Fiscal Federalism and Regional Growth: Evidence from the Russian Federation in the 1990s

29 Pages Posted: 28 Oct 2003

See all articles by Raj M. Desai

Raj M. Desai

Georgetown University - Edmund A. Walsh School of Foreign Service (SFS); The Brookings Institution

Lev Freinkman

National Research University Higher School of Economics; World Bank - The International Bank for Reconstruction and Development (IBRD)

Itzhak Goldberg

CASE - Center for Social and Economic Research; Fraunhofer Center for Central and Eastern Europe

Date Written: September 2003

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 meant to 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. Desai, Freinkman, and Goldberg 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.

This paper - a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region - is part of a larger effort in the region to support fiscal reforms in transition.

Suggested Citation

Desai, Raj M. and Freinkman, Lev and Goldberg, Itzhak, Fiscal Federalism and Regional Growth: Evidence from the Russian Federation in the 1990s (September 2003). Available at SSRN: https://ssrn.com/abstract=461861

Raj M. Desai (Contact Author)

Georgetown University - Edmund A. Walsh School of Foreign Service (SFS) ( email )

Washington, DC 20057
United States

The Brookings Institution ( email )

1775 Massachusetts Ave., NW
Washington, DC 20036
United States

Lev Freinkman

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

World Bank - The International Bank for Reconstruction and Development (IBRD) ( email )

Washington, DC 20433
United States

Itzhak Goldberg

CASE - Center for Social and Economic Research ( email )

Al. Jana Pawła II 61/212
Warsaw, 01-031
Poland

Fraunhofer Center for Central and Eastern Europe ( email )

Germany

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