Deglobalization and Protectionism: Implications for Indonesia's Economic Stability and National Resilience

Abstract

This research examines the intricate interplay among geopolitical risk, the quality of democracy, financial sector stability (specifically non-performing loans), and macroeconomic stability (inflation) on regional economic growth across Indonesia. While these factors have been extensively investigated in isolation, a comprehensive panel data analysis that integrates these diverse elements, particularly within the dynamic context of Indonesia's regional economy, remains underexplored. The primary objective of this study is to empirically analyze the short-term and long-term impacts of Geopolitical Risk (GPR), the Democracy Index (DI), Non-Performing Loans (NPL), and the Inflation Rate (IR) on Gross Domestic Regional Product Growth (GDRPG) across all provinces in Indonesia. Utilizing panel data from Indonesian provinces, this study employs the Generalized Method of Moments (GMM) regression, a robust econometric technique specifically designed for dynamic panel data models to address issues of endogeneity and unobserved heterogeneity. For comparative analysis and robustness validation, Partial Least Squares (PLS) and Fixed Effects Model (FEM) regressions were also conducted. The GMM results indicate that lagged regional economic growth exerts a significant and positive influence on current growth. Interestingly, Geopolitical Risk (GPR) and the Inflation Rate (IR) were found to have a significant positive impact on GDRPG, whereas the Democracy Index (DI) and Non-Performing Loans (NPL) demonstrated a significant negative impact. Diagnostic tests confirmed the validity and efficiency of the GMM model. These findings offer crucial implications for policymakers in formulating targeted strategies to foster sustainable regional economic growth, underscoring the necessity for robust financial sector management, prudent macroeconomic policies, and adaptive responses to evolving geopolitical dynamics.