Annals of the Japanese Association for Russian and East European Studies, vol.26, 1998

Received October 1997, Final Version December 1997 A Note on Regional Economy under Transition

Research Fellow, Japan Society for the Promotion of Science Graduate School of Economics, Kyoto University Kazuhiro Kumo*)**)

1. Introduction only economic and technical factors but also The collapse of the Soviet Union socialistic ideology led to these principles. drastically changed regional economic Reducing economic differentials between cities conditions. It is well recognized that many and rural areas had been one of the main aims Russian regions are in serious stagnation after of Soviet socialism. In addition to these, disintegration. This study examines regional military factors also had various effects on economy in Russia and is organized as follows. these policies. In the next section, development policies However, it is very doubtful whether during the Soviet era are briefly reviewed. In these policies can be justified from the section 3, regional economic deterioration in economic point of view. For example, regional Russia is discussed, focusing on its factors. A specialization resulted in an upsurge of summary and concluding remarks are transport costs. Although the increase of presented in the final section. transport costs in a large country may be This paper is concerned with the Russian inevitable, regional specialization further regional economy, which can be regarded as worsened this situation. small and open. As Armstrong and Taylor The Soviet government also recognized (1985) surveyed, it may be appropriate to the problems of regional specialization. In the assume that population reflects regional 1930s, the communist party already asserted economic conditions. Hence, regional the necessity of reducing transport costs. After migration statistics will also be investigated. the 1950s, in order to avoid long-distance transport, the government tried to settle 2. Regional Development Policy during the laborers in developing areas, giving various Soviet Era+) incentives such as higher wages. These The most striking characteristic of measures were applied to the Far North regions, development policy in the former Soviet Union parts of which existed in the Arctic Circle. This is, needless to say, centralized planning. When policy was continued in the 1960s, and the socialist party had the administrative power, equalization among regions was regarded as industrial location also was planned by the one of the main principles of industrial location. government. As Saushkin (1969) pointed out, It was very natural that regional equalization the principles of the development policy were policy led to industrial location in the frontier (1) equalization among regions, (2) such as Siberia or the Far North regions. resource-oriented and/or consumer-oriented Regional equalization policy, however, industrial location, (3) centralization of resulted intensive investment in less-developed production, and (4) regional specialization. Not regions, which then led to low investment

1 efficiency in the 1960s. On the other hand, the in specific regions that were abundant in problems of long-distance transport remained natural resources and well-developed European unsolved. These events urged the central Russia. The government decided which regions government to change its development policy. to develop, and the laborers were supplied by After the 1960s, developing specific wage rate incentives or other political regions had become one of the guidelines for measures. governmental policy. This tendency has been obvious since the 1970s. Then after the 1970s, 3. Regional Economy after the Collapse of greater priority was given to developing the Soviet Union Europe-Russian regions such as Moscow and Development policies reviewed in the the Baltic republics. previous section are known to result in Great importance was placed on resource inefficient capital location and, at the same extraction when the government invested in time, inefficient population location. Regional developing regions. However, it was very development would be conducted when it was difficult to settle laborers in the frontier. Higher necessary for profit maximization behavior. wages in these areas were not enough to offset Giving political incentives can lead to insufficient infrastructure. In addition, inefficient resource allocation. In this section, developing the frontier itself cost much we investigate how development policies because of severe environmental conditions. In during the Soviet era affected the Russian order to avoid maintaining infrastructure and to regions. promote short-run efficiency, the government intended to utilize day-workers through wage 3.1 Economic Crisis in Regions rate incentives in the Far North regions Regional development patterns in Russia (Milovanov, 1994). At the same time, to raise changed drastically after the collapse of the returns of capital, investment priority was Soviet Union. Since 1991, regional economic shifted from the frontier to the west side of the conditions have intensively worsened. Statistics Ural mountains (Kumo, 1997b, 1997c). show divergence in industrial output, average In the earlier stage, development policy wages and so on (Table 1). A similar tendency in the Soviet Union attached great importance was observed in the 1980s also, but to equalization among regions. However, geographical patterns of economic conditions efficiency considerations required development

Table 1 Coefficients of Variations: Trends of Divergence by Average Wages and by Industrial Output per capita

1980 1985 1990 1991 1992 1993 1994 1995 Average Wage Rates 0.32 0.31 0.28 0.29 0.49 0.53 0.56 0.54 Industrial Output per workers N.A. 0.32 0.29 0.34 0.67 0.62 0.60 0.63 Note: N.A. indicates lack of data. (Sources: Goskomstat Rossii, 1994a, 1995a, 1996b) 2 Table 2 Growth Rates of Industrial Output, in percent

Region 1985 1990 1991 1992 1993 1994 1995 North 5 0.1 -5 -10 -11 -17 -2 North-West 3 0.7 0.4 -17 -11 -33 -15 Central 4 0.8 -3 -23 -12 -27 -13 Volga-Vyatka 4 0.2 -0.6 -12 -6 -33 -11 Central Black Earth 5 1 -3 -12 -9 -25 -2 Volga 4 -0.2 -3 -12 -9 -25 -9 North Caucasus 2 2 -3 -20 -15 -30 -10 Ural 4 -1 -2 -17 -14 -23 -6

Western Siberia 4 -0.9 -4 -15 -12 -16 -6 Eastern Siberia 3 -2 -4 -14 -12 -17 -5 Far East 5 -2 -3 -15 -12 -14 -18 (Sources: Goskomstat Rossii, 1994a, 1995a, 1996b)

Table 3 0 The Net Migration Rate in Each Region（ /00）

Region 1980 1985 1992 1993 1994 1995 North 0.2 2.6 -7.5 -5.5 -6.8 -4.3 North-West 5.0 5.5 -0.5 0.9 5.9 5.0 Central 2.9 3.1 2 3.7 7.2 5.6

Volga-Vyatka -3.9 -1.9 2.6 3.2 6 3.7 Central Black Earth -0.8 -1.2 10.3 11.6 13 7.9 Volga -1.2 1.5 6.3 7.9 9.9 6.2 North Caucasus 2.3 -0.1 6 8.9 9.5 4.9 Ural -3.7 -2.2 1.8 2.1 6 3.6 Western Siberia 3.0 7.1 -0.5 1.8 7.4 3.3 Eastern Siberia -1.6 2.0 -3.9 -2.5 -0.8 0.4 Far East 1.0 -0.5 -18.9 -12.9 -19.2 -13.6 (Sources: Goskomstat Rossii, 1994a, 1995a, 1996b)

3 show apparently different characteristics after Russian economy, the effects of development disintegration. policies during the Soviet era would come to Striking economic deterioration is light. observed in the Far North regions, where investment priority was given during the Soviet 3.2 Factors affecting Regional Economic period. In addition, the Central economic region, Conditions which includes Moscow City, and the Ural 3.2.1 Industrial Structure in Each Region economic region, which had been the most As mentioned in the previous subsection, industrialized zone throughout the Soviet era, the largest industrial decline is observed in the are currently suffering from a serious industrial Central region (includes Moscow) and the decline. It is important to note that regions North-West region (includes Sankt-Petersburg), producing more sophisticated outputs tend to be which are recognized as the most advanced in a more vulnerable position (Dmitrieva, 1996, areas in Russia. West and East Siberia regions p.171). In other words, maximum rates of are in rather stabilized situations. This can be decline were recorded in the Central and the explained by the difference in industrial North-West regions, the well-developed regions structure in each region, and thus, the (Table 2). Keynesian approach can be applied to this As for regional utility level, a general phenomenon. trend can be seen in migration. As can be seen The North region or West and East from Table 3, large outmigration from the Far Siberia regions are abundant in natural East and the North regions, where excess labor resources. Regions specializing in the extraction supply was stimulated by the Soviet and processing of raw materials can easily find government, is observed (Kumo, 1997a). The demand for their outputs. On the contrary, the direction of population flows is the reverse of Central or the North-West regions’ that during the Soviet era. People now leave manufacturing industry is not competitive on the Far East or the North regions, where the world market. investment priority was given during the Soviet Regional specialization policy must have era, and migrate to the Central Black Earth or affected these aspects. Specialization itself has the Volga regions, that had been regarded as some positive effects on regional development. the sources of labor supply. However, it can not sustain long-run economic Almost all regions in Russia are now growth because of demand constraints. For experiencing serious economic problems under example, Toyota City in Japan can not be a transition. However, their conditions are metropolis because its growth depends on the diversified among regions. The causes of this automobile market only. The problem is that a phenomenon can be thought of as (1) decline in market demand for certain goods differences in basic industry (Keynesian or may stagnate regions specializing in production demand side approach) or (2) capital over of those goods. Pursuing economies of scale accumulation (classical or supply side and difficulties in administrating diversified approach) (Nakamura and Tabuchi, 1996, industry stimulated regional specialization Chap.11). Applying these theories to the policy. However, this has now become one of

4 Table 4 Correlation Coefficients: Industrial Growth and Industrial Structure/Export

Growth 1994 Growth 1995 Energy 0.41 0.25 Metal 0.27 0.44 Non-Ferrous 0.56 0.01NS Machinery -0.43 -0.24 Construction Materials -0.34 -0.48 Light Industry -0.32 -0.36 Food -0.31 -0.01NS Flour -0.45 -0.23 Export 1994 0.36 0.42 Export1995 0.44 0.43 Note: Export: in nominal prices; Other indicators: in percent; NS: not significant at 5% level. (Data Sources: Goskomstat Rossii, 1995a, 1996b)

Table 5 Size Distribution of Soviet Industrial Enterprises, by Fixed Assets

Fixed Assets, Number of Value Output Number of Total Fixed Power 1000 rub. Firms Workers Assets Consumption 1975 1983 1975 1983 1975 1983 1975 1983 1975 1983 -100 9.4 6.4 0.3 0.1 0.5 0.3 0.1 0.0 0.0 0.0 101-200 8.1 5.5 0.6 0.2 1.1 0.5 0.2 0.1 0.1 0.1 201-500 19.8 15.4 2.7 1.2 4.5 2.4 1.1 0.4 0.4 0.3 501-3000 38.4 36.6 17.2 9.7 18.9 12.9 8.3 4.4 4.1 2.3

3001-10000 15.3 20.4 21.6 17.2 20.3 17.3 13.5 9.6 7.4 5.2 10001-50000 7.1 11.9 27.0 27.7 29.4 29.0 23.5 20.8 19.9 15.0 50001- 1.9 3.8 30.6 43.9 25.3 37.6 53.3 64.7 68.1 77.1 Note: All figures; in percent. (Source: TsSU SSSR, 1985)

5 the obstacles to regional development. from official statistics, the enterprises in the Next, relation between industrial former Soviet Union were characterized by structure and industrial growth is examined. diminishing returns of capital (Table 5). Correlation coefficients between the growth In addition, applying neo classical growth rate of industrial outputs in each region and theory, one can predict that if the growth rate of percentage share of value output of each the capital-labor ratio was positive, then the industry are calculated. Correlation between capital-labor ratio would have negative industrial growth and export production also correlation with the growth rate of per capita should be examined. Results are shown in income (Solow, 1956). In other words, over Table 4. accumulation will lead to the subsequent Almost all coefficients are significant at decline in economic growth rates. In the case of 5% level. The percentage share of Machinery Russia, one can think that investment priority and Light industries, both of which are not regions during the Soviet period are now in a competitive in the world market, have negative more serious situation than other regions. effects on regional economic conditions. On Correlation coefficients between the the other hand, regions specializing on capital-labor ratio and economic conditions processing raw materials are comparatively in should be examined. The capital-labor ratio more favorable situations, as expected. It can differs from sector to sector, therefore this be observed that differences in basic industry paper concentrates on the analysis of industries. critically affect regional economic conditions Data on the total fixed capital in industry exist under transition. only for 1990. The objective is to analyze whether the capital-labor ratio in 1990 has 3.2.2 Intensive Capital Accumulation during negative correlation with economic conditions the Soviet Era in the subsequent years. Dividing the total What should be examined next is the fixed capital in industry by the number of effect of capital over accumulation on the laborers, the capital-labor ratio in 1990 is Russian regional economy during the Soviet obtained (Goskomstat Rossii, 1992a). era. Under the planned economy, economic Welfare transfers among regions are very development was also organized by the large in Russia (Dmitrieva, 1996, p.179), government. The central administration in the therefore per capita income itself does not former Soviet Union restrained consumption correspond with economic conditions in each and stimulated investment. However, it is region. Rather, this paper utilizes the migration generally believed that an economy that rate as a proxy for economic conditions. oversaves is dynamically inefficient (Barro, Usually, it is assumed that population reflects Sala-i-Martin, 1995). the productivity or the utility level of each Policy-induced industrial growth caused region in the field of regional economics intensive capital accumulation in many regions. (Armstrong and Taylor, 1985). However, Compared to the productivity of capital, one natural population growth rates show very can say that the capital-labor ratio was too high unusual figures because of social tensions in in the former Soviet Union. As can be seen Russia, therefore migration rates can reflect

6 Table 6 Correlation Matrix: the Capital/Labor Ratio in 1990 and Migration Rates in Each Year

1980 1985 1991 1992 1993 1994 1995 k 1980 1 1985 0.82* 1 1991 0.08 -0.07 1 1992 -0.15 -0.11 0.49* 1 1993 -0.10 -0.12 0.65* 0.93* 1 1994 -0.15 -0.20 0.66* 0.89* 0.95* 1 1995 -0.06 -0.07 0.67* 0.89* 0.96* 0.95* 1 k 0.72§ 0.80§ -0.23* -0.22* -0.24* -0.24* -0.23* 1 Note: *: significant at 5% level. § denotes that the correlation coefficients were significant but showed unexpected signs. (Sources: Goskomstat Rossii, 1992a, 1996a)

Table 7 Correlation Coefficients: Migration Rates and Various Factors in the 1980s and the 1990s

1980 1985 1992 1993 1994 1995

Per Capita Income +0.48 +0.52 -0.67§ -0.67§ -0.77§ -0.67§ Per Capita Federal Investment +0.69 +0.81 -0.37§ -0.26§ -0.27§ -0.36§

CPI N.A. N.A. -0.26 -0.62 -0.23 +0.16§ Per Capita Floor Space -0.06§ -0.16§ +0.64 +0.42 +0.19 -0.01§ Road Density -0.10§ -0.19§ +0.65 +0.54 +0.49 +0.45

Percentage of Losing Firms +0.16§ +0.20§ -0.48 -0.65 -0.68 -0.38 Dummy for the Far North regions 0.21§ 0.17§ -0.55 -0.69 -0.68 -0.67 Note : N.A. indicates lack of data.§implies that the coefficients showed unexpected signs. Factors are given one-year lag. Income and Investment: in rubles; CPI: in percent; Floor Space: in square meters; Road Density: in km/km2. Dummy: unity for regions that exist in the Arctic Circle and zero for the remainders. (Data Sources: Goskomstat Rossii, 1992b, 1993, 1994a-d, 1995a,b, 1996b,c)

7 regional economic conditions more clearly regions developed by the central government than total population growth rates. are experiencing serious economic In addition, correlation coefficients deterioration. between the capital-labor ratio in 1990 and In summary, it can be seen that migration rates in 1980 and in 1985 were also differences in accumulation rates among calculated for comparison. Investment regions during the Soviet period have certain priorities did not change throughout the 1980s, effects on the Russian regional economy under therefore regional distribution of the transition. Analyzing demand and supply side capital-labor ratio in 1990 does not differ much aspects, one can conclude that regional from that at the beginning of the 1980s. economic conditions in Russia reflect Simple correlation coefficients between inefficient development policies implemented the capital-labor ratio in 1990 and migration by the former Soviet government. rates in each year are calculated with the results As shown in Table 3, large outmigration shown in Table 6. from investment priority regions in the former All correlation coefficients between the Soviet Union is observed after disintegration. capital-labor ratio and migration rates in the Therefore, one can say that transition toward 1990s are significant at 5% level, and as can be the market economy corrects distortions caused expected, all of them show negative signs. by the inefficient development policies However, correlation coefficients are generally implemented during the Soviet era. Examining not high. factors affecting migration decision, people Economic conditions changed drastically flowed into less developed regions or frontier in 1991, when Russia showed signs of its regions when the Soviet government had decline. Extra-economic factors have powerful administrative power (Kumo, 1997a, 1997b). effects on economic conditions especially at After the Soviet Union broke up, however, the beginning of the transformational period. in-migration is observed in regions with more Because of these, the above results have to be favorable amenities as dense transportation, taken in with a grain of salt. large per capita floor space, and calm climate However, contrary to the 1990s, conditions (Table 7). Such a situation is most migration rates during the 1980s had positive evident in the Far North regions. Migration and powerful correlation with the capital-labor trends are in accordance with the serious ratio. Thus, it may be said that the situation industrial decline in the Far East region as well will be stabilized and transformation to the as the North Siberian areas. These can be market economy will enable one to apply regarded as the results of inefficient western theories to Russian economy. development policies implemented in the Although the correlation is not so strong, it can former Soviet Union. be said that the neo classical theory will be capable of explaining regional economic 4. Concluding Remarks conditions in Russia. People flowed out from This paper examined regional economy regions with the higher capital-labor ratio, in Russia under transition. It is clarified that indicating that former frontier economies or regional development policies implemented

8 during the Soviet era seriously affect regional suggestions and help. I am grateful to Prof. economy in Russia. When the Soviet Takatoshi Tabuchi, Prof. Shin-ichiro government had the administrative power, Tabata & Tomoko Tabata, Prof. Sadayoshi laborers and capital were redistributed into Ohtsu, Miss Maria Makabenta and Miss regions of lower productivity. After the Etsuko Nakayama for their encouragement collapse of the Soviet Union, large and help. I am also indebted to Prof. outmigration from frontier regions and serious Katsuhiro Miyamoto and anonymous referees economic deterioration in these industrialized for their helpful comments. regions were observed. The inefficient policy **) This study was partially supported by implemented during the Soviet period can be Grant in Aid of the Ministry of Education, regarded as one of the main causes of this Science and Culture in Japan (Urban/ phenomenon. Regional Economic Growth and Interregional The situation is still not stable. However, Factor Mobility) and the Suzukawa it can be said that the transition toward the Fellowship of Slavic Research Center at market economy will weaken the effects of Hokkaido University. political factors and enable one to apply +) This section is a revised version of my stylized facts in analyzing the Russian regional MA’s thesis, Jinkou Idou ni Taisuru Keizai economy. In addition, the role of central Yuh-in no Yuhkousei, Kyoto University, 1996, administration has been reduced, therefore Chapter 1, Section 1 (in Japanese). regional analysis will have a far more critical sense in the near future. References Before concluding, regional economic ・ Armstrong , H. and J. Taylor (1985), policies under transition should be mentioned. Regional Economics and Policy, Oxford, The central government channels budget Phillip Allan. revenues from the Central or the North-West ・Barro, R.J. and X. Sala-i-Martin (1995), regions, where serious industrial declines are Economic Growth, New York, McGraw-Hill. observed, to regions with more favorable ・Dmitrieva, O. (1996), Regional Development: situations such as Yakucha-Sakha, Tatarstan the USSR and After, London, UCL Press. and other autonomous republics (Dmitrieva, ・ Kumo, K. (1997a), Economic System 1996, p.176). The role of the government has Conversion and Migration Transition in Russia, lost its meaning in developing regional Review of Urban and Regional Development economy. Rather, reform strategies of regional Studies, vol.9, No.1, pp.20-36. administration must have more critical effects. ・－ (1997b), Studies on Interregional Such factors are ambiguous, therefore Migration in the Former Soviet Union and individually investigating each region is Russia: A Survey, Bulletin of the Association needed. for Comparative Economic Studies, vol.34, pp.72-80. Notes ・－ (1997c), Jinkou Idou ni taisuru Keizaiteki *) I acknowledge a special debt of gratitude to Yuh-in no Yuhkou-sei, Keizai- ronsou, Kyoto Prof. Masahisa Fujita for his generous University, vol.159, No.4, pp.45-70. (in

9 Japanese) Yezhegodnik. Moskva: Goskomstat Rossii. ・ Milovanov, E.V. (1994), Problemy ・― 1995b. Promyshlennost’ Rossii. Moskva: Osvoeniya Dal’nyego Vostoka, Goskomstat Rossii. Ekonomicheskaya Zhizn’ Dal’nyego Vostoka, ・― 1996a. Promyshlennost’ Rossii. Moskva: No.3, pp.37-41. (in Russian) Goskomstat Rossii. ・Nakamura, R. and T. Tabuchi (1996), Toshi ・― 1996b. Rossiyskiy Statisticheskiy to Chi-iki no Keizai-gaku, Yuh-hi-kaku. (in Yezhegodnik. Moskva: Goskomstat Rossii. Japanese) ・― 1996c. Finansy v Rossii. Moskva: ・Nakamura, T. (1985), Sorenpou no Chi-iki Goskomstat Rossii. Kaihatsu, Kokin-shoin. (in Japanese) ・TsSU SSSR, 1985. Narodnoe Khozyaystvo ・Ohtsu, S. (1996), Sovetskiy Rynok Truda, SSSR v 1984. Moskva: Finansy i Statistika. Moskva, Mysl’. (in Russian) ・Saushkin, Yu. G. (1967), Ekonomichaskaya Geografiya Sovetskogo Soyuza, Moskva, Izdatel’stvo Moskovskogo Universiteta. (in Russian) ・Solow, R.M. (1956), A Contribution to the Theory of Economic Growth. Quarterly Journal of Economics, vol.70, No.1, pp.65-94.

Data Sources (all in Russian) ・ Goskomstat Rossii, 1992a. Pokazateli Ekonomicheskogo Razvittsiya Respublik, Krayev, Oblastey Rossiiskoy Federatsii. Moskva: RosInformTsentr. ・― 1992b. Transport i Svyaz’ Rossiyskoy Federatsii. Moskva: RosInformTsentr. ・― 1993. Pokazateli Sotsial’nogo Razvittsiya Rossiiskoy Federatsii i ee Regionov. Moskva: RosInformTsentr. ・― 1994a. Rossiyskiy Statisticheskiy Yezhegodnik. Moskva: Goskomstat Rossii. ・― 1994b. Indeksy Tsen i Tarifov v Rossiyskoy Federatsii. Moskva: RosInformTsentr. ・― 1994c. Osnovnye Pokazateli Urovnya Zhizni Naseleniya. Moskva: RosInformTsentr. ・― 1994d. Kapital’noe Stroitel’stvo v Rossiyskoy Federatsii. Moskva: Goskomstat Rossii. ・― 1995a. Rossiyskiy Statisticheskiy

10 A Note on Regional Economy under Transition

Kazuhiro Kumo Research Fellow of the Japanese Society for the Promotion of Science Graduate School of Economics, Institute of Economic Research, Kyoto University, Yoshida, Sakyo-ku, Kyoto 606-01, Japan E-mail: [email protected] Tel: +81-030-489-3675

SUMMARY This paper examined regional economy in Russia under transition. It is clarified that regional development policies implemented during the Soviet era seriously affect regional economy in Russia. When the Soviet government had the administrative power, laborers and capital were redistributed into regions of lower productivity. After the collapse of the Soviet Union, large outmigration from frontier regions and serious economic deterioration in these industrialized regions were observed. The inefficient policy implemented during the Soviet period can be regarded as one of the main causes of this phenomenon.

Key words: Regional Economy, Development Policies, Over Accumulation, Basic Industry

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