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Fiscal federalism and regional growth : evidence from the Russian Federation in the 1990s

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  • Raj M. Desai
  • Lev M. Freinkman
  • Itzhak Goldberg

Abstract

Subnational fiscal autonomy-the basis for fiscal federalism in modern federations-is meant to serve two roles. First, local control over revenue collection is meantto provide a check on the capacity of central authorities to tax arbitrarily local capital. Second, retention of taxes raised locally is meant to establish incentives for subnational governmental authorities to foster endemic economic growth as a way of promoting local tax bases. But in the Russian Federation, fiscally autonomous regions have often resisted market-oriented reforms, the enactment of rules protecting private property, and the dismantling of price controls and barriers to trade. The authors find statistical evidence in support of the hypothesis that fiscal incentives of the Russian regions represent an important determinant of regional economic performance. The authors also seek to understand the conditions under which fiscal autonomy prompts regional growth and recovery, and the conditions under which it has adverse economic effects. They argue that the presence of"unearned"income streams-particularly in the form of revenues from natural resource production or from budgetary transfers from the central government-has turned regions dependent on these income sources into"rentier"regions. As such, governments in these regions have used local control over revenues and expenditures to shelter certain firms (natural resource producers or loss-making enterprises) from market forces. Using new fiscal data from 80 Russian regions from 1996-99, the authors test this central hypothesis in both single- and simultaneous-equation specifications. Their results indicate that tax retention (as a proxy for fiscal autonomy) has a positive effect on the cumulative output recovery of regions since the breakup of the Soviet Union. But they also find that this effect decreases as rentable income streams to regions increase.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3138.

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Date of creation: 01 Sep 2003
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Handle: RePEc:wbk:wbrwps:3138

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Keywords: National Governance; Public Sector Economics&Finance; Environmental Economics&Policies; Banks&Banking Reform; Municipal Financial Management; National Governance; Public Sector Economics&Finance; Banks&Banking Reform; Municipal Financial Management; Environmental Economics&Policies;

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References

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  1. Zhuravskaya Ekatherina, 2000. "Incentives to Provide Local Public Goods: Fiscal Federalism, Russian Style," EERC Working Paper Series 99-15e, EERC Research Network, Russia and CIS.
  2. Philip R. Lane & Aaron Tornell, 1999. "The Voracity Effect," American Economic Review, American Economic Association, American Economic Association, vol. 89(1), pages 22-46, March.
  3. A. Lavrov, 1996. "Fiscal Federalism and Financial Stabilization," Problems of Economic Transition, M.E. Sharpe, Inc., M.E. Sharpe, Inc., vol. 39(1), pages 83-94, May.
  4. Knack, Stephen, 2000. "Aid dependence and the quality of governance : a cross-country empirical analysis," Policy Research Working Paper Series 2396, The World Bank.
  5. Sachs, Jeffrey D. & Warner, Andrew M., 2001. "The curse of natural resources," European Economic Review, Elsevier, Elsevier, vol. 45(4-6), pages 827-838, May.
  6. Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, The MIT Press, edition 5, volume 1, number 026261183x, December.
  7. Popov, Vladimir, 2001. "Reform Strategies and Economic Performance of Russia's Regions," World Development, Elsevier, Elsevier, vol. 29(5), pages 865-886, May.
  8. Olivier Blanchard & Andrei Shleifer, 2001. "Federalism With and Without Political Centralization: China Versus Russia," IMF Staff Papers, Palgrave Macmillan, vol. 48(4), pages 8.
  9. Freinkman, Lev & Yossifov, Plamen, 1999. "Decentralization in regional fiscal systems in Russia - trends and links to economic performance," Policy Research Working Paper Series 2100, The World Bank.
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Citations

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Cited by:
  1. Paul Hallwood & Ronald MacDonald, 2008. "A Review of the Empirical Evidence on the Effects of Fiscal Decentralization on Economic Efficiency: With Comments on Tax Devolution to Scotland," Working papers, University of Connecticut, Department of Economics 2008-46, University of Connecticut, Department of Economics.
  2. Berkowitz, Daniel & DeJong, David N., 2011. "Growth in post-Soviet Russia: A tale of two transitions," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 79(1), pages 133-143.
  3. Nikolay Patonov, 2013. "Local Fiscal Capacity in the New Members of the European Union: Is It Efficient?," International Journal of Synergy and Research, ToKnowPress, ToKnowPress, vol. 2(1), pages 57-70.
  4. Horváth, Gyula & Lóránd, Balázs, 2012. "Decentralizáció és gazdasági fejlődés. Az olasz példa
    [Decentralization and economic development. The case of Italy]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(12), pages 1273-1298.
  5. Anwar Shah & Theresa Thompson & Heng-fu Zou, 2004. "Decentralising the public sector: The Impact of Decentralisation on Service Delivery, Corruption, Fiscal Management and Growth in Developing and Emerging Market Economies: A Synthesis of Empirical Evi," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 2(1), pages 10-14, October.
  6. Ramiro Gil-Serrate & Julio López-Laborda, 2004. "Modelling tax decentralisation and regional growth," ERSA conference papers ersa04p194, European Regional Science Association.
  7. Eller, Markus & Fidrmuc, Jarko & Fungácová , Zuzana, 2013. "Fiscal policy and regional output volatility: Evidence from Russia," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 13/2013, Bank of Finland, Institute for Economies in Transition.
  8. Fritz Breuss & Markus Eller, 2004. "Decentralising the public sector: Fiscal Decentralisation and Economic Growth: Is there Really a Link?," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 2(1), pages 3-9, October.
  9. Granville, Brigitte & Leonard, Carol S., 2010. "Do Informal Institutions Matter for Technological Change in Russia? The Impact of Communist Norms and Conventions, 1998-2004," World Development, Elsevier, Elsevier, vol. 38(2), pages 155-169, February.
  10. Freinkman, Lev & Plekhanov, Alexander, 2005. "What determines the extent of fiscal decentralization ? The Russian paradox," Policy Research Working Paper Series 3710, The World Bank.
  11. Philip Bodman & Kathryn Ford & Tom Gole & Andrew Hodge, . "What Drives Fiscal Decentralisation?," MRG Discussion Paper Series, School of Economics, University of Queensland, Australia 3009, School of Economics, University of Queensland, Australia.

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