Fiscal Decentralization and Fiscal Equalization within Regions: The Case of Russia
Bahl, Roy, Wallace, Sally, Journal of Public Budgeting, Accounting & Financial Management
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. The Asian Development Bank (1999) provided a similar analysis for Kazakhstan. There are a number of reasons for this. The necessary data for such analysis are hard to come by, and are not even collected in some countries. Another reason is that some central governments may not want to be involved in the intra-region fiscal debate. This would appear to be the case in China and Russia, where provincial governments may establish their own intergovernmental fiscal policies. Finally, central governments and even international agencies often ignore the third tier as "unimportant." But available evidence suggests that local governments do account for a significant portion of spending in some transition countries. For example, the percentage of total government expenditures at the subregion tier was 22 percent in Russia in 1996 (Martinez-Vazquez and Boex, 1999), 24 percent in Hungary in 1998 and 31 percent in Estonia in 1998 (Horva'th, 2000). These expenditure shares are usually an overstatement of the fiscal role of sub-national governments in transition economies, because their discretion in making budgetary decisions is often limited. …