Indonesia’s Village Fund: An Important Lever for Better Land Use and Economic Growth at the Local Level

This report by the Climate Policy Initiative analyzes the Indonesian Village Fund, a fiscal instrument established in 2015 to promote rural economic development and reduce welfare gaps. While the fund has grown significantly in size and provides over 50% of village revenue, the study finds that spending is overwhelmingly directed toward transportation infrastructure rather than sustainable land use or environmental protection. The report identifies critical gaps in technical capacity, regulatory guidance, and coordination between village and district planning, offering five strategic recommendations to align the fund with sustainability goals.

• The Village Fund has experienced rapid growth in monetary value and importance, increasing from USD 1.6 billion in 2015 to USD 4.6 billion in 2018, and now contributes more than 50% of total village revenue.
• Village Fund spending is heavily skewed toward infrastructure, specifically transportation, with 82.2% of funds committed to village development in 2015 and 89.8% in 2016. In observed villages, the fund has not been used for agro-industry infrastructure or environmental conservation infrastructure.
• There is a significant lack of harmony between village development plans and district-level planning. Village Fund usage is governed by the Minister of Villages, while village development planning follows Ministry of Home Affairs Regulation Number 114/2014, and these two regulatory frameworks are not synchronized.
• Village governments suffer from limited technical capacity and planning experience, which hinders the adoption of sustainable land use activities. Paperwork is described as burdensome, and officials often lack necessary budgeting and planning skills.
• The role of the Village and Community Empowerment Office (Dinas Pemberdayaan Masyarakat dan Desa) is currently underutilized, functioning primarily as administrative facilitation rather than providing substantive guidance on program selection or technical assistance.
• A lack of detailed technical guidelines at the district level creates hesitation among village governments to innovate or scale up sustainable activities, such as waste management or agricultural productivity, due to uncertainty regarding legal eligibility.
• The Village Fund allocation formula was modified in 2018 to prioritize poverty eradication, introducing a 3% 'Affirmative Allocation' for lagging villages and increasing the weight of the 'poor population' variable from 35% to 50%.
• The report proposes adding a sustainability variable or index to the Village Fund formula to incentivize environmentally sustainable land use, noting that the recent poverty-focused formula change provides a precedent for such an adjustment.

APA

Sutiyono, G., Muluk, S., Mafira, T., & Rakhmadi, R. (2018). Indonesia’s Village Fund: An Important Lever for Better Land Use and Economic Growth at the Local Level. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2018/04/Indonesia’s-Village-Fund-_-An-Important-Lever-for-Better-Land-Use-and-Economic-Growth-at-the-Local-Level.pdf

Chicago

Sutiyono, Guntur, Saeful Muluk, Tiza Mafira, and Randy Rakhmadi. Indonesia’s Village Fund: An Important Lever for Better Land Use and Economic Growth at the Local Level. Climate Policy Initiative, 2018. https://www.climatepolicyinitiative.org/wp-content/uploads/2018/04/Indonesia’s-Village-Fund-_-An-Important-Lever-for-Better-Land-Use-and-Economic-Growth-at-the-Local-Level.pdf.

Wikipedia

{{cite report |last1=Sutiyono |first1=Guntur |last2=Muluk |first2=Saeful |last3=Mafira |first3=Tiza |last4=Rakhmadi |first4=Randy |title=Indonesia’s Village Fund: An Important Lever for Better Land Use and Economic Growth at the Local Level |publisher=Climate Policy Initiative |date=March 2018 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2018/04/Indonesia’s-Village-Fund-_-An-Important-Lever-for-Better-Land-Use-and-Economic-Growth-at-the-Local-Level.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{sutiyono2018indonesias, author = {Sutiyono, Guntur and Muluk, Saeful and Mafira, Tiza and Rakhmadi, Randy}, title = {{Indonesia’s Village Fund: An Important Lever for Better Land Use and Economic Growth at the Local Level}}, institution = {Climate Policy Initiative}, year = {2018}, month = mar, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2018/04/Indonesia’s-Village-Fund-_-An-Important-Lever-for-Better-Land-Use-and-Economic-Growth-at-the-Local-Level.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }