Revised:
September 2002
FISCAL FEDERALISM
IN RUSSIA: RULES VERSUS ELECTORAL POLITICS*
Vladimir Popov** ABSTRACT This paper examines the determinants of financial flows
between the federal government and regional authorities in Russia. The main question is to what extent intergovernmental
transfers correspond to the “ideal pattern” – equalization of the
abilities of the regions to provide public goods – and to what extent,
if at all, they reflect the influence of federal-regional political
discourse (asymmetrical federalism). The main finding is that actual
net transfers since 1994, although quite close to the “ideal patterns”,
depended also on the results of the parliamentary (1993, 1995, 1999)
and presidential (1996, 2000) elections and on the relations of
the regions with the federal center. The more votes cast for pro-central
government parties in parliamentary elections and for Yeltsin in
1996 presidential elections and the lower the tensions with Moscow
after the elections, the more favorable was the fiscal balance for
the region with the federal center. The result is very robust when
using different measures of fiscal capacity (index of tax potential)
and costs of providing public goods (budgetary expenditure adjustment
index). JEL CLASSIFICATION: H7, P2, R5; KEYWORDS: FISCAL
FEDERALISM IN RUSSIA *
The financial support of CEPRA (http://www.online.ru/sp/cepra/)
is gratefully acknowledged. I thank Joan DeBardeleben, Daniel Triesman
and Stanley Winer for helpful comments and Yekaterina Zhuravskaya for sharing data on indices of regional power and relations
with the center. Usual disclaimers apply. **Institute
of European and Russian Studies (EURUS), Carleton University, 1125
Colonel By Drive, Ottawa, Ontario KlS 5B6 CANADA Tel.: 613-520-2600 ext. 8480; Fax: 613-520-7501.
E-mail: vpopov@ccs.carleton.ca
FISCAL FEDERALISM IN RUSSIA: RULES VERSUS ELECTORAL
POLITICS
1. Review of the literature The
emergence of the system of fiscal federalism in Russia in recent years
was one of the most important reforms in the public sector that was
carried out during transition. Not surprisingly, there is a rapidly
growing literature on this subject. With some reservations, it can
be divided into three broad categories. First
are normative papers that seek to put Russian experience into the
international context and to design a system of equalization payments
that is most appropriate for Russian conditions (Batkibekov, Kadotchnikov,
Lugovoy, Sinel’nikov, Trounin, 2000; Lavrov, 2000; Martinez and Boex,
1997a,b,c, 1999; Morozov, 1999; Kadotchnikov, Lougovoi , Trounin,
1999; Trounin, 1999). These papers have analyzed dramatic changes
in intergovernmental financial relations in the 1990s and laid the
foundations for the Russian model of fiscal federalism as it has emerged
today (Minfin, 2001). Second,
there are papers that examine the actual factors that affect intergovernmental
transfers in the transition period (Freinkman and Haney, 1997; McAuley,
1997; Popov, 2001; Stewart, 1997; Tabata, 1998, 2000; Triesman, 1996,
1998a,b; Zhuravskaya, 2000). The main question discussed in these
papers is to what extent actual transfers are really equalizing and
to what extent they are used as an instrument of federal-regional
politics (rewarding either pro-center governors or troublemakers). Third, there are studies of broader scope,
mostly political science papers about the nature of Russian federalism
that incorporate fiscal intergovernmental flows into a general model
of center-regional relations (Petrov, 2000; Polishchuk, 1998; Solnick;
Speckhard, 2000; Stoner-Weiss, 2000). These studies mainly seek to
explain the decentralization or centralization tendencies in the Russian
Federation that occurred during the 1990s and the behavior of regions
and central authorities in the “bargaining federalism game”.
This
paper belongs to second steam of literature and seeks to identify
economic and political factors affecting financial flows between the
center and the regions in the 1990s and the early 2000s. Whereas there
is a near-consensus that the Russian system of fiscal federalism in
the 1990s was far from being perfect, there seems to be little agreement
between scholars on what the key determinants of intergovernmental
financial flows have been. As
documented by Triesman (1996 and 1998 a, b), direct financial transfers from the federal budget to the regions
in 1992 and 1994 depended mostly on the lobbying power of the regions,
which in turn was determined by their ability to threaten and create
trouble for the federal government. Those regions that voted against
Yeltsin in 1991 and against pro-Yeltsin Russia’s Choice bloc in December
1993, that issued early sovereignty declarations, and whose governors
opposed Yeltsin publicly in his conflict with the parliament in September
1993, all seem to have received larger net transfers from the center
in subsequent years. Lavrov (cited in Martinez and Boex, 1999) and
Triesman (1996) claimed that 21 ethnic republics of the RF enjoyed
financial preferences, such as the retention of a higher share of
tax proceeds, larger subsidies from the center, and single channel
tax collection regimes. Stoner-Weiss (2000),
however, questions the ability of the weakened and disintegrating
central government to act adroitly and resolutely. She also demonstrates that control by the center over fiscal flows
was an imprecise and clumsy instrument in curbing many regional challenges
to central state governing capacity. Freinkman and Haney
(1997) have shown that federal transfers to the regions do matter
in explaining national economy expenditures funded by Russian regions,
especially in explaining housing subsidies, but they were careful
not to claim that the neediest regions have received the most in transfers. Stewart (1997)
and Hanson (2000) have argued that federal government transfers to
the regions – contrary to what many analysts claimed - are roughly
compatible with the regional needs because they go mostly to the neediest
regions. They believe, however, these transfers are too small and
too thinly spread to make a difference. Popov (2001) has shown that
net intergovernmental financial transfers are largely of the “Robin
Hood” type, i.e., going mostly from rich to poor regions, but they are more than
counterweighted by private business transfers going in the opposite
direction. Zhuravskaya (2000) provides evidence
that in Russia, unlike in China, every time the municipalities are
starting to earn greater revenues, the regional authorities tend to
change rules about sharing taxes and providing transfers to municipalities
in such a way as to appropriate these greater revenues for themselves.
It is logical to expect that the federal government may exercise the
same policy vis-à-vis the regions. Speckhard (2000) looked at the degree of the assertiveness of the
particular regions, measured by their ability to gain privileges,
including financial ones, from the center. He concluded that among
other factors (size, economic potential, consolidation of the regional
elite) the ability to deliver a majority vote for Yeltsin during 1996
presidential elections did provide particular regions with a bargaining
chip in their relations with the center. Finally,
as many authors have observed (for instance, Solnick, 1999; Stoner-Weiss,
2000; Petrov, 2000), the federal approach to the regions in general
and to intergovernmental transfers in particular did not stay the
same throughout the 1990s. Whereas in the first half of the decade,
following famous Yeltsin’s appeal to the provinces – “take as much
independence as you can swallow” – the balance of power in the Russian
Federation shifted in favor of the regions, in the second half of
the 1990s centralizing tendencies were evidently at play. Many observers
considered Putin’s rise to power (1999 parliamentary and 2000 presidential
elections) as victory of poor regions over wealthy ones. The latter
were united into a Primakov-Luzhkov “Fatherland- All Russia” electoral
bloc that did not do well in the elections. Whether the center succeeded
in recent years in centralizing the Federation is an open question,
but there is no doubt that the center has tried to take a tougher
stand on the regional autonomy. In
the next section I suggest possible explanations for the conflicting
views found in the literature on intergovernmental transfers and formulate
the hypothesis to be tested. In section 3 data on financial transfers
and voting patterns are discussed. Section 4 presents regression results
that show that net financial transfers in 1992-2001 were generally
compatible with the equalization scheme, but were also used to reward
the pro-center regions (i.e., those that voted for the pro-Moscow
democratic parties in parliamentary elections and for Yeltsin in 1996
presidential elections and that had less tension with the federal
government). Finally, in section
5 some conclusions are drawn and the implications for the broader
research on federalism are discussed. In particular, the relevant
spin-off for the first stream of the literature on fiscal federalism
is the identification of the loopholes in the current system that
allow “bending the rules” so as to reward political allies. The implication
for the third stream of literature is the comparison of the viability
of two different models of asymmetrical federalism – the one that
gives preferences to supporters and the other that is aimed at pacifying
opponents.
2.
The hypothesis:
pacifying the troublemakers or rewarding the supporters? If
political factors influence patterns of intergovernmental financial
flows, do they favor loyal to the center regions or “anti-center”
regions, namely those that are involved in conflicts with the federal
government? The Triesman hypothesis is that in the first half of the
1990s Moscow pacified the troublemakers in pretty much the same way
as Vienna appeased ethnic and regional claims within the Habsburg
empire through tax concessions, new jobs, additional railway branch
lines, and so on. It is not enough to look only at direct financial transfers from the center
to the regions – payments from the federal budget to the regional
budgets. These direct transfers
are only the visible part of the iceberg. The invisible part consists
of tax revenues-sharing rules, which actually allow some regions to
retain a greater than average portion of total revenues. The share
of total tax revenues retained by the region (Triesman, 1996) cannot
be an accurate measure of the benefits from fiscal federalism either.
Some regions may pay a greater share of their total revenues to the
center, but then can be compensated via the transfer flows in the
opposite direction. To complicate things further, taxes are not necessarily
paid in regions where output is produced: for instance, the share
in regional and federal tax revenues received by resource rich regions
(like Tumen) is about the same as their share in national GDP, whereas
the share received by the city of Moscow is much higher (Tabata, 2000).
Total net center-regional government financial
flows should be calculated as the difference between the total revenues
collected by all levels of government in the particular region and
total outlays of regional and local authorities in this region. In
this case the average region is certainly a donor vis-à-vis
the federal government since federal taxes that are collected in the
regions constitute the major source of revenues for the central government
(although not the only source, since part of the revenues of
the federal government, like custom duties and proceeds from privatization
of federal property, are not disaggregated by regions).
In 1996-98, in the period of financial stabilization, when
prices were relatively stable, these annual net transfers from the
regions to the center amounted to about 1000 rubles per capita (Predprinimatel’sky…,
1997; East West Institute, 1999), which was equivalent to about 8%
of national GDP, or approximately equal to the average per capita
income for 1.5 months (total revenues of the federal government amounted
to 12% of GDP). The variations by regions, however, were huge:
from over +7000R per capita in Moscow (national average per capita
income for nearly 8 months) to -6000R
per capita in Chukotka in the Far East (equivalent to nearly 7 monthly
average per capita incomes). To put it differently, Moscow residents
were paying “extras” to the federal budget equivalent to the average
national per capita income for over half a year, whereas Chukotka
residents were not paying anything to the central budget, but were
receiving net transfers equivalent to average national income per
capita for over 6 months. However,
these net financial flows cannot be used without adjustment to measure
the donor-recipient relationship between the federal government and
the regions. Consider the same example of Moscow and Chukotka. Tax
generating potential in Moscow is greater than in Chukotka because
Moscow is wealthier and because industries that are located in Moscow
generate more income. On the other hand, the cost of providing the
standard basket of government services in Chukotka is higher than
in Moscow – partly because the cost of living in Chukotka is higher
and partly due to climatic and other conditions (for instance, more
fuel is needed for heating schools, hospitals, etc.). Hence, both
– total tax revenues collected in the region and expenditure of regional
governments – have to be adjusted. This
paper uses the notion of ideal transfers per capita (ITcap), which
are calculated as the difference between all tax receipts (federal
and regional) per capita in Russia on average (TAXREVcap) adjusted
for the index of tax potential of the particular region (ITP) and
average Russian expenditure of regional governments per capita (RGEXPcap)
adjusted for the index of budgetary expenditure (IBE): ITcap = TAXREVcap * ITP – RGEXPcap
* IBE
Defined in such a way, ideal transfers are
the difference between taxes that the region is able to collect, given
the objective conditions in this particular region, the average Russian
level of tax rates and tax compliance, and expenditure that the regional
government should make in order to ensure the provision of the average
Russian level of public services to local inhabitants. To put it differently,
ideal transfers guarantee complete equalization: every region is asked
to contribute to the federal budget in line with its tax potential
and every regions gets enough funds to maintain public services at
the average Russian level (i.e., if tax proceeds collected in the
region are not enough, the region gets transfers from the center)
[1]
. The index of tax potential may be computed
in various ways. One method is to take into account regional differences
in gross regional product (GRP) per capita and in industrial structure
(oil and gas industries generate more tax revenues than agriculture)
– (see Batkibekov, Kadotchnikov,
Lugovoy, Sinel’nikov, Trounin, 2000). Another method is to
evaluate tax base in the region (value added for VAT, business profits
for profit tax, personal income for personal income tax, alcohol and
tobacco sales for excise taxes, etc.) and to multiply it by average
national effective tax rate, i.e., the ratio of all tax proceeds to
the tax base in the RF (Methodology, 2000). The first method is currently
used by the Department of Finance of the RF to compute transfers to
the regions from the Fund of Financial Support of the Regions (FFSR)
– see (Minfin, 2001). Both methods yield results that are very consistent
with the ranking of the regions by their GRP per capita (fig.1); the
current methodology used by the Russian Ministry of Finance to calculate transfers from FFSR for the year 2001 uses
the ITP, which is highly correlated with the GRP per capita ( R2=
98%). The index of budgetary expenditure (IBE)
can also be computed in various ways. The most straightforward approach
is to compare the cost of the basket of goods that represents the
subsistence minimum, since it is assumed that regional differences
in cost of provision of public goods are largely similar to regional
variations in the cost of basic necessities. All other methods to
compute the IBE necessarily take into account the cost of living index
(subsistence minimum, cost of fuel, etc.), but also allow for other
factors that may require higher/lower spending per capita by the regional
governments aiming at providing public goods to the inhabitants of
the region at a national average level. Such factors include climatic
conditions, age structure of the population, the level of the development
of infrastructure, share of urban population, etc. These factors affect
all major categories of regional governments spending – from housing
(housing is heavily subsidized from regional budgets and housing subsidies
account for 20 to 50% of total regional government outlays) to education
and health care, social assistance, public administration, and so
forth. Fig. 2 shows results using three different
measures of IBE; (a) the index of budgetary expenditure that takes
into account only the cost of living and federal standard of housing
subsidies (Kadotchnikov, Lougovoi, Trounin, 1999); (b) a measure of
IBE which also accounts for the share of urban population and the
average size of the residential communities, the age structure of
the population, the share of unemployed and average income per capita
(Methodology, 2000); and (c) the official IBE used for the purposes
of distribution of FFSR (Minfin, 2001). Currently, the computation
of this official IBE is quite cumbersome and involves adjustments
for federal standard of housing subsidies per 1 square meter of living
space, the cost of living, the share of the population living in Far
North and Arctic regions, the share of the population below the poverty
line, transportation accessibility, the age structure of population,
and other less important factors.
These indices are quite strongly correlated with the subsistence
minimum, but the official (Minfin) IBE seems to increase proportionally
more strongly with the rise of the subsistence minimum. To continue with the previous example of
Moscow and Chukotka, for the calculation of the ideal transfers it
is necessary to take into account that the tax potential (ITP) in
both regions, which, for Moscow and Chukotka, is roughly 2 times higher
than the Russian average, whereas the index of budgetary expenditure
(IBE) for Moscow is around 1, and for Chukotka – from 4 to 8 (according
to various calculations). That is to say, both Moscow and Chukotka
have a capacity to generate two times more tax revenues per capita
than Russia on average, but in Moscow one ruble of spending can deliver
about the same amount of public goods as in RF on average, whereas
in Chukotka the same amount of public goods can be purchased for 4-8
times as many. Table
1. Approximate Calculation
of ideal transfers for 1997
*Actual net transfers from the region to the center
per capita for the RF on average (1166 R) are not equal to ideal transfers
(858 R) because ideal transfers are computed with the exception of
non-tax revenues (part of these non-tax revenues, like revenues from
the privatization of federal property, are not divided by the region
of origin).
The calculation of ideal transfers is shown
in table 1. In 1997, both
Moscow and Chukotka had a tax generating capacity of 7756 R per capita,
but the maintenance of a national average standard for the provision
of public goods required 3030R per capita in Moscow and 18180 in Chukotka.
Hence, ideally Moscow was supposed to pay the federal budget 4726
R per capita (7756-3030), but in fact paid 8311 R, whereas Chukotka
ideally was supposed to get 10424 R per capita (7756-18180) from the
center, but in fact received only 7596 R. The difference, which can be conceived of as
Moscow’s “overpayment” to the federal center (3555 R per capita) and
Chukotka “under-financing” from the center (2828 R) – may or may not
be related to political factors
[2]
. In every federation there is a difference
between actual and ideal net transfers, since complete equalization
is normally not carried out and probably should not be carried out
even from a purely theoretical point of view.
[3]
The inability of particular regions to provide
the national average level of public services may be the result of
poor infrastructure. In this case the federal government can try to
stimulate the development of the regional infrastructure through shared
projects (with the regional government) rather than compensating
infrastructure inadequacies through non-conditional equalization payments.
However, the point of this paper is to test whether the difference
between actual and ideal net transfers is influenced by political
factors, in particular by center-regional relations. The hypothesis
is that in 1996-98 pro-Moscow oriented regions were paying less (or
more) to the center (i.e., getting from the center more/less respectively)
than they should.
3.
Review of data and events The data on net transfers per capita
from the regions to the center are deflated using the official GDP
price deflator, so that all transfers are expressed in 1997 prices.
This makes it easy to compare them with previously calculated ideal
transfers for 1997 (the ideal transfers for earlier years cannot be
computed because of the lack of data). As fig.3 suggests, actual net
financial flows were more or less consistent with the ideal transfers,
especially in 1995-2001, when the R2 of the linear equations
linking actual and ideal transfers was always above 40% (the coefficients
in these equations were highly statistically significant in all years).
Table 2 presents the correlation coefficients
(R) for net financial transfers from the regions to the center. It
is noteworthy that for all years actual transfers are pretty much
correlated with the ideal transfers, no matter how they are calculated.
But there are two obvious breaks in continuity – in 1995 and in 2000.
Consider the chain correlation coefficients – that of the current
year with the previous year – these are shown in the table in the
shadowed cell on the diagonal line and tell the story of how much
the pattern of transfers in the current year corresponds to the pattern
of the previous year. All these coefficients are higher than 0.87,
except for the 1995 and for 2000-01. Besides, 2000 actual transfers
are less correlated with ideal transfers than actual transfers in
any year in 1995-2000, and less correlated with the previous actual
transfers (shadowed cells in the row for 2000) than actual transfers
for every year since 1992.
This implies there were changes in
the patterns of financial flows in 1995 and 2000, although the real
meaning of these changes, especially that of 2000, is not crystal
clear at a moment. It is obviously connected with two major reforms
in inter-budgetary relations.
Table 2. Correlation
matrix for actual per capita net financial transfers from regions
to the center in 1997 prices in 1992-2001
(88 observations)
*The first
figure for 1995 is obtained using the official Minfin data, the second
one – using the data published by the EWI (East-West Institute, 1999,
2000). The data for 1996-99 are from the EWI, for 2000-01 – from Minfin
and MNS (Ministry of taxes and duties). **The “Martinez”
ideal transfers are computed with ITP = GRP per capita and IBE = subsistence
minimum. The “Methodology” ideal transfers are computed as explained
in (Methodology…, 2000) –
see previous section.
In
1994 the tax sharing procedures were unified and the Fund for Financial
Support of the Regions (FFSR) was created: whereas previously financial
relations between Moscow and the regions were of the type of pure
“contractual federalism” (Heinemann-Gruder, 2002) and were based on
the negotiated and region-specific tax-sharing procedures
with and transfers from Moscow, in 1994 the first formula-based mechanism
was introduced. The equalization formula, however, was based on actual tax collection and actual expenditure of regional governments
for previous years and did not take into account either the tax potential, or budgetary requirements. Still it can be speculated
that this was the major improvement of the previous procedure of continuous
bargaining and resulted in bringing the actual transfers more in line
with ideal transfers because the correlation coefficients of actual
transfers with the ideal transfers starting from 1995 improved dramatically
as compared to 1992-94. In
1999-2000 another reform was carried out – this time the formula to
calculate transfers to the regions from the FFSR was based on indices
of tax potential and indices of budgetary expenditure and supposedly
should have resulted in the streamlining the actual flow of transfers
in such a way that they correspond even more to the ideal transfers.
Nevertheless, the actual pattern of transfers in 2000 and 2001 does
not exhibit a closer link to the ideal transfers; on the contrary,
the correlation coefficients with ideal transfers for the year 2000
are the worst ones in the whole period of 1995-2001, whereas for 2001
these correlation coefficients do not show considerable improvement
and are pretty much in line with that of 1995-99 period (table 2).
Another puzzle is that the pair wise correlation coefficients of actual
2000 transfers with the transfers for the other years are noticeably
lower than the similar correlation of actual transfers for every other
year of the preceding period and even for 2001. That is to say that
in 2001, after the reform, actual transfers were more consistent with
the pre-reform patterns of transfers than with the pattern of the
year 2000 that obviously sticks out of the crowd. The correlation
between actual 2001 transfers and 2000 transfers is the worst – only
18%. Here the puzzle is only formulated, the discussion is given in
the next section after the regression analysis.
Pro- or anti-Moscow position of the particular
regions can be measured by several indicators. The most straightforward
measure is the share of the votes cast for Yeltsin in 1991 and in
the second round of 1996 presidential elections and the ratio of votes
given to democratic parties to the votes collected by leftist parties
in the parliamentary elections of 1993, 1995 and 1999. The political
position of the federal government in the period under consideration
was to the right of the center, if the center is defined as the average
political orientation of 89 regions of the RF. Therefore, the pro-democratic
orientation of the electorate of the region was the one that generally
pleased the federal center more than the pro-leftist orientation.
Such a scheme is definitely a simplification, but basically a right
one: the anecdotal evidence strongly suggests that the relationship
of the regions of the “red belt” with Moscow was more tense than that
of pro-democratic regions. There
is also an index of the political orientation of the electorate computed
by the Russian Union of Industrialists and Entrepreneurs (RUIE) based
on the voting preferences adjusted for the stability of these preferences
(Predprinimatel’sky…, 1997) – by this measure RF average is equal
to 100%; higher values represent more liberal (pro-reform) oriented
voting patterns. Values on
this measure are correlated with the previously mentioned indicators
of pro-Moscow voting, and these measures themselves are mostly correlated
with each other. For instance, the Fig. 4a shows, the pro-Yeltsin
vote in 1996 presidential elections is strongly correlated with the
results of December 1995 parliamentary elections as measured by the
ratio of votes cast for pro-government parties (democratic and LDPR)
to votes for leftist parties (fig. 3a), whereas the share of votes
cast for Yeltsin in 1991 correlates with the ratio of pro-democratic
to leftist votes in 1993 parliamentary elections (fig. 4b). Overall,
there is only one serious and significant deviation from the dominant
geographical pattern of voting in Russia in the 1990s and the early
2000s – the pro-Putin vote at 2000 presidential elections (fig. 4c),
but this is exactly the kind of exception that proves the rule. It
is well known that Putin’s phenomenon has to do more with political
technology than with ideological preferences, that Putin’s electorate
includes people of different and even conflicting political preferences
(Colton, ). Table 3. Correlation matrix for different measures
of pro-Moscow voting at national presidential (1991, 1996, 2000) and
parliamentary (1993, 1995, 1999) elections in the regions (for parliamentary
elections – ratio of votes cast for democratic parties to the votes
cast for leftist parties*) – 68 observations
*Democratic parties – DVR/SPS and Yabloko; leftist parties
– KPRF, Agrarians, Communists – Workers’ Russia. ** Ratio of votes cast for Yavlinsky (Yabloko presidential
candidate) to votes cast for Zuganov (communist candidate).
Table 3 confirms the conclusion
– the political preferences of Russian voters in the regions were
very stable during the last decade. Even in the 2000 presidential
election the geographical split between the ideologically oriented
voters (that of Yabloko and that of communists) was very much in line
with the previous years. It is only Putin’s share of the votes that
is not correlated with “ideological”
voting patterns. It is also important to note that pro-democratic
regions are usually richer than pro-leftist: the pro-democratic and
pro-incumbent president vote, except for voting for Yeltsin in 1991
and for Putin in 2000, is quite correlated with the GRP per capita.
So it may well be that the opposition regions are forced to pay more
to the federal budget not because of their opposition per se, but
because of their poor status (low importance) in the federation.
In addition, there are indices of tensions in the relationship
between the regions and the center. Two of these indices are presented
on fig. 5, where higher values represent greater tensions. One index
comes from RUIE (Predprinimatel’sky…, 1997). The other index is constructed
by MFK Renaissance (Ponomareva, Zhuravskaya, 2000) and takes account
of the frequency of public statements by the governor against the
policies of the center, the extent to which regional laws and regulations
violate federal laws, the level of support of the governor by the
center at the last elections, and the existence of a bilateral treaty
between the region and the center. These two indices of tensions are
strongly correlated (fig.5). Next, there are indices for measuring
the power of regional administrations, where higher values represent
more bargaining power with the center. One was computed by RUIE based
on the average of estimates provided by experts estimates (Predprinimatel’sky…,
1997). The other is provided by the Urban Institute based on the analysis
of regional legislation and its violations of federal laws, federal
elections results (pro- or against the center policies), the regional
natural resource endowment and other relevant information (Ponomareva,
Zhuravskaya, 2000). Once again, the two indices are positively correlated
(fig. 6), although not as strongly as the indices of tensions with
the center. Finally, there are dummy variables that were used for the
regression analysis, such as a capital city dummy (Moscow), AO dummy
(for 11 autonomous regions – oblast’and okrug) and republic dummy
(for 21 regions that are called republics). Formally, according to
1993 Constitution, all 89 regions of the RF have equal rights, but
it may be that the remnants of the Soviet past (when the rights of
republics, AOs and oblast’s were different) still play a role in fiscal
federalism. The general result of comparing actual transfers with ideal
transfers is that the difference between them is negatively correlated
with pro-Yeltsin and pro-federal government voting in the regions,
negatively correlated with the power of the regional administration
and positively correlated with tensions between the region and the
center. To put it differently, three political factors allowed the
regions to reduce their transfers to the center: (a) voting in support
of incumbents at presidential elections and in support of pro-Moscow
parties in parliamentary elections, (b) greater bargaining power in
relations with the center, and (c) lower tensions with the federal
center. Pro-Moscow voting patterns and good relations with Moscow
led to pecuniary benefits – they materialized into tangible monetary
remuneration in the form of lower net transfers to the center or higher
net transfers from the center as compared to “ideal” amounts (computed
with the assumption of complete equalization). This result is very
robust using various measures of fiscal capacity (ITP) and costs of
provision of public goods (IBE), with one exception discussed later.
For example, the negative
relationship between pro-Yeltsin voting patterns and transfers from
the regions to the center can be observed in fig. 7a: in every year - 1996, 1997 and 1998 – regions that supported
Yeltsin in the 1996 presidential elections paid less than they should
to the center or received more than they were entitled to from the
center. It is noteworthy that there is virtually no
relationship between actual (unadjusted) transfers and pro-Yeltsin
voting (fig. 7b). Figs. 7a,b show net
actual financial transfers per capita from regions to Moscow in current
prices (not deflated) – the comparison is reasonable because prices
for this period of macroeconomic stabilization did not change much.
However, to make a general comparison of
voting patterns with transfers for the whole period 1992-2001,
when prices changed dramatically, transfers in current prices need
to be deflated. Figs. 8a-f present the data on linkages between voting
patterns at all national elections that took place in 1991-2001 and
the gap between actual transfers in 1997 prices and ideal transfers
for 1997. The general relationship is only too obvious and can hardly
be a coincidence. In virtually all cases the relationship is negative
and in most cases statistically significant – the more the electorate
in the regions supports pro-Moscow candidates, the less the region
should pay to the center. Or, to put it more rigorously, the more
votes are cast in the region for incumbents at presidential elections
and for democratic parties in national parliamentary elections, the
smaller is the difference between what the region had actually paid
to the center and what it had to pay according to the formula. In
most cases this difference is negative because there is no complete
equalization of abilities to provide public goods by the regional
governments. However, while all regions pay less that they should
have paid for complete equalization, pro-Moscow oriented regions pay
even less. The co-operation with the Big Brother in Moscow definitely
pays off, while opposition to the federal center turns out to be expensive
in a very literal meaning of the word. Exceptions, of course, are most interesting. First, the
correlation of transfers with the results of 1991 presidential elections
is quite low, and 1992 transfers are positively related to pro-Yeltsin
vote in 1991. This is not difficult to explain: it is very likely
that the system of asymmetrical fiscal federalism consolidated itself
only after the 1993 conflict between the president and the parliament.
Second, 2000 and 2001 transfers exhibit the weakest correlation with
voting patterns and sometimes this correlation is positive. This is
the major puzzle to be explained later. And, third, there is virtually
no correlation of 1999-2001 transfers with the pro-Putin vote at 2000
presidential elections. This later fact, as noticed previously, has
more to do not with the pattern of transfers, but with the voting
behavior of the electorate – the share of votes cast for Putin in
2000 does not depend at all on the results of previous elections,
although these previous results themselves are very stable and highly
correlated.
4.
Empirical
results: electoral politics and transfers Regression
results for net financial flows from regions to the center are reported
in tables 4-7 and generally confirm the previous observations.
Table 4. Regression
of actual net financial transfers from regions to the center in 1992-93
on ideal transfers and 1991 election results (T-statistics in brackets)
In
1992 the pattern of transfers seem to have been that of pacifying
the troublemakers – the more votes were cast for Yeltsin in 1991 presidential
elections the more payments to the center the region was actually
making even controlling for objective measure of financial contribution
(ideal transfers) and for GRP per capita (the richer regions were
paying less). In 1992 this pacifying pattern is statistically significant
(table 4) – this provides the support for Triesman hypothesis of appeasing
the opposition regions, although the correlation coefficients are
very low (R2 does not rise to over 29%). However, for 1993
transfers such variables as the share of votes cast for Yeltsin and
the GRP per capita become insignificant, it is only ideal transfers
that remain significant, and the explanatory power of the regression
drops to a very low level (R2 is only 16% and lower), which
may suggest that there was a complete chaos in fiscal federalism at
a time. In
1994-95, however, the pattern of financial flows changes dramatically
(table 5). First, the explanatory power of regression increases greatly
since 1995 (from 26% to over 70%), and so does the significance of
the coefficients of ideal transfers, suggesting that 1994 reform of
financial flows was really efficient in bringing these flows more
in line with the ideal pattern. Second, from 1994 the sign of coefficient
of the variable characterizing the electoral results (ratio pro-democratic
to pro-leftist votes at December 1993 parliamentary elections) becomes
negative and the coefficient itself – statistically significant. The
more the regions supported the leftist parties at the 1993 parliamentary
elections and the less they supported the pro-democratic parties,
the higher were their financial transfers to Moscow. It
appears also that rich regions were paying more in 1995-96: the coefficient
of the ratio of income to subsistence minimum (cost adjusted measure
of living standards) was positive, suggesting that regions with higher
living standards were paying less to the center. But for 1994 the
inclusion of variables that measure living standards in the region
(GRP per capita or ratio of income to subsistence minimum) does not
change the results, and the coefficients of these variables turn out
to be insignificant. To put it differently, opposition regions were
forced to pay more not because they were mostly poor, but because
they voted in a way that displeased the federal center.
Table 5. Regression
of actual net financial transfers from regions to the center in 1994-96
on ideal transfers and 1993 election results (T-statistics in brackets)
*Data in the previous columns (1994-95) are from Minfin;
data in the following columns are from EWI.
In
subsequent years, 1996-99, the described pattern of asymmetrical federalism
was consolidated. The results for this period are consistent with
1994-95 pattern and are very stable (table 6). Regions that voted
against Yeltsin at 1996 presidential elections, regions with high
tensions in relations with the center, poor regions and regions with
no autonomous republic/orkrug status, as well as Moscow, had to pay
more to the federal budget than others (table 6). Once again, for this period, regions with high
GRP per capita were making less financial contributions to the center,
which may pose an econometric multicollinearity problem since GRP
per capita was correlated with the results of 1996 elections (table
3). However, it does not appear to be the case for the preceding years
and for the subsequent years.
Table 6. Regression
of actual net financial transfers from regions to the center in 1996-99
on ideal transfers and 1996 election results (T-statistics in brackets)
*Index of tensions is from MFK Renaissance.
Finally, the story
of the Putin’s period, 2000-01, is that of the complete change in
the direction of transfers in the year 2000 and the surprising return
to the previous patterns in the year 2001. In 2000 the goodness of
fit declines markedly, as well as the T-statistics for ideal transfers
coefficients, (still significant, but much less than before and after),
whereas the sign of coefficient of election variable changes from
negative to positive. Was it the result of 1999-2000 fiscal federalism
reform that introduced the new formula based on objective measures
of fiscal capacity and budgetary requirements? Strictly speaking, the introduction of the precise formula should
have resulted in the opposite developments – in the improvement of
the explanatory power of the regression, in the increase of significance
of the ideal transfers coefficient and in the voting behavior of the
regions becoming insignificant. The reasons that this did not happen
may be associated with the fact that there was some intensive political
bargaining going on behind the scenes when the formula based transfers
were calculated for the presidential elections year of 2000. But even
if this was really the case, it does not explain, how the formula-based
transfers could become different from ideal transfers in a statistically
significant way, and, most important, why the pattern of transfers
in 2001 returned to that of previous years and has virtually nothing
in common with the pattern of 2000. Table 7. Regression
of actual net financial transfers from regions to the center in 2000-01
on ideal transfers and 1999-2000 election results (T-statistics in
brackets)
To answer the formulated
questions, let us have a closer look at the determinants of 1996-98
financial flows (table 8). Here there is no need to deflate net financial
flows because prices did not change much in this period of macroeconomic
stabilization. Consider first regression equations 1 to 7. Actual
transfers in 1998 depend positively and significantly on ideal transfers,
and negatively and significantly on pro-Yeltsin vote in 1996 presidential
elections even when the capital city effect (Moscow pays relatively
more to the federal budget) and autonomous regions effect (AOs pay
relatively less to the federal budget) are controlled for. Each additional
percentage point of votes for Yeltsin in the second round of 1996
presidential elections was associated with 15 to 22 R per capita in
lower transfer from the region to the center. Indices of tensions
in relations with the center and indices of regional power had the
predicted signs, but sometimes were not very significant (at 11-17%
level) and, what is more important, did not improve the goodness of
fit, even though the size of the sample in this case decreased from
88 to 80 regions. All these results
hold for the 1996 and 1997 transfers. They also hold when the pro-Moscow
vote in the 1995 parliamentary elections is used instead of the outcomes
of 1996 presidential elections (results not shown). The results are
very robust to using various measures of ideal transfers: these ideal
transfers were calculated with various combinations of all available
ITP and IBE indices and in all cases, with only one exception discussed
later, the relationship between the variables was basically the same.
Even when ideal transfers were computed in the “Canadian way”, i.e.
without making adjustments for different costs of provision of public
goods, the relationship was basically the same. Also not shown in
table 8, is the relationship between the change in actual net transfers
in 1997 and 1998 as compared to 1996: regions that voted for Yeltsin
in 1996 were rewarded in 1997-98 by being allowed to contribute less
to the federal budget. The
transfer burden was also shifted away from the rich AOs with high
tax potential, but these AOs voted mostly for Yeltsin anyway. Consider now equations
8 and 9, which show the exceptional case mentioned above. Here ideal
transfers are computed with the official IBE used for the calculation
of transfers in the 2001 RF budget. The results are markedly different:
R2 increases from 68-76% in previous regressions to 89-91%.
The significance of coefficients for ideal transfers, Moscow dummy,
tensions with the center and power vis-à-vis the center improves,
but the coefficients of the pro-Yeltsin vote variable become statistically
insignificant. The latter coefficients still have the predicted sign
(more votes for Yeltsin – less transfers to the center), but the level
of the coefficient is very low: only 3 to 6 R per capita as compared
to 15 to 22 R per capita in previous regressions. Table 8. Regression
of actual net financial transfers from regions to the center in 1998 on ideal transfers, election results and
political tensions variables (T-statistics in brackets, all coefficients
significant at 10% level except those marked with asterisks)
Dependent variable – net financial transfers from regions to the
center in 1998
It is quite obvious
that the ideal transfers computed with the official IBE are much closer
to the actual transfers in 1996-98 than the ideal transfers computed
with all other combinations of ITP and IBE, including official ITP
for 2001 budget. It is easy to see this relationship from table 9,
which reports the correlation coefficients for actual and ideal transfers
calculated using various measures: if ideal transfers are computed
with official IBE for 2001 RF budget (Minfin, 2001), they are noticeably
more strongly correlated with the actual transfers in 1996-98.
Table 9. Correlation between actual
net transfers from regions to the center in 1996-98 and different
measures of ideal transfers
As was already
mentioned, the official
IBE is computed with the greatest number of adjustments – not only
for the cost of living, but also for housing subsidies, share of the
population living in Far North and Arctic regions, share of the population
below the poverty line, transportation accessibility, age structure
of population, and other factors.
Unfortunately, due to the lack of data, it is impossible to
determine precisely what explains the difference between the official
IBE and other measures of adjustment of budgetary spending. But it
is possible to show that both – ideal transfers computed with official
ITP and IBE, and the difference between official and unofficial IBE
- are correlated with the actual pattern of transfers in 1996-96 and
with the share of votes cast for Yeltsin in 1996. That is to say,
the official IBE incorporated the influence of political factors that
alter federal-regional financial flows, so it is by no means surprising
that ideal official transfers (computed with official IBE) are no
longer correlated with political factors. To cite one example, in
all 7 regions where official IBE was over 400% of the RF average (Nenetsky
AO, Taimyrsky AO, Evenkiysky AO, Sakha Republic, Chukotsky AO, Koryaksky
AO, and Magadan oblast’ – see fig. 2) the share of votes given to
Yeltsin in the second round of 1996 presidential elections was higher
than the national average, 62 to 74% against 54%.
True, these are all Northern, Siberian and Far East regions
with the high cost of living. But the other “expensive” regions (many
of them are immediate neighbors of highest official IBE regions, but
with less impressive pro-Yeltsin voting records) were assigned substantially
lower official IBEs.
Table 10 summarizes the regression results for the variables
explaining official ideal transfers and official IBE. It turns out
that official ideal transfers (equations 1-3), after controlling for
hypothetical ideal transfers computed with simple ITP and IBE, depend
positively on the actual pattern of transfers in 1998 and negatively
on the pro-Yeltsin vote, Moscow and AO dummies. In other words, official
transfers for the 2001 budget were computed in such a way that they
benefited Moscow, AOs and regions that voted for Yeltsin - those regions
were required to pay less to the center. On the other hand, the newly
computed official transfers disfavored regions that were paying a
lot to the center previously, i.e. they were brought more in line
with actual patterns of transfers in 1998.
This effect of the “streamlining” of the official transfers
to bring them closer to the actual patterns of financial flows that
existed previously and to make sure they are favorable for political
supporters is due mostly to the newly computed IBEs, since newly computed
ITPs remained quite in line with the objective measures of tax capacity.
In fact, as equation 4 suggests, the difference between the officially
computed IBE and the IBE based on the cost of subsistence minimum
depends positively on pro-Yeltsin vote, Moscow and AO dummies and
negatively – on the actual transfers in 1998. That is, Moscow, AOs
and pro-Yeltsin voting regions were assigned higher IBE (to make sure
they could leave more tax revenues in the region for the financing
of their own regional spending and to transfer less funds to the center).
On the contrary, the more a region was paying to the center before,
in 1998, the lower the IBE was established for this region, presumably
to make sure the region continued to pay as much as it had previously
[4]
.
Table 10. Regression of ideal transfers
computed with official ITP and IBE and of official IBE on actual patterns
of transfers in 1998 and on voting patterns (T-statistics in brackets)
Dependent variables: - Equations 1-3 – ideal transfers computed with official ITP and
IBE
-
Equation 4 – difference
between the official IBE and IBE based on subsistence minimum
To summarize, there is a clear evidence that the actual
pattern of net financial transfers between the regions and the center
in the 1990s was only partly determined by objective indicators of
tax capacity and costs of providing public goods. Controlling for
these objective indicators, it turns out that fiscal flows were favoring
AOs, regions voting in a pro-center way, regions with more bargaining
power and with less tensions with the center. It also appears that
the indices of budgetary expenditure for the 2001 RF budget were computed in such
a way as to incorporate these actual patterns of transfers, i.e. to
make sure that there is no need to alter the existing pattern of financial
flows drastically. Therefore, the actual picture of financial flows
in the federation in 2001 resembles that of 1994-99 more than that
of 2000. Plus ca change, plus c'est la meme chose?
5.
Concluding
observations and implications for future research The main point of the paper was to identify
the bias in the Russian style fiscal federalism. The previous research
provided evidence that there is no major bias (i.e. Russian fiscal
federalism is symmetrical) or that there was a bias in favor of regions
that oppose the federal center, i.e. the federal government is pacifying
the troublemakers. This paper contains evidence to the contrary: rather
than appeasing the opponents, the federal center seems to punish them
financially. Regions that voted for leaders and parties that challenged
the federal government and that had more tensions with Moscow tended
to get less funds from the center in the 1990s and the early 2000s
with the possible exception of 1992-93. Why do these conclusions differ
from those reached in other studies? For one thing, they are based
on examining total net financial
flows between the regions and the center, not only particular elements
of these flows, like transfers from the federal budget to the regions
or the share of total tax revenues retained by the region. The other
reason is that net financial flows are adjusted for the objective
regional differences in tax generating capacity and in costs of providing
public services.
The period of 1992-93 is generally believed to be the period
of decentralization and it may well be that the trouble-making regions
were treated at that time in an appeasing rather than in an oppressive
way. As was shown, there is no strong evidence that fiscal federalism
in these early years was skewed in either direction. Besides, the
then existing system of “normatives” (tax sharing rules) and providing
money for the “financing gap” was so complicated that probably could
not have been effectively used as a tool of selective approach to
the regions even if this was the goal of Moscow. It is remarkable,
however, that the oppressive pattern of dealing with “anti-center”
regions emerged as early as in 1994 – right after the centralization
drive that followed the forceful dissolution of the parliament by
the president in October 1993. It is no less remarkable that the attempt
to change the existing oppressive system in 2000 undertaken by Putin
administration in the framework of the general campaign to curb the
power of the rich regions and to trim their financial resources in
favor of poorer regions was very short lived and did not produce a
more fair distribution of financial resources.
It led first, in 2000, to unexpected and controversial results
(the richer regions in fact got some concessions), but then, in 2001,
the pre-2000 pattern of transfers was restored. The calculation of
official transfers for 2001 federal budget was carried out in such
a way that the pattern of transfers that existed in the 1990s was
institutionalized: the official indices of budgetary spending (used
to account for the uneven budgetary requirements of the regions) absorbed
a considerable portion of variations in transfers caused by political
factors.
This is not to say that nothing changed in 2000-2001 in Russian
system of fiscal federalism. The share of the federal government in
revenues and expenditure of consolidated budget increased markedly
in 1997-2001 (Obzor…, 2001; OECD, 2002). More important, taxing powers
were greatly centralized: in 2002 over 70% of tax revenues of the
consolidated budget came from taxes which were established at the
federal level (both in terms of tax rate and tax base), so that the
regional governments became extremely dependent on Moscow for financing
their expenditure. In addition, the relative size of inter-budgetary
transfers increased nearly two times –from 1.3% in 1999 to 2.54% in
2001 as a % of GDP (i.e. 18% of expenditure of regional and local
budgets). However, this unprecedented centralization of national finances
did not lead to the elimination of political biases in fiscal federalism
and did not alter the asymmetries that existed before the reform.
There
are at least three implications for future research on fiscal federalism
and for the literature on the issue. First,
it is quite understandable that it is impossible to change the existing
asymmetrical pattern of financial flows overnight because of the political
interests involved. The gradual approach to symmetry may be the only
feasible solution. However, the adjustment of the coefficients used
in the calculation of transfers in such a way as to make the asymmetrical
arrangements look symmetrical is probably the worst possible scenario,
since in this case the mechanisms of fiscal federalism become non-transparent
and misleading. The simplification of the current transfer calculation
scheme, especially of the computation of IBEs, even though it may
lead to the large discrepancies between actual and ideal transfers,
is definitely a preferable solution. Second, until now the existing pattern
of asymmetrical fiscal transfers in Russia proved to be very stable
and robust in two senses. For one thing, the pattern of transfers
and the pattern of voting was characterized by a lot of inertia: even
though the opposition regions were “underpaid and overtaxed” by the
federal center that tried to punish them for their opposition stand
, they did not change their political orientation. The geographical
pattern of political preferences of Russian electorate in terms of
left-right divide remained very much the same all over the 1990s and
in the early 2000s – more
prosperous Northern resource regions, Moscow and St.-Peterburg retained
their liberal, democratic and pro-reform orientation, whereas poorer
regions, usually Southern, with large agricultural and heavy engineering
sectors voted mainly for Communists and leftist/nationalist opposition
parties. This may suggest that the Russians, very much like voters
in other countries, tend to vote with their heart rather than with
their purse – even faced with the consequences of the declining regional
government spending on public goods as a result of their opposition
vote, they still stay loyal to their party. Hence, even from the point of view of the central
government the whole strategy of asymmetrical federalism that implies
the financial punishment of the troublemakers can be put into question.
For the other thing, the attempts to change the pattern of
financial transfers by Putin administration in 2000 so far proved
to be futile. Not only the pattern of voting, but the existing pattern
of transfers as well exhibited a lot of inertia. Even though the formula
for the distribution of transfers from the FFSR was established in
1999 and the new pattern of transfers in 2000 was really very different
from the previous years, in 2001 the financial flows between the regions
and the center returned to their prevailing pattern of the 1990s.
Such a shift theoretically unthinkable in the presence of the formula
specifying the exact amounts of transfers became possible mainly due
to the recalculation of the indices of budgetary spending, which was
carried out under the pressure from the disadvantaged regions. To
use the Russian proverb, the asymmetries of the fiscal federalism
were pushed out through the door, but nevertheless came back through
the window. The story is only too familiar, it was observed more than once
in other areas of the economy that were selected for reform experiments:
carefully designed and allegedly flawless reforms undertaken with
best intentions very often produced unexpected and controversial results.
Thus, macroeconomic exchange rate based stabilization of 1995-98 resulted
in demonetization and barterization of the Russian economy and ended
up in a currency crises of 1998. Similarly, the highly praised 1998
bankruptcy legislation that was designed to facilitate restructuring
and gave more rights to the creditors than bankruptcy laws in Western
countries, resulted in the capture of institution of bankruptcy by
the regional governments (Lambert-Mogiliansky, Sonin, Zhuravskaya,
2000). And
finally, third, Russian fiscal federalism presents a challenge for the theoretical
research. The asymmetries of Russian federalism are of a different
type as compared to Austro-Hungary. Whereas in the latter the center
was retreating, giving more funds and rights to the opposing provinces,
in Russia the center is advancing, punishing the opponents and rewarding
the supporters. Contrary to the gentlemen-type “balance of power”
and “art of possible” center-regional diplomacy of the Habsburg empire,
the Russian federal government of the late 1990s was suppressing the
opposing regions with the iron fist without the velvet glove. If asymmetrical federalism (skewed in favor
of benefiting regions that support the center) is regarded as an unstable
equilibrium, it is conceivable that it could evolve into one of the
three types of more stable equilibrium: (1) authoritarian
symmetrical federalism resulting from the success of the center
in undermining opposing regional governments (once the central government
has ousted trouble-making authorities in the regions and replaced
them with more loyal administrations, it stops their underfinancing);
(2) democratic symmetrical federalism resulting from the abandonment by
the center of the preferential policies towards particular regions;
(3) loosening of the federation up to the point
of the break up resulting from the inability of the center to impose
its will on the opposing regions. The question, of course, is under
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[1]
It is easy to interpret this hypothetical complete
equalization scheme as the realization of the communist principle
“from each according to ability, to each according to needs”. [2] There are special factors, of course, especially for small regions, such as Chukotka (with a population of just over 70,000 in 2001). In December 2000, Roman Abramovich, the oil-aluminum “oligarch” was elected governor of Chukotskiy AO by 91% of the voters. The regional budget for 2001 includes $65 million from federal and local revenue sources. Abramovich will match that himself - through $35 million in personal income tax and $30 million for the Pole of Hope charity fund (Washington Post, March 2, 2001).
[3]
There are also differences
in fiscal potential and fiscal requirements within the regions –
between counties and municipalities and there are equalization schemes
within regions. In 1999 the RF average ratio of budgetary capacity
of richest and poorest municipalities in the regions was 14.4 before
equalization and 4.8 after equalization (Obzor…, 2001, p. 138). |