An Examination of Intergovernmental Transfers in Russian Federation

open_access
Open Access
Author:
Narayan, Ramaswami Badri
Graduate Program:
Economics
Degree:
Doctor of Philosophy
Document Type:
Dissertation
Date of Defense:
October 19, 1999
Committee Members:
Barry William Ickes, Committee Chair/Co-Chair
Spiro E Stefanou, Committee Member
Eric Bond, Committee Member
N Edward Coulson, Committee Member
Keywords:
Initial Conditions in Transition Economies
Interregional Redistribution
Fiscal Federalism
Soviet Industrial Structure and transition
Abstract:
In this research, I study Russian federalism. One defining feature of any federalist process is the pattern of inter-governmental fiscal flows. My research is an attempt to uncover the logic behind the pattern of fiscal flows in the Russian Federation. The general consensus seems to be that there is no discernible pattern to these flows and at best they are determined purely by politically troublesome behavior by the regional players. Contrary to these viewpoints, I find that initial conditions are important in determining the redistributive pattern and there is a sound economic and political logic to this pattern. The study highlights the importance of the diversity in industrial structures across Russian regions in this highly industrialized and interdependent economy. The sudden change in the exchange environment from a planned economy to a market-based economy coupled with the decentralization process shifted the focus to the inherited industrial structure of the region. Regions were variously equipped to survive in a market based economy without any centralized coordination. The federal government seeks to maximize support across regions by appropriately selecting the optimal redistributive shares. The rules of redistribution are framed under a "veil of ignorance" in the Rawlsian sense. This objective function of the federal government yields a redistribution pattern whereby regions which are ill-equipped to survive in a market economy are subsidized by taxing the regions with market friendly industrial endowments. The support maximization function also generates larger transfers to regions with greater political differences in terms of ethnic composition of the population. The evidence thus suggests an economic and political integration motive. Initial differences in ethnic composition are important in explaining the pattern of redistribution. These results are based purely on initial differences in industrial structure, geographic location of region and composition of the population. To facilitate comparison with other work, political behavioral variables were incorporated into the transfers function. The results suggest that rewarding politically troublesome behavior may have been a small part of the overall logic of redistribution to maximize support across regions. By showing that these rewards do not constitute the dominant logic of redistribution, this study resolves the free-rider puzzle posed by earlier studies. Further, I identify the fundamental economic factors underlying the regional propensity to subsidize. The existing literature squarely blames the federal government for making bad transfers thus encouraging regions to spend on subsidies. In contrast I suggest that the expenditures on subsidies at the regional level is a response to the inherited industrial non-competitiveness. Finally I outline the implications of this study for the Chechnya dispute, for comparative studies of China and Russia, incentives for industrial restructuring and for the literature on fiscal federalism.