Fiscal Decentralization and Fiscal Equalization within Regions: The Case of Russia

By Bahl, Roy; Wallace, Sally | Journal of Public Budgeting, Accounting & Financial Management, Spring 2006 | Go to article overview

Fiscal Decentralization and Fiscal Equalization within Regions: The Case of Russia


Bahl, Roy, Wallace, Sally, Journal of Public Budgeting, Accounting & Financial Management


ABSTRACT.

The impact of fiscal decentralization on equalization between regions has received significant attention but there has been much less research of the impact of decentralization on equalization within regions. Theory suggests that the tradeoff between local fiscal autonomy and equalization ought to be most pronounced at the sub-region level where rural-urban disparities in the level of development are substantial. This paper is an empirical analysis of the impact of fiscal decentralization on equalization within one Russian region, Leningrad (State). We show that the regional government uses a mixture of fiscal instruments to strike a balance between giving more budgetary autonomy to local governments and eliminating the disparities among them. We also develop a method for studying this tradeoff between decentralization and equalization when only limited data are available. Finally, we argue and demonstrate that without a detailed understanding of the institutional arrangement for intergovernmental fiscal relations, one cannot evaluate the equalization or decentralization implications.

INTRODUCTION

Recent years have seen an outpouring of good, empirical research on the impacts of fiscal decentralization in developing economies. A particular focus has been on the relationship between the delegation of budgetary powers to elected sub-national governments and regional equalization (Prud'homme, 1995; Tanzi, 1995; and Martinez-Vazquez and McNab, 2001).

In theory, there ought to be a tradeoff between fiscal decentralization and equalization and the tradeoff should be especially pronounced at the sub-region level, where urban-rural disparities are substantial. On the revenue side, independent taxing powers for local governments should increase disparities in resources available to finance budgets. On the expenditure side, increased local assignment and autonomy should result in a larger gap between the more advanced local governments with a better capacity to deliver services, and the others. Equalization-based transfers might be adopted to temper such disparities, but in principle, fiscal decentralization should be counterequalizing.

Most of the research on this subject deals with inter-regional variations, i.e., across regions, provinces or states. Decentralization and equalization within regions is a question that has received substantially less research attention. Particularly within large countries and federations, this is an extremely important dimension of the decentralization question. The following notes are anecdotal but are suggestive of why central governments are now giving more attention to fiscal disparities within regions, and to the regional government strategies for dealing with these disparities.

* Eight of China's provinces would rank among the 20 most populous countries in the world. Intra-region distribution cannot be ignored in designing China's decentralization or equalization policy.

* Russia has 89 regions, but it has over 30,000 local governments, to serve a population of 145 million. The goal of getting government "closer to the people" underlines the importance of evaluating the fiscal relations between the regions and these numerous local government units.

* The land area in Kazakhstan's largest region, Karangandinskia, is equivalent to the land area of Uzbekistan, and is larger than Germany or Japan.

* The income disparities within regions can be greater than that between regions. For example, the gap between the richest and poorest province in China is 10:1 (excluding Guizhou), but between the richest and poorest county in Jiangsu province is 12:1.

This kind of evidence notwithstanding, there has been relatively little research on decentralization and equalization at the sub-region level. For examples of intra-regional studies of fiscal equalization in transition countries, see Bahl (1999b) and Heady, Wong, and Woo (1995) for China and Bahl and Wallace (1994) for Russia. …

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