From Disparity to Development: Unpacking the Fiscal and Social Consequences of Regional Inequality in East Kalimantan

Objective: This study examines how regional disparities in East Kalimantan, particularly in natural resources, investment, and labor, affect regional development, local government financial performance, and ultimately community welfare. The goal is to identify direct and mediating pathways that shape inclusive growth in the province, which is set to host Indonesia’s future capital. Theoretical Framework: The analysis is grounded in regional disparity theory, welfare state theory, and fiscal decentralization frameworks. These perspectives explain how uneven distribution of resources, fiscal capacity, and public service provision create structural inequalities that shape development and welfare outcomes. Method: A quantitative explanatory research design was employed, using Structural Equation Modeling (SEM) with SmartPLS. Data spanning 2013–2023 from ten districts and cities in East Kalimantan were analyzed. Indicators included disparities in resources and investment, regional economic growth, fiscal performance ratios, and welfare measures such as the Human Development Index (HDI), Gender Development Index (GDI), and non-stunted infant rates. Results and Discussion: Findings reveal that regional disparities significantly reduce community welfare, with welfare outcomes closely linked to fiscal performance and development. Regional financial performance has a strong positive effect on welfare, while its impact on development is statistically insignificant. Regional development positively influences welfare, though it does not mediate the effect of disparities. Financial performance, however, significantly mediates the relationship between disparities and welfare. These results highlight fiscal efficiency and equity as critical levers for translating economic resources into welfare gains. Research Implications: The study provides evidence for policymakers that reducing disparities requires strengthening local fiscal independence, targeting investment in underdeveloped areas, and aligning public expenditure with welfare priorities. Strategies such as equitable infrastructure investment, fiscal reforms, and skills development are vital to ensure that East Kalimantan’s economic potential translates into broad-based welfare improvements. Originality/Value: This research integrates regional disparity, fiscal performance, and welfare into a single SEM framework at the subnational level, offering new insights into the mechanisms through which inequalities influence welfare. By focusing on East Kalimantan, a resource-rich yet socially unequal region, the study contributes both theoretically and practically to debates on sustainable, inclusive development in Indonesia and similar contexts.