Abstract

This research aims to analyze the interaction between equalization funds, regional financial and human development index in East Java Province, Indonesia for 2008–2011. The method of analyze is Partial Least Square (PLS). The dependent variable used is equalization funds as a proxy for fiscal decentralization while the intervening variable used is fiscal capacity, fiscal independent and structure of regional government expenditure; the dependent variable used is human development index as proxy for social welfare live. The study revealed that equalization fund has a negative direct effect to fiscal capacity, fiscal capacity has a positive direct effect on financial independent, fiscal capacity has no negative direct effect on structure of regional government expenditure, financial dependent has positive direct effect on human development index, financial dependent has a positive direct effect on structure of regional government expenditure, and structure of regional government expenditure has negative direct effect on human development index. Based on this conclusion, regional government must focus on allocating the equalization fund to serve the public good provision.

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