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

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

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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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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  1. Ekaterina Zhuravskaya, 2000. "Incentives to provide local public goods: fiscal federalism, Russian style," Working Papers w0001, Center for Economic and Financial Research (CEFIR).
  2. Knack, Stephen, 2000. "Aid dependence and the quality of governance : a cross-country empirical analysis," Policy Research Working Paper Series 2396, The World Bank.
  3. Popov, Vladimir, 2001. "Reform Strategies and Economic Performance of Russia's Regions," World Development, Elsevier, vol. 29(5), pages 865-886, May.
  4. Philip R. Lane & Aaron Tornell, 1999. "The Voracity Effect," American Economic Review, American Economic Association, vol. 89(1), pages 22-46, March.
  5. Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, edition 5, volume 1, number 026261183x, June.
  6. Olivier Blanchard & Andrei Shleifer, 2001. "Federalism With and Without Political Centralization: China Versus Russia," IMF Staff Papers, Palgrave Macmillan, vol. 48(4), pages 8.
  7. 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.
  8. A. Lavrov, 1996. "Fiscal Federalism and Financial Stabilization," Problems of Economic Transition, M.E. Sharpe, Inc., vol. 39(1), pages 83-94, May.
  9. Sachs, Jeffrey D. & Warner, Andrew M., 2001. "The curse of natural resources," European Economic Review, Elsevier, vol. 45(4-6), pages 827-838, May.
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