
this finding is that education, like health, is an
investment channel to create human capital. While,
more human capital makes labor is more productive
and increases the rate of innovations in the economy,
which in turn result in higher economic growth
(Teixeira & Queirós, 2016a).
Furthermore, increasing years of schooling,
enhancing quality of education services, plus
distributing it more equally among areas are
important for boosting sub-national growth. As a
note, some scholars such as Mendy & Widodo (2018)
found conflicting results to the above. The conflicting
findings, in one hand, highlight that years of
schooling in Indonesia is still relatively low. According
to 2018 data from the Central Statistical Bureau of
Indonesia (BPS), mean years of schooling by
provinces range from 6.5 years in the province of
Papua to 11 years in the capital city of Jakarta; while
the national average is 8.3 years. Whereas, mean
years of schooling in Germany, the US, the UK and
OECD countries in 2018 were 14.1 years, 13.4 years,
13 years and 12 years respectively (United Nations

40
Verazulianti et al.,
How important are health and education...
Development Programme, 2019a; 2019b; 2019c;
2019d). On the other hand, in addition to years of
schooling, the quality of education is important for
the nexus between education and growth. Hanushek
(2013) concluded that enhancing quality of schools is
important in order for education to be able to
enhance growth in developing countries. In relation
to quality schools, the education service needs to be
able to increase the cognitive skills of the students so
they can contribute to growth (Hanushek, 2016). A
revealing World Bank study found that 55% of
Indonesian children who completed school are
functionally illiterate. Being functionally illiterate
means not being equipped with skills to enter the
labor market; for example, being able to read but
unable to comprehend the content. Whereas, the
percentage of functional illiteracy in Vietnam and the
OECD are 14% and 20% respectively (World Bank,
2018). Moreover, more years of schooling and higher
quality education services needs to be distributed
more equally among regions (Uddin & Sarntisart,
2019). Thus, in order for education to continue to
have a positive impact, or even increase its impact
towards sub-national economic growth, years of
schooling needs to be increased together with
enhancing the quality of school service delivery. In
particular, it must be ensured that the schools are
able to sufficiently enhance the cognitive skills of the
students. In addition, the enhancement of education
outcome and educational service quality must be
distributed more equally across all sub-national
areas.
Government spending also contributes positively
towards regional economic growth; however, the
impact is small relative to health and education. As
shown in Table 5, government expenditures (gGE)
have positive and statistically significant impact on
sub-national growth. Although the impact of
government spending on sub-national growth is
positive, its magnitude is miniscule compared to that
of health and education. The reason that government
spending has small impact on sub-national growth is
that it may not have been sufficiently allocated to
productive government spending such as providing
quality education, increasing health outcome, and
building highly needed public infrastructures. If
instead this was the case, it would have increased
the stock of human capital in the economy and
enhance the productivity of existing private capital
and would ultimately result in higher growth (Chu et
al., 2020). Thus, in order to boost sub-national
growth, public spending needs to be allocated to
activities which target enhancement of health and
education outcomes by providing quality and
equitable public health and educational services.
However, public spending on infrastructure is still
not supportive towards sub-national growth. In
contrary to the previous variables, public spending on
infrastructure (gGEin) has a negative and significant
impact towards growth in the sub-national level
(Table 5). This finding indicates that public spending
in infrastructure has not yet contributed to sub-
national growth. The argument for the negative
relationship is that not only the quantity of
infrastructure that matters, but also the quality and
its usefulness (Chakamera & Alagidede, 2018). If
government spending was directed to build public
infrastructures with sufficient quality and appropriate
usefulness, this would increase the productivity of
private (physical and human) capital, and ultimately
would result in higher growth (Chu et al., 2020).
Public infrastructure which are useful are those which
encourage entrepreneurship and the private sector to
thrive (Bennett, 2019), do not crowd-out private
investment (Shi et al., 2017; Nguyen & Trinh, 2018),
and increase the productivity of private physical and
human capital (Chu et al., 2020). Thus, in order for
public spending on infrastructure to have positive
impact on sub-national growth, it should be provided
based on the needs of the private sector,
complement private investments, and should be
provided in sufficient quality.
It was also found that both Foreign direct
investments (FDI) and domestic investment (DDI) do
not have a positive impact on growth in the sub-
national areas. The GMM coefficient estimates of the
effect of FDI (gFDI) on sub-national economic
growth are negative but insignificant (Table 5).
Similarly, the estimates show that DDI has
insignificant impact on sub-national growth (Table 5 ,
GMM2). The rationale for this result is that the
direction of relationship between investment and
growth depends on the country’s level of
development, and the educational level of its citizens.
Economies which are highly developed with high
levels of education and human capital, the nexus
between FDI and growth is positive. While for low
and middle income countries with low levels of
education and human capital, the nexus between FDI
and growth is negative (Alvarado et al., 2017). It is

41
Journal of Socioeconomics and Development, Vol 4, No 1, April 2021
known that the larger the amount of human capital
that an economy has, the higher is the economy’s
capacity to absorb new technology from abroad, and
to spur economic growth in the domestic economy
(Datta & Mohtadi, 2006). Thus, investment would
have a positive impact on economic growth only if it
is supported by sufficient human capital in the
economy. Therefore, to enable investment to have a
positive impact towards sub-national growth,
increasing human capital is required by increasing
health and educational outcomes. This can be
achieved by directing more public funds to target
increases in health and education outcomes.
Labor has a positive and significant impact on
growth in the sub-national level. The estimates for
the effect of labor (gL) on regional economic growth
is positive and statistically significant, but the
magnitude is small compared to health and education
(Table 5). The reason for the small magnitude for
labor is that it is well known in economics that labor
requires complementary factors to enhance its
productivity. It is found that human capital enhances
labor productivity (Benos & Karagiannis, 2016),
which in turn enhances economic growth (Karaalp-
Orhan, 2016). Therefore, government policy needs to
be directed to increase labor productivity by
increasing human capital. This can be achieved by
allocating more public spending to activities which
target the increase of health and educational
outcome by providing quality public health and
educational services equitably across all sub-national
regions.
CONCLUSION AND SUGGESTION
By using a panel data from 33 provinces in
Indonesia over the period from 2010 to 2018, and
the GMM model, this study found that health,
education, bank credit, government spending, and
labor have a positive and significant effect on sub-
national economic growth. On the contrary,
government expenditure on infrastructure was found
to have a negative and statistically significant to
sub-national economic growth in. Meanwhile, foreign
and domestic investments failed to have a significant
impact on sub-national economic growth.
Furthermore, the estimation results showed that
health and education outcomes significantly
influenced economic growth in the sub-nationals as
compared to other variables. The findings of our
estimated model are robust with alternative model
specification. The policy suggestions of the results
are in order to dampen the negative effects of the
current global economic downturn on the sub-
national economies, and to boost growth post-
downturn period, the central and sub-national
governments must focus on increasing human capital
by maintaining or even increasing government
spending aimed at improving health and education
outcomes. This can be achieved by providing good
quality public health services which enhances life
expectancy.
In addition, the quality of public-school service
delivery needs to be increased by ensuring that the
schools are able to sufficiently enhance the cognitive
skills of the students. Furthermore, good quality
health and educational services need to be equally
distributed across the all sub-national regions. Not
only will such policy enhance human capital by
increasing health and education outcomes, but it will
also make domestic labor more productive, and
generate the promised beneficial effect of FDI and
DDI in boosting sub-national and national growth.
Furthermore, such policy would be aligned with
achieving the UN Sustainable Development Goals
number 10: reducing inequality within a country.
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