CEU eTD Collection T M HE ARKET E FFECTS OF In partial fulfilment of the requirements for the degree of for thedegree oftherequirements In partialfulfilment Supervisor: Gabor Toka, Central European University European GaborToka,Central Supervisor: D Submitted to the Central European University European Central Submitted tothe EVELOPMENT Department of Political Science Political of Department Central European University European Central S A Doctoral Dissertation A Doctoral Doctor of Philosophy Doctor OFT Budapest, Hungary Aitalina Azarova Aitalina R June 2010 EGIONS B By UDGET : T HE C C ASE OF ONSTRAINTS ON R USSIAN CEU eTD Collection June 2010 Budapest Azarova Aitalina references. form the of bibliographical published byanother person,except whereappropriateis acknowledgment made in This is to confirm that the thesis contains no materials previously written and/or 2 STATEMENT in any institutions.other degrees for any other materials accepted no confirm is the contains thesis This to that 1 STATEMENT 2 CEU eTD Collection 3 To Anna,NicholasandJohn CEU eTD Collection Chapter 4: Determinants of Economic Growth: Evidence from Russian ...... 44 Regions Chapter 3: The Structure of Research...... 37 Chapter 2: Review of the relevant literature on creating functioning markets...... 18 Chapter 1: Introduction ...... 12 Acknowledgements...... 11 Table of Contents 4.9 ...... 77 Conclusions 4.8 Bayesian model averaging...... 68 4.7 Time series –cross section analysis...... 65 4.6 Evaluation of DMI in multivariate models...... 64 4.5 The effect of DMI in cross-regional ...... 55 models 4.4 Indicator of the development of market ...... 53 institutions 4.3 Analysis of the validity of measurements ...... 47 of market reform 4.2 Different ways of measuring ...... 45 market reform 4.1 Introduction ...... 44 3.3 Scope of the study (selected ...... 41 period) 3.2 Case selection and sources of data...... 40 3.1 Concept and analytical ...... 37 framework 2.7 Market-preserving federalism...... 34 2.6 Soft budget constraints...... 32 2.5 Fiscal decentralization ...... 27 Russian style 2.4 Political foundations of federalism Russian style...... 25 2.3 Federalism and Market...... 22 2.2. The market-making state...... 18 2.1...... 18 Introduction 1.2 Structure of the thesis...... 16 1.1 Motivation for the ...... 13 present research List ...... 9 of figures List of tables...... 8 List of ...... 7 abbreviations 4.5.2. Results of bi-variate regressions...... 59 4.5.1. Description of dependent variables...... 55 4 CEU eTD Collection Chapter 6: Determinants of Soft Budget Constraints...... 133 Chapter 5: Market Preserving Federalism ...... 79 and SBC 6.2 Control variables...... 139 ...... 134 6.1 SBC Predictors ...... 90 5.6 Data and results 5.5 De facto regional economic autonomy...... 87 5.3 The bargaining game theory approach...... 85 5.2 Theoretical framework: choice of independent ...... 81 variables 5.1 Introduction ...... 79 6.2.7 Economic need: development of social infrastructure...... 143 6.2.6 Economic need: low net profit...... 142 6.2.5 Economic need: share of federal property...... 141 6.2.4 Economic need: share of state in regional economy...... 141 6.2.3 Economic need: structural backwardness...... 140 6.2.2 Population size...... 140 6.2.1 Access to decision-making...... 139 6.1.5 Administrative ...... 139 status 6.1.4 Lobbying capacity of regional governments: inflated public employment...... 138 6.1.3 Lobbying capacity of regional government: vote 137 for left-wing parties in elections Duma Lobbying6.1.2 capacity of regional governments: vote Yeltsinagainst in presidential elections 6.1.1 Lobbying capacity of regional governments: early signing of ...... 134 bi-lateral treaties 5.6.7 Conclusion...... 129 5.6.6 Model diagnosis...... 124 5.6.5 Models specification and estimation results...... 110 5.6.4 Measurement of political variables in the sub-period 1998-2001...... 107 5.6.3 Measurement of SBC...... 102 5.6.2 Preconditions ...... 92 for SBC 5.6.1 Description of independent variables...... 90 ...... 136 5.6.6.1 Remedies to the misspecified model: deletion of influential ...... 125 points 5.6.5.4. Time-series analysis of the development of market institutions...... 121 5.6.5.3 Fitting multilevel structure...... 118 5.6.5.2 Linear regression model ...... 115 with interactions 5.6.5.1 Bi-variate and multivariate models...... 112 5.6.2.2 Russian regions in 1996: Were these preconditions in place?...... 96 5.6.2.1 Theoretical preconditions...... 92 5 CEU eTD Collection Appendix...... 189 Bibliography...... 171 Chapter 7: Conclusion...... 166 6.6 Conclusion...... 163 ...... 162 6.5 Discussion 6.4 Model diagnostics...... 152 6.3 Results of the regression ...... 144 analysis 6.4.3 Remedies to the misspecified model...... 155 6.4.2 Homoscedasticity...... 154 6.4.1 Normality ...... 152 of errors 6.4.3.3 Removal of high-leverage points...... 158 6.4.3.2 Variable ...... 155 transformation 6.4.3.1 Introduction of an additional hierarchical level...... 155 6 CEU eTD Collection SME Small and Medium Size Enterprises Size Small andMedium SME BudgetSBC SoftConstraints RSPP Russian Union of Industrialists and Entrepreneurs Rosstat the Federal State Statistic Service standard errors Panel-corrected PCSE IHS The risk rating of the region, developed by the Vienna Institute for Advanced Studies HBS HardConstraints Budget GRP Gross Regional Product DomesticGDP Gross Product Goskomstat the Russian Federation’s State Committee of Statistics FIG Financial Groups Investment FFSR Federal fundfor support toregions DMI Development of Market Institutions CSO Central Organization Selling AO Autonomous Okrug Sakha Rossii Almazy ALROSA AIC Akaike Information Criterion List ofabbreviations 7 CEU eTD Collection al . What Explains Softer Budget Constraints in Russian Table Regions? 6.4 Full and Minimal What Explains Softer Budget Constraints in Table 6.3 Russian Regions? Development Infrastructure of for Social Index the Weights 6.2 Table Official Sharing of Rates fromRevenue Taxes Shareand of Taxes in Budget Table 6.1 Estimates of Repeated Measurements Models with Political Orientation Variables. Table 5.5 Estimates of Repeated Measurements Models. Table 5.4 Comparative Statistics for Samples with and without Ingushetia (Models for Table Year 5.3 Single-level Model Versus Multi-Level Model (Models for Table Year 5.2 1996) What Explains the Development of Market Institutions? Table (Model for5.1 Year 1996) Summary Table for Tablethe Nine4.5 Iterations of BMA for the Determinant of Regional Regression EstimatesTable for4.4 the Bi-variate models, Regressing to Different Linear Regression Coefficients of Development of Market Table Institutions,4.3 Table 4.2 Dependence of onMarketInvestments Institutions in Russian Regions Dependence of Real GRP and Industrial on Output the Development of Market Table 4.1 Cross-regional Differences in Market-Reform Indices Table 1.1 tables List of Adequate ModelsAdequate Revenues 1996) Performance Economic Performance of Economic Measurements Investments, and Initial for theperiodEndowments, 1996-2001 Institutions in Russian Regions 8 CEU eTD Collection iue61 Dependence of the Soft Budget Constraints Index on Figure the Growth 6.1 of Public Residuals versus ValuesFitted for Figure 5.2 Linearthe Regression Adequate (Minimal for Effects Interaction Linear the Model Regression Figure 5.1 Image plotfor Figure GRPthe 4.6 percapita for years 1996-1998 FigureTime-Series 4.5 Plots for the Different Levels of Development of Market Institutions. Time-Series Plots Figurefor 4.4 the Different Levels of Development of Market Institutions. Relationship between Developmentthe Figure of 4.3 Market institutions and Industrial Relationship between GRPthe Figure and4.2 Investment Minus forSavings Russian RegionalGross Growth andProduct Figure 4.1 Growth of Industrial of Production Russia’s List of figures Share of the Budgets in Table the 6.9 Socially ExpendituresOriented (1998-2001) Decline of the TableAssociation 6.8 between the SBC and Public Employment Interaction Effects Between Growth of Public andEmployment Four Other Table 6.7 Regression Diagnostic Estimates for Six Different Model Specifications (Sample Table 6.6 Regression Diagnostic Estimates for Six Different Model Specifications Table 6.5 Employmentfor theRussia’s Regions, 1996 Term) with Interaction Model VariableDependent –Investments Minus Savings perCapita VariableDependent –GRPPerCapita forGrowth Differentgroups of Regions for 2000and 2001 Regions for 1996Year regions in 1996 (1996=100) 2001 Relativeto Interactions) (Two-way Variables without Ingushetia) 9 CEU eTD Collection FigureInteraction 6.9 Effects between Employment and Voting for Yeltsin in Presidential FigureInteraction 6.8 Effects between Employment and Vote for Leftist Parties Interaction Effects between Employment Status andAdministrative Figure 6.7 Diagnostic Plots for Identifying Figure Influential 6.6 Points Heteroscedasticity Diagnostics for the Four Different Model Specification Figure 6.5 Plot for the Residuals vs. Fitted values for the Figure Minimal 6.4 Adequate Model (Linear Quantile-comparison forPlot the Distribution of StudentizedFigure 6.3 Residuals from the Non-parametric Density Estimates for the Distribution Figure of 6.2 Studentized Residuals in Elections Six Predictors) with Regression Model Minimal Adequate Six with Regression (Linear Predictors) Model Minimal the with Adequate Regression (Linear Six Predictors) 10 CEU eTD Collection him. to much goes credit is this thesis extentthat friendship. the presentable uncompromising To whom I spentmany hours discussing theproject andgave who me greatmoral support and Columbiasupervisorat University. My special gotomythanks husband JohnHarbord with Frye, of Director Harriman for hisInstitute, kindhospitality helpfuland asmywork introducingUniversity forme to challengesthe rewards and of methods,quantitative and Tim editorialthorough Iwouldlikework. thank also Rudas to from Tomas Central European I am indebted toGabor Tokafor his especiallyunfailing support, his detailed comments and I wish to thank all friends andme colleagues whohelped during work the on this dissertation. A CKNOWLEDGEMENTS 11 CEU eTD Collection production costs. This remnant of This production remnant of oldthe pricescosts. freesystem, withliberated combined and for some types of production were still heavily subsidized by securing state, the them low prices beyond reasonable limits and gainimmense monopoly Atrents. the sameinputs time, freeregulations securing entry marketthe inducedto many producers monopolist to raise simultaneousand anti-monopoly regulation personal liberalization without Price gain. installed a situation of partially created transition Russian The indeed any economic processes. of these marketcomplete or all, to market-consistent sufficiently notitwas sametime the at decentralization, institutions,and privatization, liberalization, price including pillars, its all with dramatically and swiftly tolaunch thereform enough was whilewas market-oriented state the The secondreason that which was exploited‘state capture’ (Desai et al. 2003, Hellman et al. 2000). resist to inability of a weakstate of the result werethe institutions economic ill-designed andby powerful development economic paceof theslow benefits, for private in return enactment legislative economic powerful actors to ‘privatize’ As state. the managers important enterprisesof influenced the actors legacyor power, suchas the executive which enable of state, hyper-centralized communism, for of the capacity for weakinstitutional havebeenmentioned their Several reasons capture. to resist First, while the Russian state was strong enough to support a common market, it was too weak fourreasons. farby from for nineties end was of perfect the transformations of these emerged asaresult Russian system that economic the makers, policy and by both academics werepraised transformations as market aswell scope of democratic less consistentand smooth inthan countriesother of CEE. While the extraordinary speed and in been has ofmarketization Russia process -particularly the qualities Russia’s democratic democracy some- though may Shleifer anddispute Treisman’s optimistic assessmentof have Treisman ‘anormal(2005), become itcountry’ totheextentis amiddle-income that of in may, While alessShleifer and Russia words the rosy picture. presents Federation market, free and Russian the in of the establishment the both democratization successes while many of countries of the and can Central Eastern inEurope be described broad terms as years on, Today, twenty and markets. free democracy victory of the Warof heralded Cold about theend brought in states 1989 that and communist collapse of socialistThe domino-like C HAPTER 1: 12 I NTRODUCTION CEU eTD Collection of these groups from misusing the private sphere of the market to redistribute wealth and opportunities. and wealth redistribute to market the of sphere private the misusing from groups these of dramatically changed from preventionof particularistic groups from misusing the public sphere to the prevention 2 crisis. 1998 October the after transformed orwere declined gradually activities their 1999; primarily financial industrial groups (FIGs), whichemerged in1994 and were active during yearsthe 1994- impediment to their activities. When talking about financial-industrial conglomerates Hellman has in mind 233). They viewed thedevelopment of market institutions as detrimental to their privileged position and an especially after theloans-for-shares auctions, had interests at odds with thoseand ofmarket-oriented actors (1998,process privatisation the from emerging conglomerates, financial-industrial large ofthe owners and state, its legal the of system and viability the the institutional weakening infrastructure into efforts supportingtheir all put the market.trade Hellman foreign states and thatof prices the managers liberalisation privatisation, of serious obstacle to the entrenchment of market institutions. Those who gained significantlya constituted during behaviour the first winners’ the yearsnot, than often More market. ofaliberal development the for incentives no 1 (Bruszt2001). in power economic asymmetries of misuse prevent to inorder actors economic among relations power balancing businesses,labor force and minor shareholders. In other words it did not take on the role of re- the demandsThe third in quartetthe of reasons is that Russianthe state, whileit was responsive enough to of powerful production were not market-driven, salesweremade according toworldmarketprices. economic an gaveforeign producers the trade, profitfrom opportunity to this duality: while costs the of actors, failed to be accountable to consumers, small by descriptive statistics. by descriptive loss-makingand enterprises. sheltering This indiversity can experience be illustrated regional andgoods free labor,movement reforms prices controlling capitals, barriersto byerecting of heavily in developmentthe of business environmentand infrastructure, resistedothers dramatically uneven: while some were regional market-orientedgovernments andinvested Even more marketization puzzling wasthefactthat regions degreeof the the was across 1.1 Motivation for thepresent research rights. of economic irrevocability the regarding andowners shareholders samethe time it sufficientlywas not firm tocreate stableenough onthe expectations part of that emergedchanging asaninevitableof feature circumstances atthe 2000), transition (Frye As Bruszt (2001) notes, since the times of the New Deal era, the state’s role in creating/preserving markets was As Hellman(1998) persuasively argues, not only did the losers from the transitionto a market economy have 2 itwhilewas flexiblelast,And respond to the enoughto 13 1 CEU eTD Collection 139). 3 at length in Section 2.3). The level of state regulation of food prices shows the most state regulation of vary prices between 1 and 85(the methodology of iscalculation discussed and with production prices betweenregulated varies 3.2and70 per cent, services level the of regions: share the while among of a strikingdiversity demonstrate price regulation state of variation: 23and42forindicators smallrespectively.of Both large-scale privatization and in higher is of the much thickercoefficient have which the reflected tails, value privatization mean the large-scale around fordensely of distribution 78, howeverthe while distributed are more small-scale for privatization The values respectively. scale privatization large-scale maximumscale privatization respectively, the and valueof 100 and 90percent for small and show a similar pattern of variation, with a minimum level of 20.3 and 25for small large-and sharethe of price subsidized was Both high measurementsas as for33 kopeks. privatization inbut Samarskaya (again)oblast they subsidized while only 1.5 kopeks, in AO Nenetskii the a regional subsidizedgovernment about 10 kopeks in each ruble of agricultural production, is Onaverage 61percent. of coefficientvariation more: the even varies subsidies agricultural The shareof AO and only forin threeper cent. four Evenkiiskii percent, the they accounted expenditures inmore than one third of all (27regions),regions while inSamarskaya oblast for more than industrial cent: subsidiesfor cent account 15 per budgetary of enterprises the The industrial subsidies cent. of 40per exceeding variation shows a sizablethe level of variation,small-scale privatization show a very high degree of variation, with the coefficient withAll by except variables deviation the asmean. the divided standard the variation calculated a coefficient variable:the andacoefficient standarddeviation, of variation, measure dimensionless of of variation in variation of estimates two and variable, the of values minimum and maximum of the sample, 41 per The columns in in described and half large-scale 2.3, the level of nineties.Section first privatization the of denote,1996, the level state of regulation food of prices in 1996 measuredfollowing method, the respectively, as of privatization 1 July share1996, the of andproduction with services prices in regulated share of subsidies in asagricultural 100 rublesof of levelproduce 1995, the small-scale theof mean amongof Russian regions: the share ofindustrial subsidies in budget expenditures in 1995, the the regionTable 1.1below presents figures thedegree for the ofimplementation market of reform in the sample, the size of the Data for the first five variables is taken from Lavrov et al. (1997), for the sixth variable from Klimanov (2000, Klimanov from variable sixth the for (1997), al. et Lavrov from taken is variables five first the for Data 14 3 CEU eTD Collection privatization Levelof large scale food prices in 1996, points of regulation of state Level in 1996 services with regulated prices Share of production and privatization at 1.07.96 Level of small scale rub in 100 rub of produce in1995, subsidies agricultural of Share budget expenditures in 1995 Share of industrial subsidies in (Weingast 1995, 1997,(Weingast 1995, Montinola, ThisWeingast Qian, 1995). and has theoretical framework of regionalthe Idrawextensivelygovernments, the theory on marketpreserving of federalism incentives some for sets external of created market-inducing settings institutional federational how explaining In in. themselves found governments regional the settings external environment, or not as the case may be. In order to account for these differences I examine the invest into market developmentthe of institutions in andimprovetheir territories the business led to factors government that regional research istoidentify The goal of those present the and government? effective market-oriented creating of conditions the are what above: mentioned question general more marketrobust institutions in some regions butnot Thisothers? question is embedded in the duringfirstperformances decade different formation the of transition. Whatinfluencedthe of showed inRussia economies is regional why beinvestigated to secondpuzzle Thus, the Table 1.1. Cross-regional Differences inMarket-Reform Indices only 15 percent. quarters of wereregulated byhisprices on administration, while averagethe share was this three almost Stroev Egor governor Communist by led oblast, Orlovskaya In government. differentregions. Moreinformative is secondthe indicator, for pricesfixed by regional the reachingmaximum 85 points for Khabarovskii andkrai, minimum of one pointin thirteen variability: while the mean is 20 points, the distribution has a very long right hand tail, 49.9 19.5 15.3 78.2 9.74 12.8 Mean 20.9 18.4 8.77 18.6 5.98 5.3 Deviation Standard 15 25 1 3.2 20.3 1.5 0.6 Min. 90 85 69.1 100 32.9 26.8 Max. 42 94 57 23 61 41 Variation,% of Coefficient 79 77 77 78 80 88 N CEU eTD Collection preserving federalism. robustness of the empirical results which came out as consistent with the theory of market-Different model testing andvarioustechniques specifications willbe toprove employed the toinvestgovernments in developmentthe market-friendly of institutions or avoidto doing so. regional stimulated that for theenvironment foundation analyze political isto the chapter conduct market-orientedRussian regions, Iaddressquestion whatthe of conditions madesome regional governments policies to governments develop marketinstitutions in localities. Investigating afull sample of the in the interestsChapter five concentrates identifyingon thespecific conditions thatmotivated regional of economic development.transformation. market the measuring My task in initial withendowment natural and human resources, butalsothis against alternative methods of not only conventionally against variables used for explaining suchas economic performance, variable of development of marketinstitutions as a proxy. Its explanatory power will be tested the with region, inthe institutions market the of stability the hereto is, drawn attention measures, such as the level of privatization, price liberalization, and the level of subsidization, of reform indicators observable easily instead factof that liesinemploying chapter the the of novelty The case. the indeed is this that show will and growth economic for important four willChapter market developmentexamine the empirically of institutionswhether is hypotheses. main three the time period and the analytical framework for the study. This is followed by selected the for the justification the formulation to date, subject the on out carried research the of backdrop of the against objective research the out lays chapter third The study. the for framework will inconstraints, budget be critically order toidentify assessed and gaps the theoretical the groups of studies, namely ofmarketmakingthose studies states, offederalism andof soft The next, second provides for chapter theoretical background study.the The broad three 1.2 Structure ofthethesis of market development at a sub-national level. for studies comparative atnational level, butoffers asound for theory explaining differences developed innascent and federations. importantly, More not only it provides analytical tools in both markets for foundations political the explains it in that power analytical a profound 16 CEU eTD Collection The final chapter seven,chapter, concludes. of bargaining federal between the game and the center sub-national governments. number of publicI will enterprises. investigation of put the this puzzlewithin frameworkthe explored puzzle of expanding publicemployment against the backdrop of a drastic dropin the rarely tothe willbedevoted attention Special of disruption. political threat greater the of Russian fiscal theory federalism, Treisman’s (1996),which greater associates transfers to influential theories most testof is of the one The core chapter of the the beSBC will offered. asubstantial occupies six. chapter the measuringpart of of Anovelmethod concept of the The study of andorigins preconditions of emergencethe of fiscalthis federal institution of constraints. budget softthe determinants investigation of to turns thesis the regions,the the the across development market of patterns the of explanations of study a thorough After 17 CEU eTD Collection 1990, NorthandWeingast,1989). The approach other itclaimsis that so much not the and intensiveconstitutional has economic attention performance provisions attracted (North 2000, etal. Iaryczower Particularly,Bruszt between study 2000). the of relationships the market requiresmarket aspecific Several hold providingscholars that secureandpredictable political the for foundations capture the state to state the for benevolent pre-conditions the created state of features the These andfederalism. of executives, accountability of powers, separation such as Later, weredelineated elements actors. of economic from groups often reform-averse 1997, 1998).Hence, emphasisthe was placed on protectionthe of economic policy making (possible) the despite of some resistance the 1998,(Bruszt andStark Hellman societal groups reforms market forward persistently andcomprehensibly push to newly marketizing states marketsThe dominant ininvestigatingdebate in the centered abilitynineties on the early of 2.2. Themarket-making state firms. than higher analysis of a level to constraints budget applied which federalism market-preserving work of on Weingast ground-breaking significantly,due tothe especially focusesgroup on study the of budgetconstraints.soft Thelast two bodies overlap Thefinal theories. competition jurisdictional and theories, decentralization fiscal federalism, making secondthe states; groupis made up of studiesfederalism, of including theories of market literature. studiesof encompasses Thefirstbodies of overlapping together three toinvestigateIn order the puzzlelaid in out introduction the thesisthe onandbrings draws 2.1. Introduction of of stateby the any (Bruszt actors these of 2001, 5). C HAPTER credibly commit 2: R EVIEW OF THE RELEVANTLITERATURE ON CREATING form ofform governance structure to preserving the market, andmarket,to preserving at same the the the time prevented FUNCTIONING MARKETS co-ordination 18 (Williamson 1985, 1996,North 1990, among economic actors which forced among actors economic CEU eTD Collection 5 transitioncountries, fordetailed classification see Cameron Ross (2000). in of democracy success tothe preconditions of saliency on the concentrating approaches, deterministic 4 as political the structure governance which therestructuring is about enough stage the first of isnot forrepresentation’ (2001, 14), in He step state. creating that‘democratization amarket-preserving notes, of political regime, election The periods). process of democratization, in hisview,is a necessary but notsufficient (between interests of this diversity policies state ensurethat accommodate that mechanisms of and creation onthe hand,the period); other (election interests a variety of to responsive are that of institutions modesandrepresentation of i.e. formation the tothestate, citizens from of representation process the hand, one as on astate such of emergence forthe sources number of diverse interests (Bruszt2001, 12). Bruszt conceptualizes twoconstitutional biggest the in programs their accommodate to representation, produce virtuous to forces them motives, otherwise, Regardlessor virtuous political of true the competition of politicians, be from (liberal of uphelduniversal rights them to state) defends aspect and corruption. The market-preserving 1997 in Russia. based on findingsthe from his study of bodies self-governing of market equities inthe 1994- for power, struggle market-friendly tothe bureaucratic thepromotionpolicies connects of He markets. devolve infavor of expansion powers bureaucrats the when state conditions institutions market and by link between of competition bureaucratic development delineating inmarket mostthe effective way. Frye(2000)contributes to this by debate investigating the of emergence sustainability the a well-functioning facilitate and andmixed electoral systems of different notions of public good. A bicameral parliamentary system, coalition governments, and representation definition of the portfolio diversify the balances, system checks and the of and of suchpowers separation of the as the state, Heclaimsthat thecharacteristics markets. in debate which isframed functioning a broader of research on conditions creating the analyzesBruszt (2001) thefeatures are of constitutionssupportive thatfor making, market of state. in the makingmarket characteristics salient the most In this thesis the concept of the market-preserving state and market-making state are used interchangeably. used are state market-making and state market-preserving of the concept the thesis this In to opposed as agency human of role independent the recognising theories the on draws analysis present The 5 state is a state with a structure of ‘virtuous representation’ that allows that representation’ of ‘virtuous with astructure is state astate relationships amonglevels 19 4 of government that is the that government of CEU eTD Collection earlier benefited enormously from partial enforcement of property the right. establishmentrobust the on dependent became in 1996, economy the of half the about controlling oligarchs, of(2009). the market growth. and The ownersinstitution itself,privatization butthatproper protection of property rights thatis a crucial for investment of the Thesevenof propertyliterature most influential redistribution. right on theprotection, is and ineconomic is growth income inadequate dividend marketization only present protection banks, on liberalization impact the market of isweak, institutions economic of capacity institutional theeven of first propertywheninstitutions.market Popov’s (2000) study economicon performance demonstrated if that the generationthey rights economic years lay declineprovide inthe early in ofinability to thegovernment’s transition had emphasizesof of Shleifer Russian the state. the difficulties (1997)arguesthat Russia faced infighting Russian inherited from Sovietthe newly or times, have emerged) frequently in been aired literature the that it economicrobust institutions of marketandthe inability its unravel badto institutions (either is not maintain andpromote to of state the failure the the Concernsregarding state. market-making level is ofmarket theme stability the in institutions arecurrent literature on political of the the of transition – necessary, but not sufficientfor the stable growth of economies. The emphasis of crucial were stabilization, elements macroeconomic on and monetization, privatization, property (Gurievrights” and Sonin 2009) stronger for lobby to started and investment to rent-seeking from switched they growth), economic resumed to (due rent-seeking the limiting to benefits huge the saw and ownership they consolidated Once owners. 7 of the property rights, which wastes the resources. protection (Sonin 2003,717) private the to turn to have actors economic the second, production, and of accumulation paths optimal sub- follow to actors economic the forces and incentives the distorts expropriation of threat the First, growth. 6 The magnitude reforms of policy of accomplishment state. the within representation markets. It isrobust sufficientonly if followed by secondstage restructuringthe of of the “[O]ligarchs initially benefitedfrom rent-seeking asthey diluted the stakes of the government outside and There are two main mechanisms that the lack of institutions protectiong property rights hinderthe economic 6 lightby andSonin illustrativemost brought OneGuriev to the of caseswas 20 per se , such as liberalization, as such , 7 CEU eTD Collection well as inputensuring that markets operatesmoothly and effectively. ensure safe that institutions protection and rights,and transfer of as transparent ownership from preventpowerful of groups interest process the capturing public policymaking, and enforcementimpartial the for allows that system judicial developed has a itif market-oriented, considered of contractsfrom re-distributional and are that produced by such behavior areproperly secured. Actors gain much lower payoffs benefits and propertyfeasible, institutionally are efforts productive behavior, such favors incentives rights, relianceactivities and a system moreproductivepursue costly than market individual behavior, andbasedon actors to on than theof safeguardsinstitutional infrastructure makes any redistributingextra-market rule behavior on partthe of productivewhere equilibrium, the reach to oriented are choices ofpolicy whose government a words, law.other or ones.checksWheremaintainstrong enough lawto and andmarketorder, of rule atthe same In self-limited. time Inthatgood practical Based upon Bruszt’s (2000)and Weingast’s (1995)definitions,behavioritis agovernment that is terms an toformulate helps predominates, a regionThe analysis of in on market-enablingthe work previous state instrumental inalso itthat can be the(Frye andShleifer, 1997). structure shouldbe soastolimit sufficiently tied its wealth from expropriate agents ability to private of social interventions’arbitrary state (Bruszt2001,7). In words,other thestate’s ‘grabbing hand’ expectation that ‘they can safely profitfrom rational enterprise… and they did not have to fear rights for these on toencroach not enough sameat the weak but time in afair way, conflicts itsresolve own benefit evenhandedly preserve markets, freedoms, secureproperty economic anduphold rights, (Weingasteconomic And group. second, should state the enoughbe strong to be able constitute and to 1993), of andimmuneinterests competitors, by from private conflicting capture any powerful so that anyas economicto avoid so them from enough far time same at the but arbitrary interests, of diversity to enough be close should actor distribution. can have inisFirst,respects. thestate is two struck onewhereastableequilibrium enabling state a Thestable state market- the short, In in introduction. the were delineated should wasprone to that Russian state stay immune features even that of theimbalances the reveals out specific literature states In sum, the from the intensity of often operational definition of of phenomenon market-enabling state. the the 21 CEU eTD Collection 1998, 1999) 1998, argue stronglydecentralization is that a necessary for establishing element stable Russian Students predatory the Solnick (Solnick federalismof 1998). 1999, center (Stepan by constrains transgression between sinceregions (Weingast 1995), markets cooperation with power in regions establish of centers market alternative reforms: for security thepolitical provides decentralization forces thatsocieties like whichexperience Russia, from atransition democracy,authoritarianism to resist the attemptsimproves quality and quantity of service delivery andinducesinnovation. in Moreover, of the central By menu the tailoring of public servicesauthority to local the population’s decentralization demands, to interferebenefits from decentralized provision of goodsare public presenteven if isnotthis he case. Inter-jurisdictional competition only given labor, mobility capitalworks of butand goods, the and ineffectiveout (Qian enterprises Roland1998). allocationprovides for more effective resource by for bailingincentives drastically reducing provision of and assortment1972, public1956).Competition Tiebout services (Oates optimal an reach to governments regional forces labor mobile for Competition from funds byincreasingembezzling the toofficials cost and (Brennan Buchanan 1980). capital regionalencourages officials toprovide public services efficiently and prevents them production (Tiebout’s model households’of ‘voting with theirfeet’). competition Thus, for competition are only valid in case the of mobilesufficiently households and factors of of benefits The citizens. of interests the with align to governments regional stimulate jurisdictional and federalism, of competition, The twobasic decentralization features on government(Tiebout 1956,Weingast 1997). 1995, possibilities durability forlimits the creates of strong inthefederal institutionalized settings level, and central between of thedivision powers regional since market-enabling, most bemarkets. the to for institutionsareconsidered is itFederal supportive therefore particularly it highly sensitive diversity tothe of representation of publicform good of andgovernment There ispreserve markets. astable consensus that divisionthe inof powers federalism makes economy, to federalism we move question marketof tothe capability institutional the of From moregeneral the query as to preferablethe design of political institutions facilitating 2.3 Federalism and Market 22 8 assignment of CEU eTD Collection centralized economy can provide (Oates, 1999) (Oates, provide can economy centralized 8 (Weingast 1995,Treisman 1999).Federalism prevents distortional into intrusion political need self-enforcing limits deterringon state, the from itintervention upon their rights All economic actors, in order actors. by other notare tolerated to have stable of transgressions general madethe law by towards a sovereign (making privileges actor), one expectationsthat in way, so a competitive but be co-operative should they of their strategies: character about the stabilitygame. a Secondappeasement assumption of requires particular nature regions’ interaction and of their rights,sovereign,of markets. A multiplicity for foundations political the asmechanism institutions oraconstitution acoordinating serves of actorsand is the firsttransgressionsonly core assumption of it creates degree, a co-ordination ifproblem, notcircumvented, which, leadsthis tounrestrained one game. If therecitizen is ordinationone problem. policingon If the(incitizens’ enforcing part limits the areWeingast’sbeliefs one of the implications of the ‘rulestate of law’ scenario. on The problemthe of of of problemthe of sustainabilitythe limitsself-enforcingof ongovernment. These self- boundaries (orthe sovereign, of effectively framed as or‘appeasement’‘transgression’ gamethe models,sovereign. and addressedin terms state terms),differ canbe limitbehavior mechanisms that The welfare. and citizens’ ultimately, markets to ina significant his on concentrate design institutionsthe that inducesub-nationalof topromote terms) governments Inthe this isgame1998) emphasize agencythe problems between the citizenry and government officials and viewed context, transformsBrennan and Buchanan 1980, Inman 1997,Oates 2005, and Rubinfield Qian byand Roland Weingast followers of federalism second the of generation theory andeconomic Weingast 1997, (Qian strict as basicallymaximizing behavior, whichnotexclude does benefiting from givenrents, chance.Thethe utility- intofollow officials relianceregional that assumed and government sub-national of box black the a anco- and federalism, governments, of theories secondgeneration the openedup of economic which on regional of part the on behavior benevolent formal assumed which federalism, of theories an Accordingargument(1997), thereis to proposed byWeingast earlierbetween adistinction diversity of Russia’s regions, and the country’s sheer size. democracy marketeconomy and in the country, given cultural,the structural and demographic Orat least increase citizen’s welfare above that level thatis likely to arise from more uniform level, that a 23 CEU eTD Collection and basic infrastructure or encourage transfer of negative externalities to neighboring to regions negative orencourage transfer externalities of andbasic infrastructure cases. some in forms for Competition capital may inducedistortional in a‘race-to-the-bottom’ provisionthe of public welfare take to proven been has competition jurisdictional Even competition by grantedprivileges to them by regional the (Solnickauthorities 2000a). regional position fair from because selected disadvantaged were ‘sheltered’ enterprises in a createdasituation themselves found companies ‘outsider’ regions,from or where other hindered because hostregional directly either governments entry the of restricted business cooperation free of regions other and The interstate was entrepreneurial activity ‘spillover’ to erected barriersindividual totheinterstate constituents mobility laborof goods, andcapital. sub-unitsdifferent led topartial fragmentation Russianthe federal as market, common motives government’s and 2000).preferences (Stepan Thediversity marketregulationsof in regional with in accordance regulations adopt to right the with regions, constituent issue some over areasto of adelegation authority requires levels the of government between federations inherently lacks some power dimensions, since thedistribution of authority in The central government federalism clear-cut. arenot of advantages the Nevertheless, environment of ‘rulethe law’,as Kahn of or it,puts of under‘government law’. administrativeit acts(Kahnestablish was overwhelmingly 2002, 58-59), to the difficult judicial independence, or of protectingindividual through rights judicialthe of review Since wasnoRussia there market. in style common lawto preserve of pre-transition tradition Russian federalism was of failure reasons the core the of of the one order and constitutional independent These courts. my arguments support study in thethat lack oflaw enforcement constitutional supportthat such order, as grass roots traditions, central authority, or of federal corrosion Weingast(1995) examinescentral state). regulations, conditions various weak rule of law leads to sub-optimal outcomes (covert protection of regional firms for capital in competition caseof a the intense shows how interstate work againstand Treisman’s andenforcement constitutional is order crucial thefederalismfor is topreserve markets. Cai and Treisman (2004)and Weingast pursue (1995) key the argument central that law Cai federal for1977, Linz provides a cohesion state. 1997) loyalties’ ‘overarching (Lijphart and on federation.primary value sharedconsensus the concept of presence of The 1989) facilitate its operational efficiency.important moreis Even acommitment tothe Filipov etal. 2004)andtheinstitutions of inter-governmental functional co-operation (Watts Extra-constitutional institutional suchasstructures, a national system party (Riker 1964, isit forthereason capture for markets that anysub-national to hard group governments. 24 CEU eTD Collection project that was responsible for the inability to reachinability success. forthe to was responsible that project itthat was thedramatic failuretofind value regarding aconsensus inherent the of federal the suppresser of indeterminate inalienable 80).Onecan vague rights"(2000, agree with Kahn from some freedom individuality, "separateness, emphasized of terms these content autonomy" "greater and "sovereignty", of "self-determination", concepts the and co-operation: wereconsensus catch-wordsstages of Russian federal-building, the political discourse suggests separation than rather in the innote It is that to early the 80). important for is success"(2000, critical federation forming a political andbasisfor value inherent theconsensuson the federal state, "inawould-be federalism: discourse. of federation.As itJeff Kahn issuggests, ideaa basic overarching all theories different of Asvalue the on consensus shared the Kahn but polity, federal of cohesion the underpins which correctlypowers of division central-regional of principle the not is it that though, noting, is worth It pointsperiphery. out, to Linz, generally and vaguelydefined tonegotiation are center and between the subject the differentiation with the same demos" (Linz 1997, 39). Thefundamental principles that of federalism, for accordingcompensate solidarity… of that like principles complementary federal tofederal loyalties' salience of as"overarching "Only allegiances allegiance: in Linz emphasizes the of conceptualizeaframework 'state-nation'. federalism the (1996) components in upper the chamber(Lijphart 1984). constitution, right of constituents to amend the federal constitution, stronger representations of the smaller 9 federalism of concept isto the central of powers division of central-regional which itmakes thefinal (1975,101).By decision” definitionthis he implies principle the that inand acentral such away each government that kind has of on somegovernment activities in organization which divided of activities the are government between regional governments is apolitical Riker: of toisthat "Federalism most cited andreferred one often the Perhaps of definitions concept. isthe with There federalism, awide of different of theories range 2.4 Political foundations offederalism Russian style 1992). or centralizationcentral regulation government of provision the of (Rivlin controversial goods (Gordon 1982, Oates and Schwab 1988).These distortions arebest avoided with helpthe of Lijphart identifies five more principles of federalism:the bicameralism,decentralised government,written 25 9 . Linz and Stepan CEU eTD Collection other way around" ( formed onprinciple a a long and agonising redistributionof authority powersand from top the down, neverthe been have systems political democratic world, the Throughout necessary. deem they as much as levels upper the give and want they as power much as may take governments local that said been it has nowhere and principle", 10 which afterwards not meanstates, does they independentdeclared sovereignty, this became truly their that would come togetherapplicable Russian tothe case. Thoughduringperiod of the 1990-1991 all Russian republics to form a newthe politicalRussian Federation entity. theUSSR.But unique via path which sub-unitsthe state, unitary inahighly centralized The came ultimate aboutitwas of one Republic, Federal Socialist] itwas calledtheRussian[Soviet this rule: though impliesgoal of that voluntarily. joined they that federation the some features ofbetween Riker's the future memberdefinition statesAs wasrarely there a a 'bargain' consequence, Argentina, Germany, Canada). political willing mayto establish be a India, Brazil, empires colonies,federation, or (Australia, were unitary states, theUSA, cases, except and it is too strong in most communities political the previous wasno'comingtogether': there of mostcases, to say the quality of their markets. and size the their security, toincrease a comesgroup together namely of same way,states that In reality, there liesin At heartinto existence the theory all of come belief the Riker's the federations that are other paths than one suggestedover which they have anupper hand. by Riker. In areaofjurisdiction one least willeachhaveat governments national way sub-national and that raise armies" (1964, governments for levy the purposes better the constituent of aggregating to territory, and taxes the of 11).officials and leaders national prospective Thebetween a "bargain of out bargaindevelopment is aimed federationof at building is withconsistent perception Riker's federation of building as a designating areasauthority butnoto the federal morecenter, than necessary.It can be that argued this concept of authorities of their andconcede part together gather states/republics should sovereign be the workable, in such a set Only for federalthem important, tothose federalismsuperior of that, after government. to federation-building was,in grasptheir understanding, almost to unlimitedmore powersand, ideafrom conceived the of federalism constructed bottom thefirstthe step in as up, therefore a stormy which environment, prevented this consensus from emerging. The republican elites in weremade federalism Russian granddesign of the engineered that choices The institutional As Migranyan rightly asserts: "Nowhere in the world have states ever been built on the "from bottom up Izvestiya , September20, 1990, 3). 10 The Russian Federation is not an exception to exception an not is Federation Russian The 26 CEU eTD Collection be processes. They driven andby accept different indeed prescribe fiscal that and political contrary that political and fiscal realms may have different sources of development and may (2003)demonstrate Garrett andRodden however, to the relations areclosely connected; The argument2.5 Fiscaldecentralization Russian style popularized byway it was conducted in Russian Federation,theories brought long-term benefits toeconomic growth. the fiscal decentralization, whether inRussia and fiscal federalism an of overview provide of fiscal will section next The part of federation-building, was significant Fiscal5. decentralization federalism transition. economic as order, constitutional enforcement, law central loyalty’, ‘overarching holds4. Centralizingforceswould thati.e. keepthefederation wereextremely together weak, that political differedfederation was highly resulting enormously, the asymmetrical. and fiscal of bargaining and the regions power individually, bargained 3. Because with regions center than horizontal one. a bargain,it rather was acenter-periphery case, classical 2. A significantpart federal of institutions came aboutasan outcome of a bargain,butunlike inmobilization his personal struggle.political 1. It was built was: federalism of nature WeRussian the that conclude can from ‘bottom high level soften budgetwere able constraintsto for themselves. up’, as with powerof in region, bargaining the asthose the ison region developmentthe dependent a result proof the of hypothesis II, outlined below, which claims degree that the of market of Yeltsin’s for The is bargainsalience important center-periphery of among constituents. would-be the one, horizontal the than rather dimension, aspirationcenter-periphery in the conducted was bargain the political institutions offederalism. Itis notable, thatin though, contrast to Riker’s description, to use theas setup and promoted by room Yeltsin, creates for apolitical bargain design over the of regional from side principle'bottom the ofcreatingthe Nevertheless, the up', afederation of sub-units. on territories, in their of eyes people the inthe legitimacy democratic sametime gain at the ‘window’ of opportunity allowedthat them to unilaterally fromgrab authority centerthe and Union Treaty at Novo-Ogarevo,instigating regional wasYeltsin'sdeclarations toboost bargaining in power would-bethe on his part; and the eagerness of regional elites to use the 27 CEU eTD Collection become increasingly costly to the central government to hold a heterogeneous country together. country aheterogeneous to hold government central the to costly increasingly become may politics of fiscal decentralisation the example For (re)centralisation. fiscal towards pressures increase which external, and internal both factors, several are There level. federal the at concentrated being authority fiscal while responsibilities and freedoms, setting up regional parliaments, and allowing direct elections for regional officials, 11 opposite directions. movein powerandfiscal of (re)centralization authoritative of decentralization processes economic growth. economic how ofsub-national capacities decentralization and and institutional the this units, affects fiscal between interplay the into insights inthatoffer interested Iam theories literature have however,economic beenmuch less systems, Within investigated. this strand of the The and effects2003). of (Martinez-Vazquez McNab on decentralization discussions redistribution haveand macroeconomic stability been extensively in debated policy income goods, public of inprovision flexibility and efficiency as decentralization of objectives such on concentrating fiscal decentralization to approaches The normative of bureaucracy provision. and welfare of andexpendituresbudgetary wasthustightly revenues with intertwined de-concentration the decentralization The realms. in both evident strongly were processes decentralizing building, were seen parts as inexorable federation of Russian fiscal andpolitical decentralization becauseboth orworse, better in for Russian case, the in However, China. markets preserve relevantinformation from rewardandprovinces, punish provincial helped that officials) to collect the (central to capacity of political centralization backdrop the against decentralization The federal center may devolve formal political authority to sub-units by increasing their constitutional their by increasing sub-units to authority political formal devolve may center federal The 11 Blanchard and Shleifer (2001) suggest that it is the very fact of fiscal 28 CEU eTD Collection 13 scrutinized in furtherchapters. Russian regions, as compared to the variation in federal transfers and (under)collection among wide so not is of taxes,variables which will be above-mentioned three the in variation the that assume confidently fairly we can measure forit example, as a Davoodi orIMF(2006), budgets. and Zou(1998) consolidated decentralization is quantified of asaproportion regional expenditures revenues or in operationalized variously literature. Traditionally,in degree the contemporary of hasbeen itself local governments regional and the between of decentralization The concept todevelopgovernments their regional base andtax grow faster (Ahrend 2002). providinglack that evidence the of federal regional on dependence encouraged transfers regional enterprises, stalling thus andeven reversing reforms (2001).Otherauthorsdisagree, the for constraints budget hard the relax to regions allowed Autonomy rent. of sources as it gave andmanagers hand afree regional uselargepoliticians to regional enterprises as Weiss claims that fiscal autonomy from the center was detrimental to economic development been examined in terms of regional autonomy/dependence from central the budget. Stoner- inflation). (incomepromotingfeatures lackefficiency, equality, producer of andlowcorruption, in and favor against positive the impact of degree of fiscal anddecentralization growth by surrounded a greatdeal mixedinconclusiveness,of as empirical evidence has been found corruption of level the or and(Martinez-Vazquez McNab,2003,Martinez-Vazquez and 2006).These Rider studies are distribution, income cross-regional efficiency, producer in changes (Davoodi Lin and Zou1998, and Liu2000),aswell as indirecteffect of viadecentralization performance and economic between relationship decentralization explore directstudies decisions and levying taxes, limit on the center’s access to regional information,spending over and limit discretion on its ability region’s of degree to reverse the include regional principle, in should, authority of fiscal decentralization of measurement The ranking. inthe it behind came which example, for USA, the than decentralized into account the much tighter control of the central government overlocal finances, it is, in fact, muchless share of regional and localexpenditures in total expenditures isconcerned (Rodden2004, 483), but if one takes country (after Canada and Switzerland) in a ranking of twenty-nine Western developed countries, as far as the decentralized most a third as came Denmark example, For authority. ofspending decentralization real the about 12 measure of decentralization. amajor is composite considered Fiscal decentralization For an excellent overview see Martinez-Vazquez and McNab (2003). and Martinez-Vazquez see overview excellent an For Although there is evidence that the degree of decentralization of revenues or expenditures communicate little communicate expenditures or of revenues ofdecentralization degree the that evidence is there Although ex post 13 Regarding the Russian context, the ‘decentralization – economic growth’ linkhas the‘decentralization growth’ – economic Regarding context, Russian the (QianWeingast and 1997).While this argument would strongly work cross-country in studies, 29 12 Recent CEU eTD Collection a different way: economic growth may be inversely associated with the presence of with presenceof ‘unearned may associated the way: beinversely growth a different economic in link causal the theorize to is possible it though growth, economic to decentralization fiscal A form foreign massive causal mechanism workers). links remittances transfers, directly (resource rents from production and export of natural and of natural resources, rents from export (resource production revenues’. income’ of They several discuss sources ’externally such ‘unearned generated impactbenevolent fiscal of greater autonomy. Thisis behavior prompted by availability the of the reverse can rent-seeking’ mutual and collusion government-firm ‘[R]egional elites. business and officials government of behavior rent-seeking the on constraints ensures region this causal link is only valid in presencethe of an intervening variable: namely whether the They proved that sharefiscal of thedecentralization taxes thedegree generated of indicator The other decentralization measuredof of retention as regional the tax, in a causesregion andhigher left environmentand physical forinfrastructure localwith business. rates a regionalof economic budgetfor zeroincentive localshared revenuescreates provide the to abusiness-friendly government growth. (Desai etHowever, al. 2003).of budgetary transfers from regional government. Thus the crowding out of own revenues by by of an amount cut equal the counterweighed isfully In former surplus case,all the zero. the become more and more detached from the the tax base (Desai et al. 2003, 9). 2003, et al. (Desai base tax the the from detached more and more become productive activities in economy’. The second reason outlined by Desai et al. is that the public institutions source of natural commodity, whenthe ’competititon overnewly available rents creates adivertion from more favourabe. This situation parallels the situation of the terms-of-trade improvement, or discovery of the new profitability of the productive and predatory actions infavor for the latter, as the cost-benefit ratio is more federal orforeign aid constitueof central a large portion streams If of the regional reasons. two revenues,for economic actors will quicklyenvironment discern the business relativeinto invest to incentives orno little have will regions these in governments The revenues’. generated on ’externally but base tax domestic on the dependent 15 intransfers. decrease with associated 14 inreduction sharedrevenuesin Thevalue budget. a local the of subsequent by the out crowded not is that revenues non-tax and tax local from surplus acoefficient of form the in numerically formulated responsibility degree of local regional from independence the budgetary level in reflected greater for the expenditureshare of regional expenditures in total expenditures.government InZhuravskaya (2000) itis a decisions and incentives to raise their own revenues. It is The negative sign is important for the model equation, which denotes that the increase in own revenues is own revenues in increase the that denotes which equation, model the for important is sign negative The They conceptualise both sources under the concept of ’rents’, when public sector expenditures are not are expenditures sector public when of ’rents’, concept the under sources both conceptualise They 30 Į which denotes the share of revenue of share the denotes which Į varies between between varies [-]1 15 central fromrevenues 14 and CEU eTD Collection the region beyond reasonable amount. reasonable beyond region the to given are that tranfers federal those only account into takes which constraint, budget of of softness degree the ’regional industrial output that derives from‘fuel and energy production’, in my work the independent variable is of share as measured rents, resource or subventions’ budget e.g. as such programs, federal smaller transfers, ofequalisation program largest to the in addition reflects, it i.e. to regions, transferred were funds federal which 16 in markets. developing role its and SBC of phenomenon the of overview thorough a more to devoted are sections two next The government. central the by them granted SBC the by induced be can this how and engageingovernments of pursuit from isgains predatory question The whether rent-seeking. if regional reversed are decentralization of effects benevolent the that proves debate This leave jurisdictions inappropriate behaviorwith (Qian and Weingast 1997,88). helpslimitgovernments to government’s predatory Mobilebehavior. resources can quickly local among competition of shareholders, interests reflectthe to managers firm pressures competition interstate of competition as market Just constraints. hardbudget of the condition a result creates endogenously that as below, from or authority) fiscal of (centralization above conditionthe of hardbudget constraints on regional whichgovernments, be imposedcan from federalism is work ofmarket-preserving requires tothis notconstrained solution. Thetheory managers:enterprises’ central adoptedpolitical in The theoretical framework guidance. this and government regional both of appetites rent-seeking constrain can that mechanism the of constraints). budget (soft relations center-periphery to emerges that related asa predatory behaviorof the regional result the government of inversely is growth economic institutions, market the of development the through thesis: In form,this argument the put forward by al. isDesai et in withaccord reasoningthe of this growth and recovery (Desai et al. 2003, 11). economic promote to likely more is autonomy fiscal opportunities, seeking rent limited more very little to improve the business environment tocompeterents, agencies colluding for with local owners majorthe of firms, while doing for the rest of local economy.local may increasedencourage government fiscalautonomy If doexist, Indistractions these regions with more advancing retain taxserves growth. or inhibiting alternatively economic asanamplifier, income’, distracting regional from governments productive behavior,while the possibility to In Desai et al. (2003) the independent variables are federal transfer, which ‘includes all main channels through 31 16 Desai etal. pointto only to one source CEU eTD Collection respect to the budget constraint. In market economies, firms experience hard budget hard firms economies, Inmarket experience constraint. budget respect tothe the types with between istwo economies of But at of core Kornai’s difference theory the the buyersthan topurchase. arewilling firm. In a market economy,importantmore than demandin constraint defining amountthe of goods be produced to by a the demandisin resource isthatconstraint latter economies marketandplanned the socialist between constraint is efficient: difference Kornai’s from view, the sales. In exceed its revenues and financial capital cannot no more goods of The last firm the ruleconstraint. refers theexpenditures to that and budget constraint are produced types of constraints inits pursuit of maximization:profit constraint, resource demand economic Afirm units in (1980,1986). in economies planned amarketexperiences three of behavior the on work his in Kornai by coined first was constraint budget soft term The of studies of SBC in general,it is worth briefly recapping the relevantliterature. firms. Since it was the analysis of SBC at enterprise level that setnational the path unitsfor a arebroader based scopeto a large degree on those taken from for of andimplications governments of theconditions analyzing sub- SBC for approaches the analysis of SBC imposed on Roland 1998,Besfamille andLockwood2004, Cai and Treisman 2005).Consequently, the and (Qian of researchers attract attention the to begun governments) sub-national bodies, (administrative enterprises than other agents on imposed as SBC have recently relatively Only conditions. in increased of SBC ‘enjoying’ regional Russia that preconditions thelikelihood governments budget at constraints sub-national level.Following narrowingthis, the focus, I identify the federal system. In this chapter Iexplore the theoretical preconditions for the emergence of soft ina ingovernments interested regional are here while we and enterprises, state the between and the Europe formerin Eastern countries in all life in economic present Sovietis persistently syndrome SBC the Union. Much of theall though morepolities, vividly in transition economies. Maskin and Xu(2001,10) show that existing research,in is evident of phenomenon existence this the Nowadays, by state. of the rescue expectations however, has focused‘paternalistic’ state. Firms’ runup willingness to debt, financed by iscreditors, sustained by on SBC theory the theory of softbudgetconstraints (henceforth SBC) put forward by Kornai His (1980). involves One of leading of the of system central the pathologies isthe explanations planning basedon three2.6 Soft budget constraints main actors, softly restrained enterprises, their creditors and a 32 CEU eTD Collection state, but also horizontally, by andcreditors, institutionally by filethe card system, which the by vertically, only not supported were SBC the Federation, Russian the of case the In competitive system creditingof andfinancial intermediation (Berglof and Roland 1998). a fiscal regionsdecentralizedthe between outcome (Qian or of competition and Roland1998) an as HBS) (henceforth constraints budget hard emerging endogenously of importance the for ways in which effects negative the of can beprevented.SBC Themajority argue authors of discussing MuchofSBChas debate the on current movedthe markets. towards commodity in the levelefficiency use the of of Qianresources, and Xu(1998) examine howSBC lead toadecrease of innovations, in decline the on agree SBC.Whileall of implications (negative) the on concentrated which resources can later allocated be to agentsfacingMuch crises. of isrecent research and QianSBC exist (1994)not only the that and argued Maskin (1995) Dewatripont substantially. has proliferated this concept in planned proves economiesSince the phenomenon of SBC was championed by Kornai in 1980,that the academic literature on but in theSBC case mayof anyTorvik 2007,3). concentrationlead and (Robinson exante’ good from bad distinguish cannot and post ex toprojects bad [refinance] shortagesof financial Kornai, Maskin and Roland 2003)is thatSBC‘arise because politicianscommit cannot not to in (Kornailiterature 1980, Besfamille 2004,Dewatripont andLockwood and Maskin 1995, explainsin the pervasivedeficit economy.a planned of central argument The subsequentthe expansionefforts towards force them to purchase all goods inputat any price, and this guided by expectationsinducedby the concerns. Thefirm’s government’spaternalistic the which firmsprevents from unlimited growth is theresource constraint. Thisis behavior which causes that demand to be absolutely inelastic with respect to prices. The only constraint demand budgetconstraints. or Prices for input do resources not affect the demand of a firm, without fear of future financial difficulties. The growth of the firm is notconstrained either by and behaviormanagers, of whoininvest inefficientvarious projects, waste or resources state guaranteesBecause the thesurvival of firm, the this incentives the ‘negatively’ affects itfrom all or part of the taxes it should pay. resources the thefirmthat fixing or high prices for uses, exempting firm’sthe or production, paternalistic state bails out firms either by direct financing of deficits, orsetting low prices for islet unwillingto enterprisesfail, providing them budgetconstraints.with soft The state the economy planned a In revenue. exceed if expenditures bankrupt go they constraints: 33 CEU eTD Collection governments to commit themselves to the interests of populace. delegation of information and authority to lowerunits, and the competition, which can create incentives for national governments. The commitment sub- to of market part the is on inspired, market according to to them, via commitment two mechanisms:of credible the problem the to firm of the theory new the from insights 18 meaning was assigned to England and China by Weingast in seminalhis work (1995). 17 in eighteenth England the century, in existing type the of Federalism insolvency. of event in the bailout a central of expectation bystable levels,arecharacterized and governments’ between constitutional revenue-sharing pattern of extra- arecurrent encompass therefore SBC conditions and expenditures. revenues propensity and tobalance of capability obligation regional to remove/ignore governments concept of budgetsoft constraints goesbeyond state-enterprise interpretation:itis the marketIn the preservingtheory 1997, federalismof 1995, Monitola (Weingast etal. 1995)the 2.7 Market-preserving federalism diversity incomeof levels requires some redistribution on the part of the central budgeting. levels the limitations the country’s Russian highdegreeof for the -hasfurther case since between revenue-sharing on limitation strict or - constraints budget hard the of requirement The obligations. the settle in and step would state the account, debtor’s in the money no were after the card fileorder systemof their receipt.was abolished,managedby banks, and aslong as Moreover, were there some funds in account, the billsthe inwere paid in Russiasince thesurvived untilmid-1992. Underthis weremade system, almost automatically, payments were firms constraints continued for enterprises to believe remained that soft eveneven if there theory theory of firm.the new the and control corporate of model principles the follow ways many in prerequisites shows its federalism that of premises examination ofmarket-preserving Close the businessJin environment(Weingast 1995, al.et Roland 2005, and Qian 1998). discipline sub-national theformergovernment, providingincentives todevelop regional constraints hard budget and competition interstate theeconomy, while over government federal the of control the limits decentralization levels: both at governments on limits stable in in USAin or China, creates and century, the latethe nineteenth early recent twentieth Weingast and Qian (1997) conceptualized these parallels in their other work on federalism, where they the use they where on federalism, work other intheir parallels these conceptualized (1997) Qian and Weingast Federalism, in a specific meaning, ‘de-facto’ federalism, which is not necessarily ‘de-jure’. This specific This ‘de-jure’. necessarily not is which federalism, ‘de-facto’ meaning, specific a in Federalism, 18 firstfor institutionalization requirementsThe two –the of autonomy of 17 the Dutch Republic in the sixteen and seventeen century, seventeen and sixteen in the Republic Dutch the 34 CEU eTD Collection style failed to preserve the market overall, but why it did so for some regions and not others. hard budgetconstraints is potentially useful in explaining not only why federalism Russian- of condition of absence the The setof incentives. inducemarket-oriented – a that constraints instrumental in identifying those mechanisms – namely competition and hardbudget To sum up the theoretical the part, theory market-preservingof federalism will be see. regions Russian the discussion theory the on applicability federalism andits case market-preserving the of to of can crediblelimits onitsprovide behavior”(1996, 179).Section 3.2 provides a more extensive may be “(F)ederalism oneof few in federalism: the state ways a large,which nondemocratic of (separation accountability powers) were weak. Qian and Weingast horizontal put asimilarsuch statementforms in description of Chinese style conventional more since state, on limits federalism was perceived by political analysts as a primary solution to the problem of credible election wasnot fully Therefore,periods), during early the institutionalized. nineties, (between onstate limits mechanismscredible of the second, established andconsolidated, was interests, of of representation asaninstitution elections source, first the While follows. as itcan be state, formulated emergence of for the a market-enabling sources constitutional Federation and other transitional democracies. In terms of Bruszt’s theory of two The potential from market-preservinggains federalism are especially for Russian relevant burden. tax increase the to temptation marketinstitutions andinvestingin butwithstanding goods/infrastructure, public the which, it applying to the case federal sub-unitsof means, essentially, robust establishing labor, capital and for conditions create forcedattractive to are managers labor, capital and good behaviorstimulates on part the managers. Beinginof compete a position forto scarce legislative environmentwhich is free from state interventions (benevolent predatory) or agency be appliedto togovernments’ behavior.Thus perfectcompetition in a perfectly secure of incentive structure managers, the place the allowing take of governments where regional their within economy the over jurisdictions government sub-national of authority primary the and constraints – ensurelast three requirements –namely conditions for hierarchy hardgovernments, of budget that the federal The capital goods. labor, and movement of free the andwarrant market, acommon represents settingits territory that federal ensure the polity, of the coherence enable commerceboth – interstate resemblesprovide to government national of authority the for and governments, settingssub-national and central in the theory of firm, 35 CEU eTD Collection national governments. national Treisman 1996, 1998),asituation iswhich likely not create pro-marketto incentives for sub- ratherbut on bargainingthe abilities of regionsthe (Frienkman,Treisman andTitov 1999, rules, transparent on predetermined not the arebased inter-budgetary relations that literature in the a consensus however, is, There incentives. in distortions systematic of emergence the much work remains to be incentivesproductive 2000).Empirically, of set (seeZhuravskaya done for regional governments on the potential effectrevenue of of proportions fiscal the only not that namely study, present the center-peripheryfor relevant federalism Russian and expenditure relations due tothelack important is there in of finding However, one literature of research. the on andin little we knowvery theissue, about especially growth, Russian caseof Federation the sharing economic on impactof decentralization the deal regarding is of great There uncertainty but also the differentcan induce behavior. such productive Constraints, that Budget namely institutions, Hard thefederational identifies center-periphery styles towards aligning their policy withdecisions citizens’ welfare. Specifically, literature the ofand rent-seeking from away fiscal governments regional for incentives reshape will that institutions relations thenecessity federalism andtheory of highlights designing structures of special governance createfor managers, a so that firm,the studies howinstitutions which canbe designed soas create to incentive structures they act to the of new from theory the borrows federalism benefit theory of of economic the generation The second of shareholders. Along the same lines, the new 36 CEU eTD Collection society relations economic growth. economic Hypothesis 1: long run. Thus the first hypothesis can be formulated as follows. developmentof market institutions isindeed likely predetermine economicto in growth the that therefore, hypothesize I analysis. cross-regional in the lacking was which growth, and calls(Havrylyshin a 2007) for analysis time-series of relationshipmarketization the between economic growth its effect on of character gradual and cumulative the Moreover, previousthe analysis from effectof revealing the economicon marketization performance. economy marketmademe believe could problemsofmeasurement the that haveprevented nature between experienced of multidimensional a 1991 and1998.The the transition to Russia that contraction of output continuous the especially given economic performance, little impact on has of policies thedegree formedof has implementation that reformatory has found that these two variables are not closely associated. Consequently, abroad consensus Bradshaw 2000,Ahrend2002,Berkowitz and 2003,Popov2001,Golubchikov DeJong 2007) and Hanson 2000, (Hanson growth economic of determinants the on hitherto literature Russian regions that is determined by influencethe ofmarketdevelopments. Much of the across goal in The first growth share of evaluatethe isof thiseconomic thesis to variation decade oftransition. first the over evolved that development of marketinstitutions was shaped by asymmetricthe fiscal federal institutions the institutionalhowever,myself Iorient institutionalistprincipally within theory. Idrawin my on research theory theory; federal and politics comparative of those ofincluding North methodologies, several combines (1990), namely that in the case of Russian Federation, the (Ge to of performance regional have todategovernments never applied theirframework theoretical level at exclusively almost operate federalism of theories comparative dominant the While 3.1 Concept andanalytical framework asymmetrical Đ , theories of regional institutional performance explaining variations in economic variations explaining performance institutional regional of theories , man 1999, Ge The degree of development of market institutions is likely to matter for federal settings. The scholars who focus on regional differences inRussia differences regional on focus who scholars The settings. federal rather than the than rather Đ man al.et McFaul 2000, al. 2004)haveet mostly concentrated on C HAPTER 3: relations between thelevelsofgovernment between relations T HE S TRUCTURE OF TRUCTURE 37 R ESEARCH . This study national state- CEU eTD Collection powerful powerful bargaining in chips game? center-periphery the IpositThus third the hypothesis. itWasa measure to shelter andprevent workforce orwas it massiveunemployment, used as a shrinking budgets,regional were neverthelessgovernments grossly expanding employment. public employment. Theevidence thatagainstabackdrop shows of slumping and output me motivated in explore linkbetween to closely SBCand the public sector, accumulated by predominantly and public the theemployees, volumes monumental of wage arrears formswere staged which of occurrences strikes, The multiple of differentworkers’ pressure? stop government yielding toregional altogether, didpressures or itbecome susceptible to fundamentally? changed fiscal central the didDid nature the of relations center-periphery But politically hadbecome ora unfeasible. preferential aspiration to extract tool treatments, as an both ultimate separatism, andeconomic of political Assertive acts later. decade Whatinstate. haswas scenario halfa asapossible a perceived become 1991 utopia political of withearly characteristic uncertainty, consolidation of the 90s, disappeared Russian the secessionist opportunities thatwerepossible intheperiod of openings political intense and The variables. explanatory of range awider consideration into bringing by second, and measurementthe building constraints, budget soft of concept nottheoretical the of exclusivelyoperationalisation the on importance more by placing first, on approach, the conventional this from depart I valuetransfers. of transfers,in eliciting most salient asthe threats, such assecessionist 1996), (Treisman disruption but on the tax potential of political threat transfers the emphasize ofinter-budgetary pattern the theories explaining of a region; examined, by taking level the of softness budgetconstraints as a dependentvariable. Most by wasan that bargaining the feature ongoing of in center-periphery relations period the exploreconstraints howsoftbudget third isto the goal therefore, I pursue It is important to examine both consequencesthe and of determinants softbudgetconstraints, inbe market-oriented wereunlikelyto theirrelations center-periphery performance. inconstraints fiscal extract conditions of budget andwereablesoft to government central Hypothesis 2: following Hence,the hypothesis: others. context-specific generated amarket-inducing incentivesof set for some of regionalthe butnotforgovernment, in that settings turn institutional asymmetrical in way specific itwas builtcreated which the and Federation Russian the of context political The region. in each development market The second goal my of is quantifywork to fiscal scalethe of incentive problems thataffects Thoseregional which gainedgovernments more against bargaining power the 38 were conditioned CEU eTD Collection to a fiscally stronger one. The absence of equalization transfers from the center could adversely affect economic affect adversely could center the from transfers equalization of absence The one. stronger transfers fiscally a to the for different are region poor a to Transfers region. the of potential tax of the consideration important the overlook above, mentioned was briefly as studies, these However, 1.6). section in presented (discussion 19 oftransfers. pattern for example, analysts (e.g. Desai et al. 2003) often connected economic growth directly to the variables, inmany previously some works published of linksthe in chainthe were omitted, It is importantexample, will be assessed while holding other variablesto constant. noteregressions so thatat the effect of the developmentthis of market institutions on output growth, for Themost level relevant ofinmultivariate the willbe growth. these included of economic stage that ofpredicting than DMIcapable SBC and variablesother several in are there that exhaustive, even ifbeinginvestigated. It is worth mentioning at outsetthe that this causal ischain by nomeans we focus rolethe of dependentthe variable andindependent variable, depending on which hypothesis is only on alternately play and SBCboth marketinstitutions of of development variables the Therefore the abovementioned Fig.1.1 Logical Chain for the Three Main Hypotheses shown in Fig. 1.1 below. along chainas ofmoving backwards factor causality growth, the question economic the of from form a logical general starting amore These threehypotheses reasoning, of chain receive weremore toSBCconditions. likely sector public social unrest indisruption theirbargainingfor soft budget constraints; instead they used threatof the the of underpaid Hypothesis 3: legions of public employees. Those regions that expanded the Some authors connect the level of economic performance to the level of central transfers granted to to a region granted transfers of central level tothe performance economic of level the connect authors Some Power Bargaining Greater Public Sector, of Expansion Third Hypothesis By regions1996 the nolonger could usethestrategy of threat of political 19 Similarly, magnitude public of the wasthe sector regarded asa plausible Constraints Budget Soft eodHptei First Second Hypothesis Hypothesis 39 Institutions Market opment of Underdevel Growth Economic Slow CEU eTD Collection to unavailability of data. 20 necessity. of level certain beyond granted is that oftransfers value the account into take should one growth, economic on impact their and regions level field playing forinter-jurisdictional competition’ (Oates 1999, 1128). Therefore, inastudy of autonomy of a more tocreate helps perspective, this from equalization, Fiscal ones. ofpoorer expense the at comes which of growth if ’fiscally favored jurisdictions can exploit theirposition to promote continued economic growth, some eighty-nine regions with using a relatively A numberlarge of samplepotential data. country-level regressors of the transition processes in post-communist world, as it has proven difficult to analyze for theanalysis of isadvantageous numerous particularly are models Russianregions the The fact that of transition. in federal economic of institutions times development case is in valuable sensethe thatitallows us birth investigate to systematically the and connect political institutional choices to the economic outcomes easier to expose. The Russian in offlux were 80s.Thismakes thethat mechanisms from a state late the starting underlying comparisons potentially fruitful. Second, both the economic system and political the structure structure. First, federationthe is whichextremely heterogeneous, makesinterregional federal its besides reasons, several for variations regional study to in which setting illustrative is aparticularly Russia since entities, multi-level in transitional behavior institutional development among Russian regions, the findings may provide a range of insights into the focusesWhile presentresearch on the the explaining in ofvariability puzzle market 3.2 Caseselection andsources of data regions. caseof Russian to the theory variables itisapply possible to preservingmarket theory the of federalism and thebargaining Russian think tank,wasrarely in used relevantliterature.Byintroducingthe these additional of, which a represent value addedof thesis,this while the latter, produced by independentthe of institutions,market the former being variable methodology anewmeasurement variable, introducestheories.study The present thevariable of andbudget soft constraints development chainin presented Fig.the makes 1.1 itpossible tobuild the analysis onanalytically sound between. My not dissertation does intend toinvalidate findings.these Butcreating causal the in leading variablesto omit authors three other the of thus performance, predictor economic Maximum number of inthisunits thesis is eighty eight, thus excluding Komi-Permyak AOfrom the study, due 20 has at least three times more units of observations than thetwenty-seven than moreleasthas units of times observations at three 40 CEU eTD Collection 22 oblast. autonomous one 21 available from only this year it Second, on. would be unwisestart study tothe of budgetary core variables suchas for theresearch, pertinent data statistical of most the because was chosen 1996 date requirementon the ofdevelopment thein Chapterfour andfive, limits these were predetermined by availability the of anddata the stability of While alonger time would for period I analysis, bemore advantageous time-series use which the legislative of market The empirical in presentstudythe data is limited to the time between period 1996 and 2001. environment institutions in the fiscal3.3 Scope of thestudy (selected period) sphere. The starting and on from acquired open publications in and print Internet. the publicis data regional restof The the theWest. and both inRussia communities and academic employment, indicators recognizedof developmentthe market institutions, of by respected businessboth issituation inindividual and regions experts’ opinion Itispolls. one of mostthe widely development of market from The rating now. and astable on sample 1996till of Russian methodology using regions, institutions isprovided bya independentMoscow think published tank RA Expert, forannually entire the composed on the basisof Statistics (Goskomstat). of objective Committee State camefrom Most modeling data of the for Russian statistical Federation’s the evaluations of the (‘matryoshka’ okrugs). larger within are nested constituents reduced due to theneed nine toexclude Chechnya, and/or some autonomous okrugs, of which Constitution. eighty-nine formally offederation’‘subjects equal described as such in 1993Russian the the of one territory, constituent independent an as is defined region Russian the thesis, this In bynomeans difference. which isa variables, negligible run makesit feasible observations modelsto statistically six explanatory with simultaneously limits the number of regressors to two. A larger sample of eighty-nine cross-regional studies in of cross-country case fifteen,the ratio, variable observation-to-independent thumb countries post-communist worldof fifteen (of which formerare republics). Therule Soviet of It was renamed recently as the Federal State Statistic Service (Rosstat) and 2 cities, krais, 6 okrugs, autonomous 10 republic, ethnic 21 oblasts, of 49 consist regions nine eighty The 21 In some of the model specifications in this thesis the number of regions is regions of number the thesis in this specifications model the of some In 22 The data marketon variablethe of institutionsof development is 41 CEU eTD Collection attitude of the electorate, by proxying them to the voting for pro-reform or Communist parties accordingly. parties Communist or pro-reform for voting the to them by proxying electorate, the of attitude 23 atfederal to level becameof budgetary resources complimentary centralization the presidency ‘powervertical’ the building During character. took anirreversible on first term the of Putin’s secondyear of a pointdenotes presidency Putin’s when incentral change the politics towards are motivated by fact choosing the for endThe political point that 2001asthe the reasons potential predictors. legislative background, which will eliminate variation in central tax policies from listof the limitation of the time period to within boundariesthese ensuresmore a or less stable The federal thetwomajormandates. for by earmarked subventions compensated the loss was This for onaverage revenues. 15percentof accounted pre-transfer regional resulted in increase sharethe in of regional the budget incomepersonal tax from in84 to99 percent, it significantwas centralized completely in 2001. Even though this was partially by compensated the a dropregional ata ratiobudgets of 1999,and75:25 before of aratio85:15 between 1999 and 2001, in the2000). Forexample, revenue from value the tax added shared between federalthe and pre-transfer in in enumerated (adopted the by Tax Code to begradually started of Taxation, replaced those revenues inoccurred 2001.From 2001, provisionsthe of Law the on Provisionthe of Basic Principles of Theregional time-point governments, for for theresearch.unique, politically setting rich the end of the a of political the represent struggle of andthe dynamic nature center-periphery relations periodas it of The drama studymatter. in democratic conducted a truly was which yearelection, a presidential of is dictated 1995, late Theyear year,immediately startingthe point. the 1996itself preceding the was by the majorthe degree of taxthe softness reform of but varying the offederal proportions sharesprovideand regional an might budgetfacetadditional to constraints.that Finally, calculus, itthe complicate of Notonly variation. would source given additional measure, this the Duma elections were held across regions.the The degreeof SBC for preceding theyears 1994 wouldvery be to difficult in the levelsfederal and regional for inshared each whileupuniformly set taxes, different were tax, of proportions According toone of this of the Law, wasadopted. provisions Taxation of Principles Basic of Provision the on Law the when 1994, of year the before relations For example, the timing enabled me to take into account the pro-refrom and anti-reform attitudes of the of attitudes anti-reform and pro-refrom the account into take to me enabled timing the example, For 42 23 CEU eTD Collection centralization of taxes and subsequent massive re-distribution of financial massivecentralization of of re-distribution andsubsequent taxes resources. mechanism of employed the center federal The vertical’. the ‘power policies building the of 43 CEU eTD Collection statistical analysis of the effect of As several on GRP.test Irun effectof a this of the variable robustness analysis statistical arguments in favor of measurementthe market of reform used in my followedstudy, by the development. of measurements previously market Igo utilized on to introduce andpresent of validity question the into casting growth, andeconomic development marketbetween national level outcome and report the research in of attempts different causallink the building First, I reviewpositive. is fact, in other, the differenton investment and growth and hand, one on institutions market of ways development the between link dominant the regions Russian of measuringPopov development2001). This chapter will depart frommeasures in explaining patterns of economic regionsacross development (Ahrend 2002, this consensusof the by showing marketthat in the ofreform role on negligible the consensus isthere astable countries, case of transition literature of the reform at and 2000,Ahrend Bradshaw and 2002,Berkowitz DeJong 2003,Popov2001).Unlike in the the sub- human geographical advantages, capital, (Hanson and infrastructure physical 2000, Hanson in natural resources, as endowment of such reform, economic start atthe initial conditions the analyses,inand the Russianregionsinvestments growth strongly correspond andto positively contrary to expectationsthe of conditional convergencegrowth raised by cross-country comparative studies2001, Iradian issues2007). The of have debate a certainthis to beenextent appliedin on the sub-national slowergrow lessthan (Barroand economies advanced Sala-i-Martin al.1992, DeMeloet units conditions areinversely growth:related to of countries with levelhigher developmentof tend to Russia, though1996, Havrylyshyn andWolf There is,2001). however, agreement broad that initial the with differinggrowthpositively to (deMeloal.correlated Heybeyet Aslund and 1996, Murrell etal.1999, conclusions: reform are and enterprise privatization liberalization, marketization as price of indicators (Popov 2000, Lawson andWang 2005),agrowing number of studies suggestsuch that comparison changein on output cross-country indicators effect of negative transition the indication of find aclear some researchers While economies. on transition literature emerging countries of Central and Eastern Europe and formerthe SovietUnion has been focusthe of an of post-communist the performance economic the measures on of reform The impact 4.1 Introduction C HAPTER E 4: VIDENCE FROM D ETERMINANTSOF 44 R USSIAN E CONOMIC R EGIONS G ROWTH : CEU eTD Collection into the reasons why previous analyses fail to explain cross-regional variation in economic in variation cross-regional explain to fail analyses previous why reasons the into pitfallsadequately due to captured measurement, inof process the my insights analysis add not was link the but does it whether or growth, economic the for matter not did indeed Without endeavoringprovide to the definitive answerastowhether market-orientedness analyses into ofmarketreform ofgrowth. economic measurements include the and(Berkowitz DeJong 2002).This section an offers of overview attempts differentthe to for regional proxy newon or and formation reform) enterprise incomeof growth per capita DeJong 2003), of Treisman 2005), of degree of price liberalization on incomeper capita and(Berkowitz growth the share of the impactregional population of Onlythe after that eliminatingdevelopment votedperformance in terms of value added, industrialfor output and real investments (Popov 2001). thepro-reform effect of regional level initial 2002,Popov(Ahrend 2001). Relative speedparties in reforms did not lead tobetter ofat performance economic on coreconditions impact (asnegligible a has reform of (development) implementation marketwere some authors institutions theview thedegreeof towards that converge Thegeneral however, 2001). conclusions, able to identify (Ahrendgrowth and 2002,Berkowitz and DeJong 2002 2003,Cai and Treisman 2005,Popov the economic of speed the explain would on measures reform economic implemented flowa region of investments degree in to which the expectation that the variables, in reform explanatory set of their market Berkowitz and 2003,Popov2001).Many DeJong authors included the degreeof of progress (Cai invariation economic performance (Hanson 2000, Hanson and Bradshaw2000,Ahrendand 2002, industries, regional of infrastructure andlevel transport forcesurbanization of drivingare the behind regional competitiveness initial capital, human of development endowment, resource asnatural such characteristics, structural that agree sources relevant the of Most 4.2 Different ways ofmeasuring market reform Themethod. Averaging last section concludes. analysis tomore usingBayesian Model variables and elaborate predictor proceed then and of response for eachpair estimates regression bi-variate Ireport First, performance. variables of various economic against of market development estimates various the of power explanatory comparative of outcomes the section presents next The investments. and in GRP change the of analysis the for model effect a mixed out I carried level, regional the industrial output. In order to explore the long-term effects of the development of the market at models, replacing the dependent variable with growth of real GRP, investment flow and 45 CEU eTD Collection progress of market reform was strong and positive income concentration effect – i.e. effect more of income concentration reform market andpositive progress was strong effect of net the poor), to incomefrom rich (which redistributed flows constant interregional incomes. Holdingbusiness via income budgetary the performance, of redistribution better in form of the solely yielded dividends policies Reform andGRPpercapita. change, investment asindustrial output, measured performance on economic noticeable impact in enterprises trade, public and catering services,shareof regulated prices) did have not any of GRP change. variation for half of interregional andthe accounted significant werestatistically advantages However,institutional of capacities regional the aMoscow dummygovernment, and resource heboth that and and speedofliberalization Heshows privatization. governments, the found of capacity institutional conditions, initial of measurements the includes regions thatRussia’s the Popov reformin his (2001)analysis varyingthe of patterns of economic growth andincomes in progressin regional production. variablessignificantand were factors robust initialthe industry competitiveness of and shareof exports (share most the aminorplayed role, the while orientednessa region market of (1990-1998), output of forprivate the 21). Hestressed that of transition declining growth performanceperiod on (2002, share of regulated prices and in subsidies budgetary expenditures –had closetozero impact the structure, ininvestment investments foreign direct of level relative activity, economic which marketreforms were implemented –measured asthe share of privatized orprivate degreeto thatthe findingHis and was urbanization). of infrastructure developmentphysical industries position, serviceand sector, the shareof geographical endowment, competitive (resource conditions initial of measures several and reform, economic of implementation of fiscal incentives, potential of efficiencyviolentconflicts, of institutions,state degree of performance, including of political attitudes regional the leadership and population, adequacy Ahrend (2002)uses a wide spectrum of variables in his study of regional economic andmore complex picture. me toprovide afuller allows research of present longer timethe the span growth, economic tothe relatively lifecontrast short span previously forof factors theexplainingthe used analysis. In of data methods conventional depictusing to is that effectdifficult more distant impact thanhaving had animmediate on economicthe a rather institutions, performance, marketof emergence development of process and validity.the Second, lack construct performance. First, I will show that some of the previously used variables of market reform 46 CEU eTD Collection divisionof parties on the marketisation issue no longerexisted starting from the next Duma elections. 24 account. into is taken parties pro-reform for voting once marginalized is variables liberalization price and privatization small-scale of power explanatory marginal the that showed way appropriate measurement of of andreform Berkowitz progress. DeJong(2002,227) forsupport pro-reform in parties 1995 Duma elections, represent seems perhaps to a least methodsThe lastfrom havebeen far variable,measurement mentioned electoral adequate. because the least not reform, market of regional pattern of achaoticthe picture create The descriptions of reform inprogress Russianthe regions by reported differentanalysts 4.3 Analysis of thevalidity ofmeasurements market of reform liberalization. andprice privatization level small-scale to the of closely connected method they justify with referencethe toWarner’s (1999) findingvoting that were patterns parties in for asaproxy elections 1995 Duma regional the marketlevel reform. This of and(Berkowitz DeJong, 2002)they used ameasurementof voters’the support for pro-reform formatters the growth of real incomes (Berkowitz and DeJong, In a later study 1998). in tothe which turn was closely of new election formation connected enterprises, presidential ‘redness’ of region,the measured of percentage asthe votingvoters for in Zyuganov 1996 the Berkowitz and DeJongin (1999)gofurther causaltheir inference: theydocumented thethat of asspeedof economic(measured reform and degreeof priceprivatization control). for implementation degree the mattered of of branch executive regional the orientation party regional populace.government or Case studies bydeMeloand Ofer (1999)showed the that in development explain region of authors marketOther a bythe market-orientedness the foreign. and domestic both investments, in attracting competitive more were localities of androads water mains andspecial put in effort marketdeveloping institutions in their thatspentgovernments more budgetary funds cut oninfrastructure back less on construction developmentof both physical andinfrastructure leading market institutions. Regional and investments of level the between correlation a strong report (2005) Treisman and Cai successful in terms of reform progress. less were that incomes from regions ‘sucking’ were regions market-oriented liberal, Not to mention that its usefulness is impaired by the impossibility of applying it to other time periods, as the 24 Bearingin mind unstable the floating party insystem Russia at time,that itwould 47 CEU eTD Collection reform, but also the lower level of economic growth prompted the populace to vote against pro-reform parties. pro-reform against vote to populace the prompted growth of economic level lower the also but reform, variables seems unjustified for reasons of endogeneity. Itis likely that not only the negative attitude toward investigate the determinants of regional growth, the choice of the voting pattern as one of the explanatory 25 prices and 80per cent of state wholesale prices (Berkowitz, DeJong, Husted 1998). At retail liberalizedof national inJanuary1992,when state 90percent scale decree a federal a on started reform. process market The of objectives core the of was one price control state lifting thus of resources; of allocation efficiency the enhances directly liberalization Price is for proxy enterprises thedegree abetter market of orientedness the of regions. the small of privatization of indicator The alike. managers and officials government regional in behavior both stimulated rent-seeking that privatization large-scale was predominantly between small- andlarge-scale reforms. Aslund (2008)andBlack etal. claim (2000) it that distinguish can one privatization Russian in the schemes, money and voucher the between as proxy be scarcely can used insider arbitrary and self-dealing corruption, taxation official invigorates for market-orientedwith privatize enterprises for gains. corrupt As Friebel (1995) argues, privatization that Goldberg 2005),whereby governmental officials and managerslarge of enterprises colluded tendencies methods,other wereriddled with incidents ofinsider self-dealing (Desai, Freinkman, and hand,money schemes,privatization which included tradesales, non-competitive auctions and at the regional bejustifiedcan for speed asaproxy the potentially andmagnitude of On reform. other the economy. Voucherprivatization 1996),which(before level.was usedby majority the enterprises, of a market to of transition the component Asmajor a is enterprises considered state of Privatization well as the privatization been in have them. potential dichotomy the using Isummarize levels.Below weaknesses liberalization and price development market of measurements used widely most the Among reforms. market-oriented more radical introduced that andadministrations may have governors elections national labeledZlotnik behavior 1996,Regionspolitical thatare (Slider in 1996). as conservative 1995. it even though happened tobethe casein Russian electorate, of the patterns a single yearin voting of the character volatile the of reform with progress the associate to be unreasonable There is anotherpossible problem withtheir methodology: asthe ultimate goal of the researchwas to 25 Moreover, behavior in national elections is only loosely connected to regional to connected loosely only is elections national in behavior Moreover, 48 CEU eTD Collection regions. had to be delivered cost, by which air, low substantially inflated the expenditure part of budgetsrelatively the of several northern involving river via be delivered to planned was that food of amount The provisions. basic extremely dry summer that lowered the level of waterin rivers, which in turn shortened the time for delivery of 26 external shock. temporary measure toprovidelevels minimal forsustenance populationthe in case of adverse Even in a developed marketeconomyitis possible for rationing tobeintroduced as a introduced. was reasonswhyrationing account intothe totake byfailing market-orientedness high thepattern drawback, and versus rather scoring distorts the of anti- of rationing pro- hasthesame one services. second The or amount products the of sales of these account it is asopposedtocompletely notdoes assortment that regulated, liberalized, takeinto catches are scope while the firstof the far As wecansee,the indicators perfect: two from points. these sum as the is of in calculated region regulation the degree of The price points. three scored The‘hard’of werescoredastwopoints. suchas rationing, growth) forms, introduction the scored one point; ‘medium’ forms of regulation (imposition of fixated prices or limits processingfood of andmanufacturing, grantinglimitationprice of subsidies, margins)on trade were regulation: ‘weak’first, complex: points prices toregulated they accordingallocated degreeofstate tothe forms of regulation with pricesproduce regulated in of list of the prices 285 types.index The issecond more (imposing limits indices: and shareof services first,the theirthe al. compiled two et Lavrov (1997) statistics, on profitability of Russia, registering howtheprices were regulated in regions.Basedon individual these of the productionstatistical possessesagency (Goskomstat) information on 285 types of inproducts 140 cities of systems offood rationing which limited thesales of certain goods to residents. The federal regional localand governments (Berkowitz andDeJong 1997). Some regions also used margins. At beginning the of 1995 asmuch as 30per cent of all were controlledgoods by imposinglimits on growth the rates of prices, granting subsidies, orlimitations ontrade usedgovernments indirect methods, such as imposing aceiling levelson price orprofitability, Aswellasdirectreforms. federally fixation of mandated prices, regional resisted remainedproduce) under control the of regional as governments, some regional authorities regional level, however, the prices for a significant share of consumer goods (mainly food In 1997,forexample, the amount of ‘severnyizavoz’ (Northern delivery)fellback substantially due to 26 ledlimitationsan indexThese validity for to which lacked the construct 49 CEU eTD Collection only those regions where the share of the capital was more than30%. 28 several studies,i.e. Hanson Bradshawand (2000), ranking of RA Expert. 27 with But this4.7. mean doesnotmarket thatinstitutions developed better are inAltai off better was latter the subsidies, industrial scaleof on the of 10.1 has ascore first the while regions; geographically close andAltai republic, oblast Take for exampleSverdlovskaya entire sample of 88 regions, since itwill bias in favor of less industrially regions.developed be usedforthe cannot economy), theregional less market-oriented the sharethe subsidies, of indicator of market-hinderingthe policies of individualan ( region The first indicator, meaningful index of degreeof the development of marketinstitutions for several reasons. a into be compiled cannot worthy, individually while indicators, for these All regulation. example, sharethe output; with prices, servicesthe of and produce regulated degreeof the price and the levelof privatized share the ofexpenditures; in budgetary small subsidies industrialindustrial the of level the of enterprises;in Russia average the ratio of market development.agriculturalsubsidies, This index is constructed as a sum of points, estimated as the ratio of the subsidiesindex of developmentto of marketthe reform that seemsvalue whilepotentially useful for the ofmeasurement agricultural of included changes in industrial andoutput construction inoutput. Among them, however, wasan itself cannotbe itsthis usedbecause indicator componentparts of problem: an autocorrelation a useful butof GDP, growth the with index isvery correlated well overall The climate. political, etc. of several second-level indices describing the economic, demographic, geographic,financial, which consisted business climate, the of attractiveness indexof an calculated al.(1997) overall In their study widely quoted on entrepreneurialthe of climate Russianthe regions, Lavrov et only for cities, which dramatically reduces its use forinterregional comparisons. is available it is that measurement this of drawback Another regions. individual the of policies prices has tobe based onmore finely analysis of tuned pricethe liberalization/regulation respectivelypoints (Lavrov, 275-276). lessmuch regions, market-oriented Kurganskaya andPenzenskaya scoredone and seven Nizhegorodskaya 16and and Petersburg oblast 15points respectively,scored city St. while suchmarketdevelopment: regions of measurement as the market-oriented clearly Berkowitz and DeJong (2003) circumvented this problem by reducing the sample size to 48 units, by selecting in documented are oblast Nizhegorodskaja and Petersburg Sant in environment market developed highly The 27 Thus the measurement of the degree of regulation of of regulation of degree the measurement Thus the 50 ceteris paribus 28 , the greater , the CEU eTD Collection industries introduced by Soviet planning system biased distant and cold regions. 29 of economic decline.since developing new industries requires massive initial scarcecapital inputs, during periods In this case, Less diversifieddisadvantages. have regions more far in difficulties adjusting tomarkets, they andgeographical specialization cannot industrial of level the notably re-industrialization, impede can be restructured economic andmarketization of performance factors regional otherstructural economy. Third, without massive production capacities was not needed, and indeedwould have been fordetrimental both reduction of competitive of De-industrialization growth. economic regional of used asalocomotives industries,more competitive suchas fuel, electrical energy, steel metalsand nonferrous were development, such as machinery, agriculture, doindeed equipment, require downsizing, other, with inconsistent levelthe market development. Second,whileof some types ofindustrial relatively high and the degree of de-industrialization, which low,remained be will already was services of level the regions some In industrialization. of level initial the notably, This method development. of measurement degree the Therefore, to which de-industrialize regions becould usedas a proxy for market in consumption. favorof private consumption government andconsumer services, reducing can be argueddistortions by shareof the downsizing infavorheavy industries of especially services, againstthe transition from a Soviet-type economy towards markets, regions should undo these forcause many regional become economies to unviablein aliberalized marketenvironment. In several‘gigantomania’ and spatial incurallocation production high and transportation andcosts, reasons, industry services.over Suchfeatures of industrial Soviet economy ‘overindustrialization’, as and industries light over heavy of importance the emphasizing however,former the with substantially, differ economies market and inSoviet economy of the sectors the of proportion relative most The ofmarketreformbe degreeof the indicator possible could adjustment. Another structural of agricultural shareof subsidies. indicator the the to applies same The activity. economic regional in their industry share of average comparison: Sverdlovsk The reliability structures. measurethe of based on depends indicator this on choicethe of oblast has torepublic, bebecause this indicator iscompared not suitable to compare two regions with different economic with regions with a similar, greater than The inter-branch restructuring is to be distinguished from the spatial restructuring, since the allocation of allocation the since restructuring, spatial the from distinguished be to is restructuring inter-branch The 51 29 CEU eTD Collection of that process, as their component parts tend to cancel each other out in the process of intheprocess out other parts tocancel tend astheireach component process, of that On multidimensionality. its given the hand,other are indicators complex lessoften even insuccessful magnitude the depicting economy, market to transition picture real the distorting of which runs riskthe formation), newenterprise liberalization, level (i.e. price privatization, of of reform aspect above measuredasingle discussed All economy. variables market the type of capture multidimensional Russian regional Western- from the picture cannot the deviations liberalizers) slow vs. fast (or anti-reform vs. pro-reform into regions of division simple that or investment growth. This can be explained byvarious the mainconsiderations, onebeing market reform had little impact on growth, measured as GDP growth, industrial output growth All above-mentionedthe studies prove that for theperiod 1990-1998, implementation the of which growth, in abounds literature. the Russia, aswell and analysis as the marketreforms between relationship of economic the market inreform in analysis of regions base descriptive the(comparative) for rich data in the degreeofimplementation of a marketparadigm among Russian regions. They a provide time-limits of applicability, butthey almost unanimously agreeon observing agreat variation of aspects and having measuring reform, internal differing different validity,and external of degrees varying with variables of aplethora employ transition Russian the of Observers sector. energy the of in favor biased is significantly it as indicator this of usefulness the about uncertainty isdeal in of agreat there Russian However, case, investments. security of their warrants developed regions thatprovide arobust market environmentwhicha to certain degree Desai arguinget al. 2005), that investors foreign may beattracted moreinstitutionally to Several used theindexauthors FDI as indicator of marketof an development(Ahrend 2005, regions. of destination the immigration restrictions and the costs, heavy transportation regions, down by prohibitivelythe high cost moving,of including the low liquidity assetsof in host political weightpreventing out-migration of population,the since a decline in population inwouldmean less bargainingin may interested beRegional especially costs. governments political transaction and related with the center.population falls tomuch lower numbers. However, this process is seriously impeded by Interregionalthe iftheir only viable economically made be can they alike; conditions living and investment labor mobilitythe was alsosize slowed of the labor force. Distant and cold regions are particularly unsuitable for both 52 CEU eTD Collection approached the the approached insisted formationorder of market sequencing differently: gradualists that of is agenda animportant part of gradualists between debate the vs. bigbang reformers, asthey of reformist the parts institution-building and of liberalization the importance The relative Djankov and Murrell As2002). Havrylyshyn summarizes 64), (2006, in marketa robust institutional (Brusztenvironment2001, Campos and Coricelli 2002, unanimouslyliterature almost The relevant thatmarketclaims reforms canbe only successful comparable variable. of reform a which represents of cornerstone and marketization the process will measurebe aconsistent progress.problem of multicollinearity, As itis necessary to choosewell only one aspect of reform, but one to avoidleastorder at some of pitfallsthe andtocircumvent mentioned above, potential the as informative, market of reforms In comparable is variable development the regionally task. of a daunting itIn the previous section I have demonstrated thatidentifying asingleinformative and should also4.4 Indicator of the development ofmarket institutions be a spatially andvalues, which couldmore shedlighton this problem,have rarely been undertaken. temporallyhaddevelopment aless but short-term effect, pronounced based analyses on laggedthe market of factors that case bethe well may It period. transition in the point time single a at measured variables on models their based studies the most of is that reason least the the measures of reform progress, cannot liberalreplace parties in national them elections in to regressionthe Duma, no matter how tightlyanalysis. itmay for the correspond vote example, For validity. construct level of reached anacceptable havenot variables toThe last, but not some of these variablesthat is were not explanation measuring third The performance. what theyeconomic of claimin equations to variables measure;explanatory in other words these areusedas indicators reform the an progress problem, asinmany cases endogeneity creates asarule, substitution, This kind of reform. of the of progress the indicator used asan process,forthe example, inflow agreater foreign cannot of beinvestments justifiably direct for is result isof often reform substituted the thatthe summing up.Thesecondconsideration of institutionalof isdevelopment needed alongside private-sector development. institutions…market itstrongly does confirm view the somethat minimum degree competitive of development complementary the with only come benefits significant but effects, positive small some have best at may alone ownership of transfer […] 53 CEU eTD Collection 32 basis of interviews with a panel of experts, which included not only Russianbut on the foreign interviewees. calculated were of factors weightings The risks. ecological and social, criminal, political, financial, legal, ofeconomic, average is a weighted index second The institutions. ofmarket development and infrastructural innovative, consumer, financial, labor, industrial, ofresource, average weighted a is rating first The 31 development of market institutions in their investigationof the various trends of investments. used the risk index in his analysisof outputand incomes, Cai and and Treisman (2005) used index of 30 This rating, or moreprecisely,underlying indices, was used by several authors in their analysis: Popov (2001) their from isdistinct which regions, individual of institutions market of capacities institutional into on Theperceptions account of ratingopinion takes questionnaires. business the experts measures of institutionsof development inindividual andregions of outcomes experts’ Russianthe by regions is constructed Russianthink-tankthe RA Expert. One of mostthe widely of recognized indicators developmentthe of market institutions for (Brunetti, Kisunkoand Weder,1997). variables reform oncethe that institutions variablesincluded lose forimportance are their redistribution 2000). Moreover,(Popov ithas been foundin cross-countrythe regressions, isperformance inadequateand amarketization dividend is only inincomepresent economic on liberalization economic of impact the weak, is institutions market of capacity assessed. levelinstitutions, marketof development overall marketactivity the be of can private In the by Therefore, level the of measuring 2002,36). (Havrylyshyn pace of reform’ economic case of theis institutional tothe broadly weresymbiotic, andthedevelopment ‘paceof processes related RussianHavrylyshyn 2006, Havrylyshinandvan Rooden 2003) have shown,however, that these regions,studies Recent(Aslund2007, order. arguedfor anopposite advocates while rapidreform it hasfreeing of institutions should policies liberalizing privatization, precedethe prices and trade, been proven that if the institutional sample of 89 regions. has basis for been andindicator theentireproduced a consistent annually since1996, on attractiveness. investment part of rating overall of acomponent the constitutes it and DMI), (hereafter institutions market of development the of basis the on regions Reduced2003 between and 2008 to 83 regions due to amalgamations. The overall rating is based on the two sub-ratings: that of investment potential, and that of investment risk. of investment that and potential, of investment that sub-ratings: two on the based is rating overall The 32 DMI is a rating based on a composite index that polls both objective both polls that index composite a on based rating is a DMI 54 30 This is a rating of 31 This CEU eTD Collection margins, indicating interquartile range, median, minimum and maximum values, and outliers. and values, maximum and minimum median, range, interquartile indicating margins, lines.are presented squares and regression plots Box-and-whisker on non-parametric the scatterplot of variables firstthe two for in 83regions as 2001 relativeto1996, well leastas industrial of industry output ten branches; and flow the Fig. ofinvestments. a 4.1plots of in quantities changes the time; over added value in gross change real the in turn: variables, response againstthree betested variable will of asindependent power DMI The explanatory Description variables4.5.1. ofdependent 4.5 Theeffect of DMI in cross-regional models institutions. market of development of level represents higher development of market institutions,i.e. 1 denotes the region with the highest reform.market is of plausible DMIvariable variables value The aranking, thelower where aspects of against other performance regional in economic advantages different explaining usingfor asequence datacollected years and,finally, of its (1996-2001) comparative estimate this variable againstdifferentvariables, dependent in one-level multi-level and regressions, of power explanatory the a test to devoted is section next The show. will analysis following defined, DMI serves cannot be marketization narrowly the conceptGiven that of of transformation. measures as a good proxy indicators marketof regional marketenvironment (Lavrov index, HISindex), andpartial for the summarywhich covers the entire between period 2001,andalso1996 and itiswith consistent other of progress incriticized ongrounds of subjectivity, buttodate isit the only indexconsistently measuredmarketization, asitcan bedevelopment, market of measureregional asa perfect be regarded DMI canhardly as the development.infrastructure perceptions region’s of the potential its with naturalto respect human and endowment, or 55 CEU eTD Collection data isdata available)in seventy 1997, and of (!) out eighty in 1998,while in2001 GRP fell below experienced GRPdecline in physical terms was as high as thirty-nine (out of eighty for which wheredecline experienced during Russia 1992-1998, numberthe of regions which percent, or2.32 percent per annum. This is a remarkable outcome,in mind bearing sharp the level, percent 1996 per annum at2.7 on average. was 11.6 growing median The growth periodthe 1996-2001. The mean regional valuegross addedincreased by its13.5 percent of precipitous deterioration of the first stage of transition, as is reflected in net GRPIt growth over is note value,but not bigger than 1.5 times value for the third quartile,and outliers. –biggest point) zero the from away ofline (end value maximum quartile, first the for value the than times 1.5 line inside a box), minimum value (end of line close regressionto line overlaid.are the On margins: box-and-whiskerzero plots, indicating interquartilepoint) range (box),median (a – the smallest value, but not smallerNotes than Source (1996=100) Regions in 2001 Relative to 1996. Fig. 4.1 : The least : The squares regression line (dotted) with 0.351 r= andR² adjusted 0.31, and non-parametric (solid)

: Calculations based on Goskomstat Yearbook for 2003: for Yearbook Goskomstat on based : Calculations Growth of GRP

worthy that the vast majority of regions experienced a quick recovery from from the aquick recovery worthy experienced thevastmajority of regions that 80 100 120 140 Karachaevo-Cherkessia Gross Regional Product Growth andGrowth ofIndustrial Production of Russia’s EvreiskayaAO 80 100 Growth of Industrial Production of Industrial Growth Magadanskaya 120 56 Astrakhanskaya Regiony 140 Rossii in 2003 Kalmykia Orlovskaya Vologodskaya 160 Rostovskaya . 180 CEU eTD Collection production lines, as a rule, created negative or low investmentnet (Campos and Coricelli 2002). However, in efficient to inefficient from and industries to efficent inefficient from shift The ofshortages. case in measure aprecautionary as enterprises manufacturing Russian most in accumulated were inventories oversized These economy. planned in investments as accounts to in referred was which inventory, in reduction the reflected 34 research. by earlier was perceived as role, decisive a less play growth, real mentioned above, isvery low, which implies that the factors of initial preconditions, at least in relation to the coefficientssection 4.6. Table 2 inof the Appendix to this chapterdemonstrates the that the statistical significance ofeffect the regression with the initial wealthof of each region, for which Iconstructedthe an index of initial endowment, describedinitial below in endowment33 on both the real GRP and industrial growth, measured as development. economic regional destructing (Aslund 2007,65)production,fact a thatmade new investmentcrucial for in manufacturing 2003, Union Sovietthe 118), was anegative value- value-addedor (Boettke in seriousbefully or restructuring, engagedwithout Most some casesradical rebuilding. (Havrylyshyn 2007).Manufacturing inherited capacities from Sovieteconomy the could not The recovery of industrial untapped wasnot enough capacities to trigger growth economic prolonged decline firstthe of stage of transition was not possible new without investment. the from revival economic Russian economies, post-communist of majority the to Similarly between investmentand correspondence economic growth in countries.post-communist andliteratureeconomic (Barro growth Sala-i-Martin positive pinpointthe 2003) variable, investments. The flow third taking the accountwithout the into dependent of impact marketwould on institutions incomplete beThe analysis of of growth economic from a few regions’ (Golubchikov 2007, 199). transfers on than rather output, industrial of expansion locally-anchored on ‘relied growth strong correlation with expansionthe industrialof which impliesoutput, that post-1998 the levelthe yearinof a preceding from Asis six regions. only apparent GRPhas Fig.the 4.1, a investments varies between (p-value0.91 and <0.001in 0.83, all andforcases) variable that Table 3in Appendixthe for displays theperiod that 1996-2001 regressionthe forcoefficient variables. thetwo between association below forinvestments the and GRPfor year the 1996prove that isthere astrong and positive What is more interesting, the real growth rates of GRP and industrial production are notstrongly associated Aslund (2007) argues that adrop in investment was a necessarily outcome of earlythe transition, as it 34 and lineinFigIndeed, plot scatter regression the the 4.2 57 33 CEU eTD Collection Fig.4.2 Relationship between GRP and Investment minusSavings for Russian Regions for1996 for thelevel indeed principal predictors performance. economic of are twovariables that these hypothesis the models confirm for these estimates regression growing regions (Barro 1997,Barro and Sala-i-Martin 2003), ratherotherwise. than it is plausible to assume that during the times of economic decline, initial investments were attracted to faster 36 35 over. was investment new Russiaby 1996, offsetting effect ofdishoarding and ‘capital shrinkage’ in old industries against the growthof endowments initial close to the zero point) whisker plots,– indicating interquartile the range (box),median (a line inside a box), minimumsmallest value (end of line value, butvalue 11.18), and R² adjusted 0.63, and non-parametric (solid) regression overlaid. line notare On box-and- margins: smaller than 1.5 transformationtimes led to a more symmetric distribution.than The least squares log regressionthe the while line point, (dotted) zero the withup valuenear bunched r= were 0.53 (t- variables the transformation the forBefore 10:1). (> the first quartile, Note: There is a great deal of uncertainty onthe direction of causality in the ongoing debate in growth literature, thus The composition of the variable is described in detail in section 4.6 the logarithmic transformation was used for both variables since the range of values is large in both cases both in large is of values range the since variables both for used was transformation logarithmic the log of Gross Regional Product for 1996

8.0 8.5 9.0 9.5 10.0 10.5 11.0 yva Ty 4 Ivanovskaya 35 The in cases). all 0.001 (p-value< 0.62 and 0.68 varies between Kalmykia 5 6 Ingushetia log of Investmentsfor 1996 Magadanskaya 7 Dagestan 58 8 Rostovskaya Sakha 9 Tumenskaya 10 36 Moscow 11 CEU eTD Collection on industrialon displayedgrowth opposite toexpected,unstable, though signs. for all years, except forthegrowth industrialof for theyearsoutput 2000and 2001.The effect variables both for high was association of strength the that shows 4.1 Table hypothesis. the institutions onthe physical of growth GRP and industrial growth of were supportiveoutput of market of of development effects the the estimating analysis of regression the The results long-term effect of the DMI variable on the growth of GRP and investments. and model of estimates, formixedthe the evaluation then run a investment effect various replacing theGRP percapita by of physical growth the GRP, growthofindustrial and output, analyses run first regression the I outcomes, statistical the of check robustness the to In order drop of 413 thousand rubles. of drop 106 thousandin rublespercapita, samethe 2001 shift withwould be associated a ranking of regionsthe more (from market-oriented lessto market-oriented) would cause a of marketthe institutions for economic growth: while in 1996 an upward shiftby one place in -106.8 to -413.2 over time. This finding the hypothesis reinforces of importance growingthe The t-statisticfalls belowand never 2.6, estimate the of slopethe isfrom gradually increasing (seeTablecapita in Irun regressions 4.1below) bi-variate for eachyear between 1996-2001. The variable of4.5.2. Results of bi-variate regressions DMI shows statistically significant association with the level of GRP per data: basis Goskomstat the on of all inflows, calculated capital of regional measures three against variable DMI regressed I variable, DMI the of test a robustness of part As a the third quartile, and outliers. for value times 1.5 than bigger not but value, –biggest point) zero the from away ofline (end value maximum x x x private investments attracted, percapita, attracted, investments private availableonly periodfor 1999–2001. the physical investments,of growth measured for the entire 1996-2001; period, and region per capita, measuredfor the entire 1996-2001; period, total investments in non-financial minus total assets savings of population in given the 59 CEU eTD Collection R² adjusted t-statistics production industrial ( R² adjusted t-statistics GRP ( R² adjusted t-statistics ( variables Dependent divergence betweensuccessful backward and regions (Dienes 2002, Golubchikov 2007). 37 greater demonstrated industrial growth. marketdevelopmentof institutions, therelationship was less opposite:the developed regions low with regions the For either). negative not but positive, (not group in this zero The line for the year 2000 is almost flat, which shows that the impactslower industrial the whichgrowth, is apparentin downwardthe slope of of regressionthe line. the DMI was close to follow the main trend:found for that 2001,thegroup of market-orientedthe regions (ranking1 44) didthrough the less developed institutions.market of I theirin with development of accordance groups separately, regions the region withrelationship between DMIthe industrial and growth of which me output, analyzeprompted to respect to marketconflict with overallfindingsthe section.of this Isuspectedanon-monotonicity in theinstitutions, the of The regression for for models theindustrialestimates yearsthe output 2000and2001, variable is(Independent DMI) Dependence of Real GRP Table 4.1 and Industrial Output on the Development of Market Institutions iii ii i ) GRP per capita This finding constitutes puzzlea which imply clusteringa hidden indata, or, more probably, deepeningthe ) Real growth of growth ) Real ) Growth of Growth ) in Russian Regions 0.02 -1.6 -0.06 NA NA NA 0.11 -106.8 1996 -3.3 0.005 -1.2 -0.04 0.03 -1.9 -0.05 0.08 -2.9 -112 1997 37 dichotomy. this demonstrates below 4.3 Figure 60 0.01 -1.4 -0.04 0.003 -1.1 -0.04 0.09 -2.9 -120 1998 0.03 -1.9 -0.09 0.03 -1.9 -0.08 0.10 -3.1 -225 1999 0.01 1.4 0.05 0.03 -1.9 -1.9 0.11 -3.3 -392 2000 0.001 0.9 0.04 0.01 -1.4 -1.4 0.03 -2.6 -413 2001 CEU eTD Collection BayesianModel Averaging, in sectionthe 4.8. 38 44), 1 to from (Ranking Regions with High development of Market Institutions Fig. 4.3 Relationship between theDevelopment ofMarket institutions and Industrial Growth for thanin better half. other the were developed mainforHence, the findingof holdsthis section institutions the halfmarket whereregions of

The unstable statistical results forthe models of industrial growthwill be reasserted by further analysis using Growth of Industrial Output in 2000

105 110 115 120 125 130 0 Different groups of Regions for2000 and 2001 10 Development of Market Institutions in 2000 20 30 40 38 61 (Ranking from 45 to 88) to 45 from (Ranking Regions with Low development of Market Institutions Growth of Industrial Output in 2000

100 110 120 130 140 150 50 Development of Market Institutions in 2000 in Institutions Market of Development 60 70 80 90 CEU eTD Collection below. very impactweak onthe flow of investments for all years (1996-2001),as shown in table 4.2 a has institutions market of development the of level the that revealed independent, as variable DMI the and dependent, as entering variables these with analysis regression Bi-variate 44), 1 to from (Ranking Regions with high development of market institutions Growth of Industrial Output in 2001

90 100 110 120 130 0 10 Development of Market Institutions in 2001 in Institutions ofMarket Development 20 30 40 62 (Ranking from 45 to 88) to 45 from (Ranking Regions with low development of market institutions Growth of Industrial Output in 2001

90 100 110 120 130 140 50 Development of Market Institutions in 2001 60 70 80 90 CEU eTD Collection minus minus savings ( R² -0.01 adjusted t-statistics investments of growth R² NA adjusted t-statistics ( R² -0.01 adjusted t-statistics ( Investment Private Variables Dependent the fit of the models displayed in the Table 3 in the Appendix. in the 3 Table in the displayed models the of fit the market improves institutions of development section assesses whetherthus next the adding for economic and The important performance. endowments) variables natural (investments The next stage in the analysis entails running the regression formeasurement marketinstitutions model wasreported as of 1996. that controls for these two least,andadvantage; not all investments measuresfor werecalculated for 1998,but the it included slightly calculated of differently: geographical measure additionally the the was endowment natural of index the analysis, in their is that my own and study their between atp<0.01. Possiblemine) werepositive andsignificant forthisincongruence explanations between them and development of market institutions (incidentally, measured identically to and measures correlation netinflows forthe capital 1998, of different three calculated regionsoriented with wereassociated ofinvestment.higher inflows Cai and Treisman (2005) shows market- the result analysis that This finding of that previous contradicts analogous (Independent variableis DMI) Table 4.2 Dependence of Investments on Market Institutions in Russian Regions iii ii i ) Investment ) Physical ) Attracted ) -2.61 0.4 0.03 NA -0.1 NA 1996 27.5 0.02 -1.6 -0.1 NA NA -0.01 0.9 NA 1997 -12.5 0.01 -1.2 -0.13 NA NA -0.01 0.6 NA 1998 63 -2.1 0.00 -0.1 -0.2 0.07 -2.6 -0.01 -0.1 -0.02 1999 93.3 0.02 1.5 0.7 -0.01 0.97 -0.01 0.9 0.05 2000 19.9 0.02 1.8 1.0 -0.01 -0.6 -0.01 0.2 -0.04 2001 CEU eTD Collection of 1 to 3 percent, which in itself does not refute the main finding of this section. ; institutions. improves model consistently tothe compared marketmodels omitting development of models,multivariate is and nearly for theyearssignificant 2000and 2001.Thefit of the exception market yearininstitutionsthe of of development 1998,the remains the significant the With conditions. pre-existing and investments flow the of variables the controlling even inmarket canexplain some variation institutions growth, that regional conjecture The regression estimation results shown in Table 4.3 below offer some support for the andstandardized addedtogether. All of fouraccount on variable 1).were variables calculation the see Appendix,Table the as of1995, and (4) numberthe of research developmentand (for organizations thefull higher human shareof education developmentof as measured the with capital, the population as of 1995, and thenumber of public busesper1000 inhabitants as of 1995, (3) anindicator of paved measured thatwere as thepercentage of infrastructure, roads of developmentphysical in region rawmaterialsthe as output of 1995 (divided bymean) anindicator of (2) indicator of natural resource endowment, measured as the natural logarithm of the share of the Treisman (2005), indexthe initialof endowment is fourconstructed of parts, namely an (1) initial are heldendowment Following constant. methodologythe suggested by Cai and estimates of produced changethe inGRPwith rankingwhenthe flowand of investment which year, each for separately regressions multiple ran I endowment, initial of level andthe above,which investments made of level reported regardless are the regressions of forcapita regions with large valuesinvestments percapita.of As well theindividual as per GRP the at looking are we development) market in (best ranking of values small at Thus decreases. development onmarket as increase ranking investments the It canbeseenthat 4.6 Evaluation of DMI in multivariate models 39 Comparison of the Tables 1.3 and 3 in Appendix shows that the fit of the model is improved by an increment 39 64 CEU eTD Collection R² adjusted (i)and (iii) (i)and between Interaction (i)and (ii) between (iv)Interaction index endowment, (iii)Initial Variables (ii)Investment institutions of market nt (i)Developme possibility isremaining mixed-effectsthe model. in only Therefore, thiscasethe ratherthan measures TSCS. the design repeated tothe closer is my model terms, statistical In periods. time of number the than larger much is observation cross section methods, since it represents a ‘true’ series time panel forusing limitations has some my data However, data (TSCS). sets set, section data cross where the number of units of (Beckand(PCSEs) 1995),which for Katz timestandard errors are particularly suitable series meanthe years;on calculating across the values and third, panel-corrected and reporting foranalysis eachyear; second, averaging away pseudoreplication andbasing the analysis the techniques tohandle the problem of first, including carryingpseudoreplication, a out separate across features will in be are time.several measurements There reflected structural all the same the because errors non-independent have not will annually taken region same the assumptionviolating the important pseudoreplication, of standard analysis since measures of issue of the creates data ofthe nature time series The analysis. section cross - series of time using possibility the investigate led me to data of available the The structure 4.7 Timeseries –cross section analysis parentheses in values Notes Linear Regression Coefficients Table 4.3of Development of Market Institutions, Investments, and : the first column for each year contains coefficient for the bivariate model, the second – multivariate. second the model, bivariate the for coefficient contains year each for column first the : 0.11 1996 (-3.3) -106.8 Initial Endowments, for the period 1996-2001. Dependent Variable: GRP per capita 0.86 (-1.8) -11.3 (2.3) 0.03 (3.65) 697 (13.9) 2.8 (-2.4) -52.9 . 0.08 1997 (-2.9) -112 0.83 (-2.1) -16.8 (3.5) 0.04 (3.9) 902 (-3.3) -84.5 (13.1) 2.5 0.09 1998 (-2.9) -120 65 0.74 (-2.5) -47 (-0.7) -0.01 (2.3) 776 (-0.3) -10.5 (7.3) 3.9 0.10 1999 (-3.1) -225 0.78 (-2.5) -47 (1.5) 0.03 (4.8) 270 (-2.0) -144 (4.8) 3.14 0.11 2000 (-3.3) -392 0.82 (-3.7) -99.9 (2.3) 0.04 (6.9) 5635 (-1.6) -141 (7.4) 2.4 0.03 2001 (-2.6) -413 0.83 (-4.2) -122 (1.4) 0.02 (7.2) 7011 (-1.7) -181 (6) 2.43 t- CEU eTD Collection contains 22 regions, the second 20, and the last two 23 each. 23 two last the and 20, second the 22regions, contains group first the hence variable; DMI of values boundary the approximating and group each in of regions numer 40 notdue leastincrease2002, to the in oil prices. oil-rich regions of less the (4) immenselydeveloped group increased their GRPlevels in The for80 percentof of 2003). atleast total budgetary the revenues (Quan growth accounted growth of tax the revenues from the oil industry to consolidated budget, which in turn, 1998 and 2001thegrowth of pricesoil (from $23)$12 securedto 60-75percent of the between that shown has Analysis regions. in these product regional gross the of appreciation for this in lies effectof of the risingexplanations causedafaster oil prices gas,which and omitting the year 2002would clearly in place 4 group last position. One of mostthe plausible for averagethe this group to jumpfrom rubles percapita30,000 60,000.Anto over analysis this canbe explained by increase sharpthe of innominal GRP yearthe 2002,whichcaused 4 group the largest.the Surprisingly, leastdeveloped the regions overtookgroups 3and 1,but 2having between mean with other, resemblance each valuegroup smallest the GRP, and of of marketfor eachlevel panels, four one arein Below, presented Figure 4.4 in treatment. each replicate development, each for averages calculated andgroup ranthe same model, butthis time with only one development, market theregions samelevel grouped Aftertogether the with this, I of and the isinstitutions), 1,014rubles per capita, with t-statistics 2.02(see lastthe line in table). linesthe in reduction with item GRPassociated one the the change inDMI(less developed display mean the is that result essential The regions. within pseudoreplication represents measurement the growth indicate that the year of effects random in in the presented where Appendix, 3 the Table ofyears. variable is theGRPpercapita. The response output of model mixedisthe effect GRP. replicates, twenty-two approximately The panels and65.9), four –low (between Each 88.3). 66.0 and treatment(level contains of DMI) and 44.3 between (rating – medium-low three 44.2), and show 22.6 between (rating medium-high a following way:one–high (averageyears ratingfor 1996-2001between 1 and – 22.5), two in levelmarket in the of the a region,the development variable, coded of levels categorical The model specification is as follows. For simplicity, I have only one fixed effect – a four The division between the treatment groups was done in such a way as to balance between the equality of equality the between balance to way as a such in done was groups treatment the between division The 40 successive seven over measured region with each 66 CEU eTD Collection position in to the linescomparison for groups.other pull on linethe group1, for theline this for group cardinally neitherchanges its shape nor its strong extraordinarily an had have could which Yamalo-Nenetski), and (Khanty-Mansiiskii Appendix shows thatfaster rates inof yearsgrowth 1999-2001, stabilizing in 2002. The graphin Fig.in 4 the even with thein 1999,with of a decreasing until growth rate The upperlevel 2002. showed much group omission of the2) have similarpatterns growth, sluggishinvestmentof before 1999andthen growing rapidly observation ofhas a profound effecton levelthe investments. Themiddle of (factor levels level groups 3 and the two oil-rich belowvariable. Figure clearlyhigh 4.5 that market institutionsdevelopmentdemonstrates of regions minus model investments I ran savings dependent measurementthe as replicated the with Fig.4.4 Time – Series Plots for the Different Levels of Development ofMarket Institutions. Dependent Variable –GRP Per Capita.

GRP 10000 20000 30000 40000 50000 60000 1996 1998 3 4 2000 2002 67 year 1996 1998 2 1 2000 2002 10000 20000 30000 40000 50000 60000 CEU eTD Collection 1999), and second, the aforementioned Lavrov index of development of market andsecond, index the aforementioned1999), of development Lavrov of reform it as a forproxy thelevel a of or privatization proxy of property protection rights (Sonin of market reform. The first is the IHS risk rating, the structure of which enabled authors to use price liberalization, widely inthe relevantresearch, Iincludeemployed complex two indices and As of privatization, well in literature. largeand variables small-scale reform related as the Along with of market variable with the DMI Iinclude variables associated other several models. selected a selected set of dependent variables, andposterior reported probabilities from bestthe for models bi-variate separate each pairindependent of andrun responseSecond, Irun variables. I Bayesian Averaging Model for First, development. economic regional of measurements different the against reform market the of measurements different the of power explanatory consistentlyinvestigated in work. previous This section fills this gap by testing the been havenot market reform of indicators of different anddrawbacks advantages comparative of The reform. scope the todescribe designated asetfewvariables, of or a variable doing so, I followedrobustness the pattern of its The previous sections werefocused a around single market variable reform,of testing the of regressionprevious research,estimates4.8 Bayesian model averaging whichin variously based the specifiedstatistics models on a singleof economic growth. In Fig.4.5 Time-Series Plots for the Different Levels of Development ofMarket Institutions: Dependent Variable –Investments Minus Savings per Capita

Investments 10000 20000 30000 40000 0 9619 2002 1999 1996 4 9619 2002 1999 1996 2 68 year 9619 2002 1999 1996 3 9619 2002 1999 1996 1 CEU eTD Collection industrial industrial compared tothepreviousproduction year. for thepricecorrected income growth/declinein andGRP,both index,andthepercentage personal three: to inregions Russian measuring performance the economic the variables, the any significant regression for applies of variable the real growth of GRP, and for investmentsdid variable the nothave estimatesincome for all the variables.showedreform. market for eachyear), Outof models (six 18 bi-variate considered growth of the Therefore significant I forandflow,variable few investment the affected with by arenot exceptions, reduced of variables the the numberAs the table shows,of the variables of real growth of GRP, index of growth orfor personal income, nearlyp<0.12. at significant outcomes the for t-statistics corresponding and coefficients significantregression variables, the regression estimates summarized in the Table 4.4 below, where I report only the correspondenceAs a preliminary analysis, Irun bi-variate models for all of pairs dependent andindependent and previousin foreign investments. enterprises onlyforeign and joint of experience the of evaluation an includes also It three. region. given The ina risks as ecological aswell social, economic, of political, average asaweighted computed same risk rating of regionthe is developed by Vienna Institute the for Advanced Studies (IHS). It is (Lavrov et al. 1997).The composition of Lavrov index is described in section 4.3 above. The 69 CEU eTD Collection HIS Index Index Lavrov Liberalization Price DMI privatization Small-scale Privatization Large-scale 1998 HIS Index DMI privatization Small-scale Privatization Large-scale 1997 HIS Index Index Lavrov Liberalization Price DMI privatization Small-scale Privatization Large-scale Variables Independent Lavrov Index Lavrov Liberalization Price using Bayesian in marketreform, be can and tackled progress regional growth of economic measurements Model The uncertainty regarding form the of the model, duetomultiplicity possibleof AveragingNote: (Bartels 1997). The essence of the method lies in the Table 4.4 Regression Estimates for the Bi-variate models, Regressing to Different Measurements of t-values in parentheses in t-values Economic Performance (2.3) 1.4 Dependent Variables -0.3(-1.5) 1.8 (2.5) -0.03(-2.4) -0.2(-1.6) -0.1(-2.6) -0.9(-3.5) -0.1(-1.9) corrected income, Personal (2.6) 2.4 (-2.6) -1.4 (-2.3) -0.1 income of Growth (-2.4) -0.6 corrected capita, per GRP (-3.0) -1.0 (1.6) 27 70 growth GRP Index of (-1.9) -0.05 (1.6) 2.1 (-2.0) -0.9 in real terms production industrial of Growth (1.7) 2.6 (-1.5) -0.7 investments of Flow CEU eTD Collection favored by the BMA results, and the posterior probability of that model. years, parameter estimates probabilities, Ireportcorresponding mostof posterior model the belowin for each interest,4.5: according grouped Table independentof variables to the of is substantive The statistics summarized years:1996,1997and1998. and successive three posterior models probabilities. Irun BMA nine times, for each of dependentthree variables lines show the number of variablesfour last The models. infive best the in case they are selected the variables forthe estimates in each of these models,five standardnext parameter The presentmean, the deviation. columns andposterior R squareds, BIC values, and theposterior iscolumns thatthe probabilities variable report in model,a BMA posterior the three first the Appendix: in the 5 Table in is presented output The variables. control as - areincludedinto setof potential the dummy republicanstatus the forregressors variable the for region the which belong anindustrial to core of national the economy (Desai et al. 2003), index and priceliberalization).The other variablesthree -initial dummy endowment, variable six independent variables ofinterest (DMI, HIS, small large-scaleand privatization, Lavrov globally optimal model.evaluation of probabilitiesposterior of all modelspossible giventhe data, and finding the I use this method in order to compare the explanatory power of the 71 CEU eTD Collection 1998 1997 1996 Large-scale privatization 1998 1997 1996 Small-scale privatization 1998 1997 1996 Price liberalization 1998 1997 1996 DMI 1998 1997 1996 HIS 1998 1997 1996 index Lavrov’s variable Independent large-scale and small-scale privatization, the probability in probability privatization, former the large-scale andsmall-scale the variable of appearing of indicators from the Starting reform. market implementation of of of degree estimates the of alternative the power explanatory comparative into the insights several The table provides Summary Table for the Nine IterationsTable 4.5 of BMA for the Determinant of Regional Economic Performance 0.04 0.052 NA 0.055 NA 0.061 NA 0.066 NA 0.052 NA 0.061 NA 0.066 NA 0.074 NA 0.84 0.76 1.00 0.043 NA 0.049 NA 0.048 NA Dependent variable 0.075 NA 0.130 21.2 0.068 9.98 Income variable y of the probabilit Posterior NA -0.83 0.34 -1.31 0.21 -1.6 model best the ȕ in NA NA NA NA NA NA NA NA NA 0.42 NA NA NA NA 0.06 0.07 model of the best probability Posterior 0.077 NA 0.056 NA 0.062 NA 0.067 NA 0.056 NA 0.065 NA 0.067 NA 0.089 NA 0.075 NA 0.066 NA 0.067 NA 0.086 NA 0.14 0.14 0.14 0.26 0.39 0.36 GRP variable y of the probabilit Posterior 72 NA NA 1.15 0.9 1.54 1.15 ȕ model best the in NA NA NA NA NA NA NA NA NA NA NA NA NA NA 0.10 0.10 0.15 0.11 model best of the probability Posterior variable y of the probabilit Posterior Industry growth in real terms 0.021 NA 0.195 -1.1 0.081 0.7 0.18 0.05 0.056 NA 0.29 0.05 0.056 NA 037 0.22 0.60 0.051 NA 0.038 NA 0.057 NA 0.07 0.62 0.057 NA 0.08 NA -0.11 NA -0.09 NA -0.1 NA 3.5 model best ȕ inthe NA 0.05 0.30 0.09 NA NA 0.12 NA NA 0.13 < 0.05 0.30 NA NA NA NA 0.20 model of the best probability Posterior NA CEU eTD Collection from being satisfactory: in different model specifications t-statistics vary from 1.05 to 1.52. argumentis thatthelevels of statistical significance inPopov’s (2001, 880) areoutput far butto acertain explain,not last, Andthe contradictory results. theleastimportantdegree, the level the Allin variablemeasurementGRP percapita. of of deviations dependentthe these the central will relative poorer regions, to the whichreceivelarger budgetary transfers overvalue deviantmeasurements for the same regions. Moreover, the ratio of personal income to GRP between 1990and 1996in wealthier (in terms ofincome) regions could have produced study itis personal income for corrected theregional index.price slower The income growth GRP in of to while inthis income of personal measured asa 1990, 1996 as apercent ratio in level income the differ: is paper, forPopov’s dependentvariables of measurements for this lies in fact the that the mostexplanations plausible research. Oneof the present the performing This (2001,882). regions’ finding theresults contradicts of in BMA the analysis income ‘redistributing from worse performing and poorer regions towealthier and better in were Marketreforms, incomewords, level. level Popov’s the predicting of regional the predictor of the level of the regional GRP, industrial output, or investment, it does a fairjob in Russianwhile Heclaimscannot it across regions. that beconsideredchange asan adequate income of patterns for different determinant is important an privatization) of small-scale Oneof services. his is mainfindingsmeasure the the market that of paper reforms of (scope its set too, Popov’s mentioned study (2001), insection had4.2, a variable in forsmall-scale privatization in the form of the scale privatization, this model has aprobability posterior low particularly (9 percent). share of privatized probability itstandvariable’s out: posterior is 18percent, andsimilarly case to the large-with only privatization, in BMAiteration,one thereal for enterprisesgrowth of inindustry does 1998, the BMA: itin varies trade, between scale privatization 5.0has an even smaller probability of featuringin any models by selected publicand 6.7 per cent. catering As in variable privatization large-scale of the fifth appeared best model.is Theof variable small- the case with theand variablehowever of large-scale region.the ina industry of growth selection real the of predictor a good not is variable the that implies which cent, This model of probability However,0.195). the posterior probability thisof model is the extremely low, 5per was variables selected plausibly variable bein quite the could large-scale privatization included of equation (with the inamong probability its of appearing inamodel for real the of industry growth in 1997. In model this the modelthe modelsthe is very small, varying between 0.021and 0.081, onlythe most beingexclusion the was probablesub-optimal, for a givenwhich setis whyof variables,the 73 CEU eTD Collection extremely extremely probabilities. low posterior models appearin not of this byBMA,for due variable do one, set favored except the to include which models The growth. economic of equations in the variable this of inclusion the the models themselveshigher in than equations for GRP or industrial However, growth. posteriorthe probability of is 0.1 or less, in regressor equationsthe explaining personal income iswhich approximately points 10 percentage leaves us with in industrial real production terms. probability The of IHSvariablethe appearing asarelevant a good deal of uncertaintygrowth of forGRPor than between those regions inthe income thevariation explaining about depending responsevariable: on the ithas a chancebetter of inappearing models the has The nextvariable, awider IHS, probability, and range of 0.043 0.143, posterior between model was due to the other variables, DMIthat among of them). probability high relatively the that shows Appendix the in tables the of examination for industry explaining yeargrowth the probability 1996(whichhasa close posterior 0.3), of butset, for adifferent reason: even itthough features (with in probability 0.08) a model from be the safely can discarded also Thevariablelarge-scaleprivatization determinants. of ofindustrial forprobable determinants yearthe ingrowth 1998,are among factnot its as which appear (control), liberalization price and privatization small-scale of variables thethat given isset of predictors superfluous in industrialexplaining the Therefore, growth. industrial in growth 1998 is explained best of all by grandthe mean of sample.the Thismeans of pattern the that shows Appendix in the output BMA the of inspection the Moreover, it. explain plausibly can levels control) price (or liberalization price nor privatization neither growth, as for economic measure a variable onechooses of resultBMA: whichever the by isre-affirmed in inreform variation performance interregional market economic capturing as of one liberalization of indicators price the low variable of statistical the The capacity (share variables too economicof andprivatized private activity prices).and shareof regulated This isresult in line with study the (Ahrend 2002)mentioned in section 4.2, which used these models included variableswhich (12 percent)of privatization, itis still not very plausible. probability Even (p=0.294). though this model has a higher probability posterior than the Only for themodel explaining real growth of inindustry 1998 does variablethe have greater is posteriorthis probabilities variable varybetween somewhatgreater: 5.0 and8.9per cent. Analogous inference can be drawn for the variable of price control, even though the power of 74 CEU eTD Collection years respectively): the x-axis of themodels represents by selected imagethe x-axis years in of the plots BMA respectively): response variable (Panel A, Band Careimage for plots for datasets 1996, 1997and 1998 Below, in Figure 4.6, Ipresent avisual summary of the BMA analysisfor GRP per capita as a less probable than themodel containing only intercept value (p=0.134vs. p=0.192). second best model includes only DMIthe variable (except intercept), of which is only slightly combination of them are better at explainingas mentionedfor the year However, none orany above, of 1998 potential the regressors, the growth than a simple grand mean. probability inclusion inof modelsthe explaining growth of industrialHowever, inproduction real terms. industrial for production 1997). The index also shows a respectable level posteriorof than for any of the is higher models these of all probability in posterior The explainGRP. variation modelswe areto the observed so if DMIhastobeincluded,that it with can certainty year complete forbe the 1996, asserted far (with the exception all variable. For inclusion probability years the of of fallsDMI never below and 75percent, of that explainingreform.market is for This particularly apparent themodels having GRP asaresponse growth of vastly variables inclusion totheother are probabilities superior of andprobability of posterior the for values The institutions. market of development of is that consider to variable last The the levelpredicting income. of in index Lavrov of robustness the proves outcome BMA the and index), price the for yetanothermethodincome measurementfor estimating income corrected (personal percapita index is highlysignificant or significant (t-statistics vary between 2.34 andI 3.06). employed 1990level,to the aratioof GRPin or personal income to 1996 as a percentof 1990, Lavrov changein 1997,asa percentage incomeas real compared wasspecified percapita change income index. of and of income change the patterns variable Whether the Lavrov the personal finding isin line (2001), who with Popov found astrong statistical correspondence between chance of beingincluded in all models,relevant basedon giventhe set of variables.the This Thisreaches amassive 62percent. index for year, that means Lavrov that avery has good plausibly of industrialexplaining growth islessforproduction, stable. But yearthe 1997it 39.0 percent.varies from Theprobability itof 26.2 to appearing inthe model specifications, probability the manner: stable very in a income inpersonal variation interregional the captures The yearthe impact 1997). of progress the measuredreform,of market asLavrov index, growth evaluated in termsincome of all (for years) and growth of industrial production (for of ineconomic It features theequations growth. economic of variables of the explanator The nextvariable, Lavrov index, hasamuch probability better appearingof asa plausible 75 CEU eTD Collection Panel C. Plot for 1998 year Panel A. Plot for 1996 year Fig.4.6 Image Plot for the GRP per Capita for Years 1996-1998 the industrial core, are two principal determinants of the GRP, given the set of regressors. denoting variable well as the as variable, in TheDMI model. is that variable the the denotes and rectangle corresponding the toaregressor, colored corresponds probability. They-axis of order decreasingtheir of probability; width the of columnthe is its proportional posteriorto indcore indcore riskihs riskihs repub lavrov big.pr sm.pr lavrov big.pr repub sm.pr price natur price natur i96 i98 1 1 Models selected by BMA Models selected by BMA by selected Models 2 Model Model # 2 Model # 3 3 4 4 5 5 89 7 6 789 6 11 76 Panel B. Plot for 1997 year o indcore riskihs lavrov big.pr repub sm.pr price natur i97 1 2 Models selectedModels by BMA 3 67 5 4 Model # Model 11 823 18 14 11 9 CEU eTD Collection output leveloutput investmentsand inflow. of The with regions group highestthe developmentof that have shown analyses measurement Iranreplicated growth. on factors of regional economic debate the the that the development yearsthe which is 1996-2001, a in novel approach effectthe discerning market of reform in over ofinvestments and in GRP market change the of analysis the for model section cross – series time institutions a employed has I institutions, market of development the of delayed the effect capture As away to a long term effect both separately. on year each for taken investments of growth the on institutions market of development any produce evidence infavormy of hypothesis of positivethe impact of degree the did not however, model, andhuman statistical The capital. physical infrastructure resources, even controllingafter for the inflow of investments and initial inendowments natural development of market Basing my oneof on the namely measuresdevelopment, research the ofmarket index the of institutions, I found based variables. on these interregional comparisons that it is stronglyrisk of being biased in the onerun way or another, de-industrialization, since or regionalcorrelated liberalization, differencesprice seriously subsidization, of level confound reform, of aspect with GRP growth,measured because studies that asingle However,the growth, of endogeneity the problem. economic markets cannoton beusedtoanalyzeof effects and the therefore component cancel out. each other In many cases include these growth the of gross the regional product to tendency a have which variables, many too encapsulate climate business the of indicators for composite thecause.Most outcome the substituted validity lackedor construct reform My methods. research thatmostshows of previously the methods ofmeasuringmarketused matter, if with measurementdoes multiple the can one associated the problems overcome each region. But more importantly, the degree of development of the market environment in real terms and industrialmeasured of investigation found the In thecourse the degree of development I that economic production are not stronglyin which the region found itself conditions beforeinitial the on the reforms?focuses associated performance regional in the variation the of explanation the with the initial mean that this Does performance. in economic factors equation of the regional explanatory wealth of disappointing suggesting picture anegligible role for market progress the of reform among the The debate on impact possible marketthe of a reform haseconomic produced on performance 4.9 Conclusions 77 CEU eTD Collection growth, andgrowth, differentspecifications of righthandthe sideof model the equation. measures of of economic the with respecttomodifications are robust estimates regression development of degree the account into taking of indispensability the prove ofresults obtained marketThe institutions if we study.the are to explain percapitaregional varies between product 100 and76percent,depending on the periodthe of gross of variationpatterns explaining model in the being variable the of probability posterior The in level. regional output.measuredregional at growth, of economic bestpredictors is institutions the of one market Its of of variable development the that revealed These calculations estimated. BMA) wasalso of variable year (nineiterations plausibleforand dependent of each model combination growth), as well as to all possible models which can be specified by these variables. The most predictorsThe Bayesian AveragingmethodModel assigned posterior probability a setto of possible of regionalterms of growth of GRP and growth of investments per capita. institutionsmarket steady demonstrated andimprovement consistent of performance both in economic performance (in terms of GRP, income and industrial 78 CEU eTD Collection some aspects of the behavior of the regional governments towards markets. towards regional governments the of behavior of aspects the some fiscal relations may reveal important tendencies in center-periphery relations and illuminate selectivity is the fact striking most the policies, fiscal Russian of history the Tracing degree. same its lower political to decentralized fiscal units, itauthority to the authority never decentralized government has always strived to play the role of residual claimant; In applying these theoretical account. into aretaken region experienced outcomes aparticular constraints soft hardbudget of conditions or the performance, unless government to the case of Russia, in differences regional for the account can reliably fiscal of relations (de)centralization it is worth nor degree of the thelevels of government flows between balanceof neitherthat the noting that central federalism preserving’ in to China. present The research contributes debate by the showing about‘market- thatbrought centralization backdrop of political againstthe decentralization Furthermore, and may power move fiscal authoritative directions. in often (re)centralization opposite Blanchard of of decentralization fiscalprocesses political and claim that They processes. by different driven be may they and development of sources different have may realms fiscal and political and ShleiferandrelationsGarrett areclosely Rodden contrary argue tothe connected. the (2003) that (2001)The argumentsuggest5.1 Introduction thatpopularized it is the veryby theories fact of ofthe fiscal fiscal federalism holds that political and fiscal though, the most important is its latterfuction, desire to re-distribute, and re-distribute unevenly and deliberatly. stopped tostruggle ‘to maximise appropriation inorder todistribute’ (Burawoy 1996, 1107). In thiswork, formal terms, regional governnments were granted the right to claim this surplus, but factually,Kremlin never 42 together. country aheterogeneous to hold government central the to costly increasingly become may politics of fiscal decentralisation the example For (re)centralisation. fiscal towards pressures increase which external, and internal both factors, several are There level. federal the at concentrated being authority fiscal while responsibilities and freedoms, setting up regional parliaments, and allowing direct elections for regional officials, 41 Government as a ‘residual claimant’ is defined as one that appropriates surplus after all taxes are paid. In paid. are taxes all after surplus appropriates that one as defined is claimant’ a‘residual as Government The federal center may devolve formal political authority to sub-units by increasing their constitutional their by increasing sub-units to authority political formal devolve may center federal The with which the central government treated its constituents. Hence, the dynamics of C HAPTER 5: M ARKET P RESERVING 79 F EDERALISM AND EDERALISM 42 though at some point it point some at though SBC 41 CEU eTD Collection concessions made to those regions was considerably wider. considerably was regions to those made concessions dependent on the federal contributions to their budgets signed bilateral treaties earlier and the scope of the less were which regions those that He revealed center. onthe dependent is region less the budgets, their in contributions federal the less the and region, inthe gathered are taxes more the performance, economic the better the that is forward puts he ofthought line The them. to made concessions economic and political to regard with government central the from treatment gotbetter sub-units independent more the relations: federal by the 2000). Solnick’s analysis assumes that the shape political institutions of the Russian federation was conditioned 43 and and its SBC, for then measurement to themethodology turn of theoretical preconditions Istart with of analysis chapter. of the empirical core the last constitutes section The economy. regional the over responsibility primary region’s the namely federalism, preserving for thesatisfactionjustification detailed of of one Weingast’s ofmarket- prerequisites more of Thegenerate theirresources to fill section budgets. nextmore own provides their withtransfers, whilethose lesswere bargaining power obliged tolook downward and those regions that had more seized bargaining power opportunity the to elicitmore federal evidencethat for the explanation theoretical it asound provides relations, center-periphery in for thedifferences By andregions inaccounting center Russia. between the relations which I draw theoretical insights for the analysis of sources of the asymmetry of fiscal isThe second section application to the devoted of from bargainingthe gameframework, economic development at regional level. questioned, and I discuss in detail consequencesthe of these conditions not beingmet for has appliedbeen level regional are tothe that prerequisites of two fulfillment the However, nation-level for market-enablingprerequisites federalism were in satisfiedprinciple by 1996. hypothesis. By applying Weingast’s framework of market-preserving federalism,argue I that main for first with background the starts This of theoretical the chapter an overview economies if their budgets are filled regardless of the level of taxes gathered in the region. have Governments very littleimprove to incentive their anddevelop their performance particular region, less the thelikelihood of a robustinstitutional market environment. the thesis, in briefly outlined thirdisthe Chapter, that softer thebudget the constraints for a of hypothesis main first The federation. in regions across behavior in economic differences The analysis of fiscal relationships, thus, can provide useful tools in the analysis of the This issue, thoughin reverse order, was scrutinised by Solnick inhisworkRussian on federalism(Solnick, 80 43 CEU eTD Collection from from ideal,severalthe opposing for explanations this have deviation emerged.Among the greatly agree HansonWhile authors Russian the that 2001, fiscalsystem 2000).all deviated provided rich empirical for testingevidence various theories (Treisman 1996,1998, Popov regions individual tothe granted in transfers variety thevolumes of the The great transfers. uncommented by politicians andscholars, butmoreintriguing patterns werethe of the in the Russian The third stream of isacademic on issue works inter-budgetary concentrated the transfers of Federation. The disparities. cross-regional measuring ways explaining and of accurate feasible and increased volumesGimpelson, Treisman and Monusova (2000)find budgetrelations tobeone mostof the of federal between powers levelsthe of Lavrov government. the et al. McAuley (1997), (1997), fiscal and political of aid (de)centralization the explaining generally, or toin groups, individually, the regions regions, tothecaseof Russian havebeenextensively applied place.theories took Federalist did not go one evolvedof arenaswherethe andrelations game’ ‘bargaining where the center-periphery as relationships fiscal of system the scrutinize works These inparticular. federalism Russian The second stream devoted comprises works to a more general federalism,theme of and background on which modernthe fiscal system in Russia evolved. atheoretical provided they fiscal relations, Russian of the experience early the Summarizing in system. federal newly the emerging relationships budgetary forthe criteria normative acomparativeauthors take and approach tothe Russianexperience develop attempt to system (Lavrov 1997, Illarionov 1997, Sinelnikov al. 1995, Kadochnikov et These 2002). fiscal Russian the on outlooks normative of collection is a first The streams. broad three into divided be can federalism fiscal Russian on literature The constraints. creating and incentives generating haseffect of regional adirect governments, behavior Russian also the on for federation important only integrity and extremely it the stability federal institutions; of is not be spent should money the how on say final the has government of level Which spent. One of key the offederalism isquestions wheretaxes areraised and where is public money 5.2 Theoretical framework: choice of independent variables the four basic model specifications and outcome of the statistical processing of the data. attention is paid tothe core independent variable,Special SBC. In thevariables. last part of this sectionindependent I present the of construction the present I model, the of specification specific problems connected to this. Starting general with the description of data the and 81 CEU eTD Collection enforcing, ( self- restrictions federalism’s makes that manner in a institutionalized is government particular a common market and interstate commerce, ( interstate and market acommon particular reward toefforts, but limited to a degree not toredistribute unfairly wealththe created thus nascent market systems forUnlimited holdsthepotentialparticularly government investments. political destroy to - the state in many have which respects, expectations, are crucial could stable constituents the shouldconstituents, the of rights upon encroach arbitrarily not be can state the strongthat extent the to only enough to guarantee protection for the andconstrains, revenue sharing among them is limited, ( hierarchy withgovernments of scope a delineated of authority ( Weingast delineatesfive of federalism conditions market-preserving include: that ( research. of present forthe the choice purposes appropriate mostbe the model to this seems reasons, Forthese level. sub-national atthe performance of governmental itcomparative studies atnational level,also offersexcellent forexplaining clues differences provide model foristhe though analytical tools developed to Moreover, federations. explains politicalthe foundations for enabling marketsboth in developed and in nascent theoreticalThe follows. as justified be can markets and federation the of analyses prominent most framework The 1997),Montinola,Weingastchoice of (1995, Qian, andWeingast(1995) asone of the elaboratedeconomically independentregions (Solnick 2000). by Weingast todisloyal bybailouts 1998)or ensure regional (Treisman acquiescence political has to forced was federal government when the historical conditions tothe was given attention a profoundmost andprovinces, center fiscal between relations of of asymmetry the explanations various analytical power in that it salient condition ( condition salient The first condition is a minimal or necessary precondition for a federal system. The most primary authority over the economy within their jurisdictions: property law, civil law, etc. committed to. The self-enforcing limitations of the state ( intervene upon limitscompromiseneither nor to oncethe principlesithas established, to the There is itbe whicha dilemma: sameshould atthe has time alimited possibilities state, of the federal polity and ensure the common market, mobility of goods, labor and capital, etc. iii ) thenationalprovide has in theauthority national government to goods public iii ) requires the central government to be strong enough to enablebe to enough coherence strong to government central the ) requires 82 iv v ) sub-nationalthe governments have ) all have hardbudgetgovernments ii ) are not less important, because less) arenot important, ii ) the autonomy of each of autonomy the ) i ) a CEU eTD Collection institutions, ceteris paribus, to be better-off. market on reliance with regions the cause will federation of the constituents the among competition Thus labor. and investments attracting development, economic for chances better have goods public of other provision units, those with more attractive menu of public policies such as level of taxation, social amenities, and better 45 44 the though territories, in respective taxesraisedtheir the of average, thirds two keep, on to for this competition place,take asin second the half of ninetiesthe the regions wereableto enough was regions of fiscal autonomy of actual degree the that however, noted, bemust It from sufferlack fiscal the of todevelop incentives a sustainable source of tax revenues. if markets federalism notpreserve theory: will authorities regional Weingast’s mechanism of capital, labor and as inconceptualized an obstacle wayof attracting for amongthe economic sub-units competition activity. is lackwork the fifth of pre-condition the federalism.their In of type a ‘market-subverting’ In stating this, created they from control and profitgovernment claim, federal theyentrepreneurship, the regional to explicitlyaspirations governments’ regional the down letting By level. regional the to referauthority to taxing delegate the to failure particularly fundamental precondition, fifth the of fulfillment insufficient the Weingast’s intheory attribute thefailuretheir of work, market-preserving federalism solely to aspects of Russianthe federalism. Desai,Frienkman whileand Goldberg (2003), referring to debated most the of one is economy regional the over responsibility primary region’s The over governments regionalthe lackingeconomy – are (Ross2000). hardbudgetconstraints, and the primary responsibility regulatory sub-national of Weingast’s model concerning the regional level of market-preserving federalism – namely of conditions two remaining the of satisfaction the that shows evidence Nevertheless, them. override to government central from the constituents securethe simultaneously and marketplace, provide common to state thecentral federation, enable levels of the second) conditions,prerequisites for market-enabling federalism, namely firstand the third (andtoa lesser degree are, nation-level these showsthat framework Weingast’s Russian theoretical tothe case, Applied by and large, in place. preventedunits.behavior by from are of government constituent central co-operative the They establish(North 1981,Bruszt2000). These embodied limitations arein only ifeffect the transgressions a hierarchy between the In short, their line of reasoning is as follows: given the mobility of factor production among federation sub- federation among production factor of mobility the given follows: as is of reasoning line their short, In costly. highly government central ofthe transgressions made environment co-operative when words, other in 83 45 44 CEU eTD Collection central government and bargain for fiscal concessions contributes to the market-oriented and market-oriented the to contributes concessions fiscal for bargain and government central I will show that limitedthe ability regional of elicitgovernments to budgetresources from the encourages regional government to encourages regional government of fiscal the authority decentralization confirm that relations, fiscal the center-periphery stressed in work the of several scholars. Burawoy (1996) examining the regional andbudgets The ideabargaining thatgreater is in power reflected fiscal greater has been privileges and government accompanyingthe inequality in fiscal were pervasive. re/distribution allowingmany sub-units torun budgetdeficits. Hence revenue sharing between thelevels of 1996) of ofbehaviour federal the centerduring periodthe 1990-1995 (Stoner-Weiss 1997, Lapidus 1999,Solnick of ’ prevalence the that agree all decisions, ofpolitical convergence occasional or the choice institutional deliberate 46 for opt to government 1990-1995(Shevtsovaperiod 1996, SolnickTreismanled 1996, 1996), thecentral the during made Political choices regional governments. between economicperformance the preserving,also but providesanalytical animportant clue for understanding thein differences market- not is Russian-style federalism why only not explains This satisfied. means no by is however,constraints, hardcondition budget federalism. Thelast market-preserving regarding four Hence, system the Russianpolitical of out approximates of fivethe characteristics of Weingast’s fifth precondition. for the fulfillment givesjustification Section 5.5 amorewas satisfied. this condition detailed meanspolicy withto makedistinctthat This importantqualifications discretion choices. some enough had and policies, public of menu a distinct control, in regional variations local regions. Regional governments had enoughregulatory authority at their disposal allowto by seized unilaterally decentralization fiscal of process this halt to power administrative budget(Shleifer andTreisman federalThe 2000). weakened didhavegovernment not enough of federal narrowly the thefederal suffocation avoided fiscal autonomy,government while Goldberg 2003).Regional governments used as this an excellent opportunity to grasp greater governmentfacedmassive problems its with expenditure responsibilities (Desai, Freinkman, variedretention rates the considerably.demise Following Soviet of Union in federal 1991, the Though analysts diverge with respect to the ultimate strategies of the central government, whether it was it whether government, central the of strategies ultimate the to respect with diverge analysts Though bilaterality ’ and selectivity, rather than universality in resolving federal problems was the dominant pattern ad hoc regulation and follow the politics of ‘soft budget constraints’, budget ‘soft of politics the follow and regulation assume primary responsibility for economic development 84 46 . CEU eTD Collection effect on the present institutional behavior. If we claim that political institutions The federal of setting Russianfederation, the andthewayitarecame have about aprofoundpath- context (Lapidus 1999,Kahn 2000, Solnick1999, 2000). 1996,1998a, specific federationsub-units, to the contributed andhowthespecific building of path political whyit ofinstitutions have possible indifferentfederation become came about, to sets various In the case of Russia thebargaining gametheory explains product of ongoing bargaining’ political (1995,54). consequence thatasserts the Russian federal institutional setting canbenot ‘bestunderstood as a of evolving constituentthe units during thepowerstruggle atthefederallevel Solnick,in 1991-1993. too, regions. During mid-90s the thefederalconstitutional wascenter regaining power the which was given to process,butalsoan ‘staying together’ outcome struggle of power the and center the between Federalism bargaining in processes. Russian the case is not inonly, (2000)terms,Stepan’s a norms or a significant degree by intransitional to aredetermined ininstitutions differences differences latent ethnicbargaining is game approach particularly useful within historical the institutional framework: conflict,by level the itisof SBC, worth turning tosome implicationsbargaining of game The theory. In order to testthe secondhypothesis, degree which the markets explains of development of but rather 5.3 Theas bargaining game theory approach the (Treisman 1996,2000). from Moscow concessions tax in extracting successful weremore resources economic political and possessed greater that regional anddecade those governments of first transition, gives up’ (Burawoy 1996, 1108).This pattern of behavior waspervasive in Russia during the it what minimizing and from [center] the itobtains maximize what to trying energy political earnings. By following this redistributive logic,it makes regionalthe ‘expendgovernments with negative bail those out to from regions resources successful ittakes in that level national redistribute the profits earned andto collect it has inRussia, up given though discretionary The federal authority center the at the company level, still strivesconstraints will ‘work be prone out to theirstrategy own of (1996,1107). development’ to be the residual claimant localof economy. regional The governments, havingfiscal autonomy and hardat budget remittance tothecenter, ithas incentives even greater and topromote efficiency the support developmental set of incentives. Moreover, if a government has the right to retain taxes after 85 why and how the asymmetrical the CEU eTD Collection federal federal Revenue sharinginsubsidies. streamlined their is direction conducted via theFederal survive on only their on andcan own, unviable remote, backwardandeconomically too levels the between can revenue-sharing on limitation a as notconstraints budget Hard be setting. strictlyinstitutional applied to from independentsuccess or market federalist the whichmaybe orfailure, derivative, either the whole sample ofcontains analyticalRussian challenges that may reveal regions. characteristics Some regions are a possess bemarket-enabling, hasto Federalism, to may at it same itsthat markets, own the setsdangerous development. traps time undermine while that conclude may One resources. in threat order to fill in their budgetshadlook to downward and more generate of their own those regions thatterritorial resources even if meantthis concealing it amount the produces’. On otherhand,the had less bargaininginstead of investing in regional economic developmentpower sought to ‘retain control withover its onfiscal issues chances with center a bargain ownhadwinning the of better Hence,that aregion the center and couldis constraint federalism. necessary market-preserving of the precondition not pose a credible according accuratelyrelations fits Weingast’s into framework, which to hardthe budget fiscal regional Russian the of analysis His constraints. budget soft enjoyed government thecentral to credible threats could state that regions those and republics the that claims fiscal relations tothe explanations game is bargaining the approach of branch this A separate some powersto This center.the sequence preventedthestrong state from being.intocoming they grabasmuch could as they authority upheld, and consolidating only could that, after first involvedFederation state-making of all devolution the of whereauthority to constituents, of asa‘bargain’ framework federation-building prospectivethe sub-units. Russian between prescribed by success. The offederation-buildingfits intosequence Riker’s Yeltsin economic in noryet greater inbettermarkets, nor democracy, in neither consolidating bysub-unitsissue, literature on devolution of the the resulted to noted powers academic the Accordingly,would afurther assertion be that As matters. the federation-buildingsequence of aboutbroughtsignificant changes ininstitutions in that determineturn theirperformance. wecan of avoiddependent, not federation-building that particular path the deduction the , complementing and enhancing one another. Moreover, the study of federalism of study the Moreover, another. one enhancing and complementing , between and center the by regions discussed Treisman (1996,2001).He de-jure federalism for robust federalism specific opportunities creates 86 other explanatory factors set ofinterrelated market-preserving accounting for asymmetry of CEU eTD Collection resources. own oftheir more generate and downward look to had transfers, by central budgets their in fill to order in threat credible pose not could and center the with power bargaining less had that regions those hand, other the On produces’. it amount the concealing means this if even resources territorial own its over control ‘retain 48 by 1.43, thetransfers otherand revenue sharing between the levels offederation had grownby 57 (55).1. 47 expenditures. and revenues balance to obligation the ignore or remove to governments regional the constraints goesbeyond interpretation: this narrow itlabels the propensity and capability of Weingast’sbudget conceptof soft equalizing inequality However, through transfers. RegionsforFund Supportto even (FFSR),designed specially economic the to out andsocial for the economic performance. economic for the beneficial or iswas detrimental autonomy question, whether a related And second, accurate? federal draw influence of politics notdoes heavilyon the that economic development individual invokes doubts. units two Firstof all,is any consideration aregional about for institutions market of separately The application of development conceptof degree of the 5.5 De facto regional economic autonomy of expenditure regionalthe budget. part of publicfourth, over thethe growth Duma,and the percentageof the of growth employment third,President, existencethe of individualthe established by concessions federal parliament, by establishedthe decision existenceindividualof of the region, the second, the concessions a given for granting legal to tax concession existence procedure offederal regulation on the Qualitative andquantitative analysis of incidentsthese can be usedfor this task:first, the correspondinggrowth to of public responsibilities can be used asmeasurements of SBC. Occurrences of bailouts and rapid the of growth regional not employment public of indicators other actualized, SBC outside realm the fiscal flows arealsoappropriate. of is phenomenon this where venue the as a budget to points explicitly term the Although inof stable expectation a central case bailoutthe of insolvency. by governments’ andarecharacterized between levels, the revenue-sharing constitutional According toLavrov et al. (1997) in 1996, regional budget revenues grownhad by 1.38, while tax revenues - Hence, the regions that had better chances to win a bargain with the center on the fiscal issues sought to sought issues fiscal on the center the with a bargain win to chances better had that regions the Hence, 47 SBC conditions, therefore, encompass, a recurrent pattern of the extra- the of pattern recurrent a encompass, therefore, conditions, SBC 87 48 CEU eTD Collection developments aremoredevelopments subjectregional factors, tothan rather unifying political pressures bargaining power. with in among relative regions thedegreeofindependence their accordance varied process, of political Notably, decentralization gubernatorial elections. was not an authority even claimed theirand sovereignty status, became awide-spread phenomenon 1995-1997 the after independence of regions grewsteadily from earlythe when 90s, firstthe ethnic republics 9). Political (1999, regions’ particular or toward regions, nation-wide either toward of federalism. As Ge oriented reforms. Cited in Bradshaw and Treivish(2000). market- radical introduce that administrations and governors elect time same the at and elections national in parties conservative the for vote can regions ofsome Citizens affiliation. party the demonstrate than rather the lobbying federal government or introducing reformsthrough thatwork (Berkowitz 1996,1994a;either Frienkman and Haney 1997), improvements bring to capability their verify and express to candidates for important than rather national issues ones are the most regional salientsince factors in voting behaviour, (Slidervoting 1997, Solnick 1998a).regional to To win elections correlates in regionsweakly it pools is national the in behaviour 50 49 politics hadrelatively overregional weak influence politics. In general, empiricaldue tohistoricalthat the evidencedemonstrates circumstances central liberal (Kirkoweconomic policies 1998,Hanson and Bradshaw 2000). tothe resistance substantial displayed regional authorities that observation the by indicating asautonomous recognize regional policies studies Recentagents. regions onRussian rights to institutionalthe enforcedenvironment that protection of universal and granted rights, specific were that supposed governments to re-regulate andcorrect themarket’sfailures andprovide institutions to discretionthe of regional Itgovernments. waspredominantly regional infrastructural market implementing of task the left level, national the on implemented pervasive, and ‘bad’ equilibria being sustainable (1998).The liberal marketparadigm, missing marketinstitutions but in resulted counterproductive, rent-seeking becoming behavior absencethe of institutionalrobust infrastructure marketof not only failed tobring about institutionsmarket would then appear by default. AsPolischuk notes, institutionalthe void, or and economy the regulation of minimize state it to was enough was believed that economy. It of marketization the to the a neo-liberal approach adopted government The Russiancentral Forextended summary see Sperling (2000), McFaul (1995), Stoner-Weiss (2000), Remington(2008). This pattern finds its parallel invoting behaviour in national as opposed to regional elections. The voting 50 regional pervasive that a conviction haveproduced tendencies All these Đ man puts it, ‘there is no evidence of consistency in federal policies 88 49 Partly consequence was the this CEU eTD Collection enterprises. selected and to enterprises,subsidiesprivileges loss-making tax to direct entering regions, marketdirectlyrules:fixed that regulations tariffs contradict prices, ongoods andtaxes laws and the embraces violations type of The second actors. external of access the restricting natural at all aimed ofresources ownership declarations regional inregions, agencies 2000). Laws on restructuringjudiciaries, restrictions regarding the functioning of federal the limitthat labormobility via permit residence andsystems (Andrienko Guriev 2004, Klimanov was level acts passedon A regional the of plethora regulatory non-regional access of actors. Constitution in ways deformedthat themarkets in their by, regions for example,limiting the federal the contradicted lawsthat passed legislatures case:regional the fact often This was in closure. close downsuchprohibitive to immediate forces evenifmarket their prescribed enterprises, of types staple, organizedaround and or one it largetwo would enterprises, bepolitically structures. For mayreform be overridden by of perception costs and payoffs of by reform local business example, in toward The positiveof governors attitudes the their and preferences. population, entrepreneurs the case of a relativelyThis factmeans that regionalforthe aredependent theirgovernments local survival the on small by regional the are elected electorate. legislatures of regional and deputies municipality), region, specializedtransition countries, both chief executives at all levels (federal, regional, county and in political legitimacy of regional andthe governors In legislatures. Russia, unlike inmost one or two from the stems regions the of autonomy economic relative of the in favor argument Another (2008, environment’ 7). institutional in the changes national-level enormous to respond to which with autonomy by Asgovernments. noted “[R]egimesRemington at the regional level had substantial in of a significant degree by regional andattitudes behavior the explained to differences differences in development/underdevelopment of marketinstitutions in regionsthe are the largestthe in world the (183). 51 politics (Ge actors, influencing regional in politics a way similar to internationalthe influence on national as‘external’ federal the authorities considering even Somesuggest authors from center. the For overview see Matsuzato (2001) where he observes, that the share of total expenses for elections in GDP is Đ man 1999, 9).Without fully supporting it viewpoint, this is clear that the 89 51 CEU eTD Collection onwards. 2004 from Rosstat by issued databases in Excel region this for unavailable data the made This too. years earlier for regions forthese data the merged retrospectively Rossat subsequently, 2004; in merge to regions first 52 between Federation 1996 and 2001. variable variables. andcontrol Itest hypothesis this on a sampleof 88 regions of Russian the requires oriented, avariety of data for construction of mainoutcome variable, independent in conditionsconstraints of beingbudgetsoftmarket- fiscal center-periphery relations tobeThe hypothesis namely tested, of regionsthe unlikelihood the wereable that toextract 5.6 Dataand results menu of andpolicies public had tomake enough discretion policyindependentchoices. regional inmid-ninetiesgovernments amassed regulatory enough tailorauthority to adistinct preconditions, namely the region’s debatable Weingast’s of one primaryfulfillment the responsibilityjustify above arguments the oversummarize, To the regional economy. Russian associatedregional the of with orientation thepolitical governor. the support compliance, political of to source YeltsinThefirst the to regionalpertains and the partygovernor’s of powerwhich be thesecondwill andthirdindependentvariables. Thesecond inthemodel variable stanceas the core to advocatesthethe implementation reformist of such political with compliance government’s regional the Theeffectof important. more are governments of centralagenda of reformthehypothesis Kremlin could alternative the against DMI, in will variation the thatbe in explaining be constraints in budget examined of softness the development with respect of I length which the first main inhypothesis, at described the emphasizes section test 5.6.4. regional to two sources, institutionsindependentThe firstis variable degree the of SBC. Themeasurementmethodology is the political attitudes Description5.6.1 of variables independent of regional and Internet. the print andExpert, rest the isof from data comparativethe regional acquired in open publications (developmentmarketof institutions) is provided bya independentMoscow think tank RA variable Theon dependent data the Statistic (Rosstat). Service Federal the nowadays, State from the Russian Federation’s State Committee of Statistics (Goskomstat), or as itis named The sample excludes the Komi-Permyak autonomous okrug (KP AO). Permskaya oblast and KP AO were the 52 The bulk of the data for independent variables came 90 CEU eTD Collection human resources as an explanatory variable. asan explanatory resources human institutions,it is therefore worthwhile toinclude degree initialof with endowment natural and developments in regions,the and assess thefuture prospect of developmentthe marketof proof of claim.this understandorder In to the complexity of systemicthe economic as time the at regions the of polarization ongoing the using factors, structural of outcome for example,marketBradshaw (2000), showsthat were anddemocratic development the explanationstraightforward seems quite convincing. Research by conducted Hanson and markets predetermine atregionallevel. of that This factors primary development the an advancedindustrial a resources, base, strong or link canserve multinationals with as initial of level the is endowment. Structural suchas resource explanations of endowmentthe regions natural with variable control a as include I which model, the in variable last The anddummies valuethe take 1, 0otherwise. it if upthevaluefirsttakes and is of two: both 1 variable other of second the combination the likely institutions aremore thirdmarket thrive. the branches, Hence, dummy and to executive legislative between synergy political of event in the that hypothesis the test separately will wererelatively powers powers I the against Therefore, of executive weak (Turovskii 2002). for legislative of however, rest the the regions, the Asthe evidence shows, regional executive. werewere empoweredMordoviarepublics parliamentary and thattoappoint Dagestan the It is worth mentioning that 0otherwise. and category in two regions1 itlastwas setto fallsif into accordingly: the wascoded region legislature the reformist the second sourceconservative (12),center-oriented (51)and reform-oriented (26).The dummy variable forthe wascategories: three into of legislatures crucial regional eighty-nine of a sample divided team above importance, the by conducted estimation The legislatures. regional namely agenda, reformist Kremlin’s as the with compliance of political thesecondsource variable describes independent The third and 1996. on the assessmentGeographic Department atMoscowof State University, Moscow Statepolitical Bank and Expert Institute and of product a jointproject bytheRussian of IndustrialistsUnion and Entrepreneurs (RSPP), economic developments (Lavrov al. andet a book istakenfrom published asa The power, 0otherwise. 1997) data among adummy introduce variable: 1if was a governor amember a supporter or of party the of Russian regions reform et al.(Lavrov As 1997). aproxy for thepolitical of attitude chief the I executive in 1995 91 CEU eTD Collection sub-national governments, which are presented below. Sinelnikov-Murylev etal. (2006)outlined a list comprehensive of forpreconditions SBCfor agents conducive toSBC, but saylittle aboutthestructural institutionaland preconditions. additional national aid. Both of these conditions describe the structure of strategies of two wouldintentionally increase provision of public goodsabove optimum on expectations of financial ifresources a region runs abudgetary deficit. Sub-national in governments, turn, forinfringe national the to authorities on announcedearlier principles andgrantunplanned preferable it makes this politicians, national the of voters the time same the at are politicians ante decentralizationthe includes strategy optimal authority’s national the game: formal in a constraints of tax powers Inman (2003)frames main the for softening necessary the preconditions of softbudget and provision of public5.6.2.1 Theoretical preconditionsgoods to the lower level Preconditions5.6.2 forSBC with the inemerging Russian the Federation. institutions. market of development of the explanations alternative two of these relative strength the The next section provides a theoretical explanation of the possibility of SBC spend relatively larger proportion of their expenditures on market environment, which leaves an open space for space the discussionopen an ofleaves otherwhich explanations,environment, SBC being market juston one of them.expenditures of their proportion larger relatively spend 53 financially constrained. more they willinginvest because institutions were poorregionsin market that to werenot institutions=0.41). Their market (r gives astructural argument explanation to the observation foundthey since my analysis, for appropriate the isparticularly methodology Their Cai. and Treisman index of comprehensive index initial initial of endowmentinresource Chapter four, in keeping with endowment2002, Hanson and Bradshaw2000,Treisman and Cai I have2005). already the used evenlydistributed material werenothuman (Ahrend conditions, asnatural, and resources to be strongly andmarketdevelopmentcan performance be accountedfor by invariation theinitial economic in regional variance of proportion large the associated analysts, many by noted As with the development of Cai and Treisman notice, however, that it cannot explain why the regions that were better endowed initially endowed better were that regions the why explain cannot it that however, notice, Treisman and Cai strategy strategy limitingof provision the of additional becauseaid. But the voters of regionalthe 53 For this reason, byincludingitin analysisthe Iwill be able test to 92 ex CEU eTD Collection take take responsibility for providing minimum social standards livingof ontheir respective public goods of One isthefourth of crucial mostin the list: prerequisites the (Sinelnikov-Murylev al.et 29). 2006, provide additional funds in framework the of the national system financialof support” “[S]ub-nationalothers. haveauthorities the possibility persuade to nationalthe authorities to financial criteria these aid, in canbemanipulated favor ofindividual at regions expensethe of and criteria forthese areno areunstableblurred, there grantingclearly and procedures defined formulae and unambiguous criteria, budget the constraints remain hard. Butin cases where granting intergovernmentalfor aid. financial is forof the theemergence SBC the precondition third Hence, legislativelyand strongly set (Sinelnikov-Murylev procedures” enforced al.27).et 2006, is based but isnot of ina framework decisions, on inter-budgetary discretional transfers two types of imbalances may be from prevented softening budgetconstraints if “system the of theirrevenue own finely sourcesandtaxrates tuned to problemthe hand.at even But these Thelack preventsthemfrom circumstances. of worsened power decision-making choosing sub-nationalthe willgovernments have limited very institutional capacity adjustto to fortaxation be budgetary In can independence. insufficient a situation financial difficulty of expenditure obligations, the scope of the sub-national decision-makingnational governments power in the spherethe is of prerequisite institutional Second whole, the tax price for additional borrowing diminishes with the amount of borrowing.for region because the as a for borrowingattractive, very Thatmakes incentives the rate. taxpayer not growproportionally does totheamount financialof aid, butatadiminishing regional by the borne taxes of amount the But tax. national of rate the by raising government central by financed is borrowing sub-national that assumption the on based is them and McGuire2002).Theborrowing Goodspeed formal (Garcia-Mila, by model described extra- for government sub-national of part the on incentives creates also and SBC for thepreconditions imbalance creates This exceedsof thedegreeof powers. revenue delegation Itis institutional devolution prerequisite. the asituation of obligations when expenditure First, the condition of . In federal states it is common for the sub-national level of government to government of level sub-national the for is common it states federal . In . Even in a situation of perfect match between the revenue powers and match revenuepowers the between in of . Even perfect a situation fiscal vertical imbalances between the levels of the verticalimbalancesbetween thelevelsof government fiscal lack of decisionfiscal making capacity of the sub- 93 Where accordingclearallocated transfers to are joint responsibility for provision lack of established procedures lack of is a key CEU eTD Collection precondition. In many precondition. theupper federal house of isstates, parliament composed of structureofgovernments The specific significant. (Sinelnikov-Murylev 2006, 33). be very may way in any limited not borrowings excessive case, this In government. case offinancial creditrisksproblems... and areshifted costs associated onthenational exists an anticipation of additional financial providedaid by national the inauthorities the opportunistic behavior [on partthe of is subnational higher.... [W]hengovernments] there of probability ’the case, the is opposite the If governments. subnational for borrowings It is awidespread for policy federal caps practice to introduce governments on level the of the is precondition seventh The in for thesupport reward voters elections. of regional competitive typical areespecially exchange of types These situation. duringpolitical given current the important more support, of types other receive they in exchange as long as electoral regions some for conditions SBC campaigns:conducive totheemergence of SBC. The are central authorities inclinedthemselves togrant of is importance the The sixth precondition the federalbailauthorities to sub-national the out unit. national the for precondition strong is a center situation This level. national to up inefficiencies the often maskinguses the realthe costs (Sinelnikov-Murylev By et al. 2006,31). andskillfully complicating the budgetary andprocess SBC benefits condition of certain fiscal non-transparency of reporting” facilitate often initiative theiron own authorities fiscal policies, as they“Sub-national electorate authorities. andlevel the national both a the from at their processes can fiscal shiftthe on information the hide or withhold responsibility to incentives have often governments national for substantial are there that requires precondition The fifth 2005) ondoing so. (Vigneault, restrictions legislative in of harden budgetconstraints presence the difficultto of failure toprovide key public services. Thefederal government find will increasingly it in case the levels government both of accountable hold will of regions the electorate case, the both levels of bearjointgovernment responsibility for the provision In thisof goods. public that stipulate often level national at adopted mandates expenditure the However, territories. absence oflimitation onsub-national borrowing conducive to the emergence of SBC is the eighth political objectives of the national government, 94 information asymmetries information . Sub- . CEU eTD Collection way federalismway market-preserving to 2000). (Solnick the on obstacle fundamental a was conditions SBC of granting asymmetrical The markets. of developments the stimulated would have federalism that of benefits economic potential legitimacy federal laws,of undermined the protection of civil andrights prevented the didindeed helphold to Russia together in shortthe run, but in longthe run they weakened the emergedconcede that a inresult uniformity institutions to as them. asymmetrical The treating central the government forced theregions between of heterogeneity how on investigation the is work based Solnick’s canbe outcomes, asource adverseexploitative of national the units 2000). Thelast exceptions: twoare thoughWeingastonly mentions thathighly sub-diverse federalist bargaining and Shvetsova 1964,Ordeshook (Riker 1997,Weingast 1997,Solnick regionsbetween the Heterogeneity has relatively in attention received little studies of of SBC. asaprecondition considered it afairdifficult from to evaluate can itmakes and of be center, the transfers amount therefore additional additional financial foraid backward regions. for justification the are imbalances horizontal the contrary, On the agent. that for softened are constraints budget that indicates unit sub-national the for assistance financial of form government. level lower to higher from transfers by intergovernmental solved is cases of the inmost revenuesis and expenditures between of mismatch problem the (2002), by Bird noted as but obligations, of expenditure transfer 54 The ninth precondition requires list. the from missing be to seem which preconditions, additional two only with section, next the in classification this on my analysis base will I in federal shared taxes. in shareof the center the increase favor of increasing additional financial as longsupport, as increaseisthis financed by an isconstraints buteven more complicated, can financially stable regions bevote tempted to in (Alesina andPerotti 1999, Rodden, 2002).The case of universal softening of budget can be for granted individual in regions for forexchange support other policy decisions conditions SBC level.The national atthe canbelegalized constraints budget soft cooperation, interregional and lobbying political to Due units. sub-national the from representatives The fiscal gap may be closed in a variety of ways, such as delegation of revenue-rising power, or upward or power, of revenue-rising delegation as such ways, of avariety in be closed may gap fiscal The substantial heterogeneity between theregions 95 54 But the extreme heterogeneity of theregions of heterogeneity But extreme the . Notevery CEU eTD Collection that regionalthat wouldgovernments be subject toself-imposed hardconstraints. budget But spending responsibilities down to regionalthe level. The early reform believedgovernment deeply insolvent. Itis understandable thatin situation this federalthe pushedauthorities in 1992-1993, when regional werebudgets not running adeficit, while federalthe budgetwas aredelegated regional tothe beby level.Partly,public goods situation can explained the this of provision for obligations the of most government, federal inthe powers broad vest laws Russian While perfectly. vertical imbalance condition the of theRussiancasemeets First, adversely the applicability of these preconditions to the Russian regions. affect not do deviations these However, taxarrears. regional of tolerance center’s federal by expenditures.As noted Pintoetthe al. themajor (2000), source of SBC in 1990s the was Moreover, in many cases, resultineffective of spendingthanjust anincrease inthevolume of provision goods. of public it was caused In goods). Russianthe regions, asregards 1996, period the deficit budgetthe more often was a by a shrinkage of described as an outcome of revenuesof growth expenditures (usuallyfor provision the public of are difficulties financial regional ratherclassification, abovementioned in the that noting thanis worth It a growth in theoretical all met situations of SBC. emergence forthe preconditions political the of peculiarities the and institutions political of profile the the system, fiscal of features the Russian that willdemonstrate This section 5.6.2.2 Russian regions in 1996: Were these preconditions in place? SBC. will of in be to voter conducive a median national of legislature the preferences highly specialized regions (even if in of terms population they are in a minority), the structure poor, relatively federation over-represents of the structure If process. the policy-making the into region particular this of interest the conveys who legislature, the in representative(s) ability conduciveof regional for SBC. This precondition leaders is closely relatedto toaccess the eighth, since to it drawsnation-wide on the decision making. Each region has a The final, tenth precondition concerns precondition The final, tenth specific attributesspecific of themedian region/voter 96 , CEU eTD Collection Saratov oblast, mounting to 6 percent of the revenue part (Abdulatipov, 2003). (Abdulatipov, part revenue the of 6percent to mounting oblast, Saratov 55 case in 1996-1999. was elicit areparticularly in instability, which the easy of to constraints times macroeconomic budget from soft for macroeconomic overall the situation, the protected accountability provisionproper of public Because goods. regional more governments often than not are lack macroeconomic of and performance asresponsiblefor regional not federal,government seeis electorates factIt reform explainedbythe that 2000,Prud’homme 1995). (Wibbels likelihood of policy in divergence federal settings andparticularly respect with to economic are in preconditionsfederal first These authority. line two argumentthe with of high the to crises solvency for responsibility the delegate to inclined were who governments, under double government pressurefrom the regional and of creditors electorate regional the territories, coupled imbalance with an and between rights obligations, putthe federal in their taxes levy to powers Limited precondition. seventh the approximate borrowing 2000, 110). The absence laws of and introducing regulations capsfor a maximal amount of and (veksels), using exchange of bills bonds, regional issuing collected, they than more spend to tax-offsetsways various found they years the Over governments. sub-national of part the on borrowing extra andfor incentives creates also imbalance This combinationsdeficit. a ran they where incases responsibility policyrelated making diminished the capacity of sub-nationalthe to authorities take full of transfers ability helpof to regions etal. themselves (Hanson The lack 2000,104). flexibility of in tax- from This the by limits federal were the restricted center. powers fiscal theirdecision-making rates, off-budgettax and bases tax other over discretion had they though even and autonomy, fiscal limited funds experienced regions The sphere. inthis governments regional the of capacities (Hansoninstitutional the out’ ‘crowded efficiently government central et the tax, profit and VAT al.especially base, tax the calculating rules for the levelsand the taxation By of Russiancase. defining the too. Thedegree of respectautonomy of todefinition with basestax andrates is low quite in in is infiscal power of lack precondition the the the sphere of place Second, decision-making acquired an ‘informal right’ to seek SBC to cover the deficit. because between rights of regional instead andobligations, authorities of mismatch the that, The vertical imbalances, for example were the alleged cause of the permanent deficit of the budget of the budget of the deficit permanent the of cause alleged the were example for imbalances, vertical The 97 55 CEU eTD Collection of financial flows drastically”(Popov 2004, 7). pattern existing the alter to no need is there that sure make to i.e. of transfers, pattern actual these incorporate to territories. “(T)he indices forof budgetary expenditure for the 2001 RF budget were computed in such a way as on these remain could taxes less so that established, was need expenditure of level lower the 1994-1999, in and transmit less to the center, following region patternthe inin the 1994-1999. The more taxes the region was paying more to the center leave could AOs, and Moscow regions, voting pro-Yeltsin formerly that sure make to 56 non-financed 150federal laws, 40of backpart of mandates: 1992, before those which dated financing. The provision financialof aid constitutes particular for a substantial social groups spending on provisionthe of withoutpublic goods, indicating of corresponding sources amount the of stipulate mandates These mandates. federal with non-financed situation the federalthe Especially for theregionaland regional authorities. troublesome is governments expenditure obligations for fulfillment of the social and economic policies is borne jointlyhave jointresponsibility for provision by of key servicespublic in territories. Thebulk of the likeFourth, inamajority federal of states, federalthe and sub-national levels of government fashion. in granted arbitrary an absolutely were fiscal relations, asymmetrical nature andof theRussian concessions exemptions,to whichaccounted tax the tax federal transfers, story, asunplanned of the only part were transfers These choices. policy governments’ regional tothe endogenous basedoncharacteristics was assistance on respectivethe needs(Sinelnikov-Murylev al. Thuset 2006). allocation of planned financial was computedindicator by indexing inflationthe to level 1991budgetary the of expenditures need expenditure the example, For based werenot on calculations. formula objective existing in then the parameters Butthe theformula. basis of the eachregion on to assistance financial years (Popov 2004). from previous inon the basisof calculated transfers the they were largepart, outset; from the clearly not regional the defined were level to from federal the transfers forgranting Criteria annually, were renegotiated andin 2003). some years,semi-annually (Abdulatipov as they violated, constantly years, was least three of at period for the stable be set to are taxes in shared shares federal regional and of ratio the that which states Code, Budget 50 of the alterations. Art. frequent to weresubject financial aid of for the granting andformulae ratios Third,Russian fiscal becomingmore though were routinized by practices tax 1996, even core Popov thatargues in2001 federal authorities manipulated expenditurethe part of formulathe of transfers the 56 Sincefixed identified lawon a budget amount 1994,the federal the of 98 CEU eTD Collection (Gigolov, 2000). of GDP percent 22 constitute would and percent, by 70 budgets consolidated of the part revenue the exceeded 57 Chechnya andfailure blamed toprovide stabilization on economic were inability Yeltsin’s to Thewarin in electorate. of eyes national the the government central the of popularity the issue. The end of 1995 andthefirsthalf 1996 weremarkedof by decline an unprecedented in years 1993and 1994.The presidential inelection 1996 was a particularly political pressing an increasein regionsfrom transferstothe 3.8 cent federal budget per 1.7 to of GDP in the coincidedwas followedin with bi-lateral byasequence developments treaties of 1994. These in 1992 caseof from Tatarstan starting the of parade The sovereignties a weakenedcenter. 1992-1993, republics andsomeregions soughttobuild uptheir sovereignty expenseat the of SBC. In to conducive mid-90s was in and early particularly political the Sixth,situation the regions. in the developments real the monitor closely from tocase,andinsome to itwas tooexpensiveforcase regions thefederal government vary backThe information used to upapplicationscosts 2003). extra for transfers (Kalitin such floods were disasters or otherobjectiveSakha republicnatural as river circumstances presented asa strong reasonfor bailing out deficientthe budget (Enikolopov et al. In 2002). risk, lives at was with situation, several emergency thousand Theelsewhere. consequent financingearmarked for the system central of heating housing of residential wereused spending. One of the most cited examples is the case of Primorskii krai, where funds convincethey federal tried werebehind to factors the expanded thatobjective center budget Instead the inof favor. deficitbyineffective that wascaused spending, accepting their regional often governments provided thefederal with information center deliberately distorted underdevelopedinstitutional environment. In their pursuit of extrathe financial funds, the a region transfers of amounts isthe the justifiability of of verification case, in the that found Russian the entitled andbetween federal the sub-national inmodel.units center of a framework He principal-agent to is verySinelnikov-Murylev etal.investigated 2006,35) the informational inasymmetry relationships costlyThe fifth concernsrequirement thelevel information of asymmetry. Gilbert (2001,cited in due to insufficient sources. revenue information whileregional it impose on was atthe tofind of latter the discretion governments, necessary transparency and an It has been proved by the Fund of the “Institute of the Urban Economics” that the amount of the payments of the amount the that Economics” Urban of the “Institute ofthe Fund the by proved been has It 57 99 CEU eTD Collection 58 national accessto decision-making. grantingpresent, regional representatives namelygovernmentmentionedprecondition, particularof structure abovethe wasalso eighth The regions. constitutent its by borrowings of amount the on caps introduced fulfilled as effectively isnothere documented evidence federal the inthat Russia government is borrowing sub-national on limitation of absence the namely precondition, seventh The softeningthe of constraints. budget unpopularity, supportof regionsthe in the was mostessential,was achieved casesvia which Yeltsin’s poll was lowrating as as percent(Aslundthree 2007,165).With level this of effectively fulfill his In asapresident. duties January just1996, six month toelections,prior these areas, this creates a permanent pre-condition for the SBC, as federal budgetary as federalrevenues budgetary for theSBC, pre-condition apermanent creates areas,this these (AndrienkoandLeaving Guriev 2004). asidethereasons why movethey prefer notto out of Russian confirmsevidence thatmobility labor of is extremely low byinternational standards and in toresidecontinue disadvantaged, climatically and areas which are economically economic andsocial inequality. These disparities are perpetuated as long as its citizens to evenout efforts make to systematic federal government itfor the necessary makes of Russian regions andinfrastructural conditions economic, climatic, demographic, structural, extreme heterogeneity amongits constituents. Thehighly geographical, heterogeneous of example is a paramount federation Russian is the concerned, heterogeneity As far as as changes in wellstructure, questions toimpeachment. territorial related as and dismissal highest the of officials,use of presidential decreesand emergency and powers, appointment in the say significant a have Council Federation in the representatives Regional of chamberthe majority andconstitutional (three-quarters required), required). amendments majority regarding lawsof (absolute initiation powers the statutory and enactment significant facto of periodinvestigation,the under between1995and tworepresentatives 2000,these were national making. rule Itisformed from of representatives two each region; for thegreaterpart Federation upperhouse The from seat single of territorial Federal the constituencies. Assembly, the Council, members halfelected directly (225MPs)were the of some degreeof representation: regional however, Assembly, Duma, allowed in lower Federal house of the the mainthe legislator, recruitment was considered the main channel of regional influence on The rules described below in the papargaph apply to the period 1996-2001. the governor and leader of the regional legislature. The Federation had legislature. governorandleaderthe Council of regional the 100 58 Therules of de CEU eTD Collection not to look not tolook downwardgenerate theirto resources, own but tolobby central for authorities the power relativebargaining itlevy for with was moreregions powers greater to rational taxes, Withpowers. blurred, boundaries these and levelthe notmatchedof responsibilities with was drawn,correspond with didgovernment andthese responsibilities not revenue-raising the the of levels the between responsibilities of division clear No center. the and regions federal transfers achievebudget madeit andnearly to trust impossible between agreement the for the rules and unclear agreements tax-sharing clandestine almost the of The combination by lackinvestmentare produced incentives of embodied inthe of budgetconstraints. softness and flight, capital growth, economic asslow outcomes economic indeedin place.Such were all that theoreticalthe preconditions for soft the budget constraints outlined insection 3.6.3.1 Through applicationthe of taxonomy this into situation the Russiain mid-nineties,the Ishow for SBC. the are conducive that region/voter median of the and attributes the national (Sinelnikov-Murylev governments al.et heterogeneity 2006): between theregions, the otherwise comprehensive and robust classification of preconditions of SBC for sub- To sum up, thecontribution of this section consists of additionthe of two important items to and subsidies. sharing revenue the for votes voter median the vote, equal an has unit constituent each Since median voter would be unable to achieve economic viability central financialwithout aid. to their economic efficiency is highly skewed toward less efficient ones,which means that the overwhelming. Ickerand Oferdocumented (2006) distribution the that of regions with regard but when this system collapsed, the problem of economic integration system provided parity of economic activities between regions via pricing andat subsidizing, regional level became economic centralized and highly The of costs benefits. the industries regardless allocated of politics pre-Sovietthe of occupation and control, Sovietthe planning of and system, which resultfollowlogic the not did they of were the efficiency: development economic economic of patterns The territorial for Russianregions. characteristic wasparticularly pre-condition This more effective their counterparts. outnumber should regions less effective financially making, the of that and central requiresdecision federal structure a regions, butalso The preconditionnext is connected tothe previous, asitis basedontheheterogeneity of ninth requirement. the This areas. approximates disadvantaged these contains have tobe continuously in favorredistributed of regionalthose whosegovernments territory 101 CEU eTD Collection expenditures. increased ofthe price fiscal true the underestimate governments regional the when illusion’, ‘fiscal create intact, thus the fiscal 60 cost per one unit of publicWeingast 1995). benefit and Qian (Montinola, will expenditures and revenues tobalance obligations stay toremove/ignore governments national sub- of constant. capability the labels constraint budget Soft grants... soft especially However, governments, among equalization and the shift of this line 59 will price of benefits public goes down when financial assistance is provided’(Sinelnikov-Murylev purposethe misunderstand authorities for regional when information, which inadequate of event in the ‘emerges financial assistancein the next period. is They allocated, note that fiscal the leads price toanincrease in provisionthe of public goods to above the optimal level the SBC is orclosely when connected voters to the ‘fiscalassume illusion’ that which the relative have stable expectations of a central bailout in the event of insolvency. levels regions where between revenue-sharing of pattern additional The SBCisa recurrent 5.6.3 Measurement of SBC (Burawoy 1996, 1108). itsover own eventerritorial ifresources itmeans concealingit amount the produces” “retain control to sought development economic in regional investing than rather center the regions andbailed out Anyothers. stoodabetterthat region chance of winning abargain with some from resources took government central the fact that point to regions, to concession as well the existence of for as federal legal on granting procedure the regulation tax bailouts, of Occurrences rates. moreconcede preferential to federal center the forced regions were transmitted to thefederalBut budget. these were by rules meansno uniform, and several The federal revenuefrom andafixedcollected Tax Ministry regions, of core percentage taxes is the selectivity with which federalthe its government treated constituents. striking most is what policies, fiscal Russian of history the Tracing transfers. and benefits tax provision hasprovision of beenpublic goods reduced, wheninfactit has not. fiscalof the price the that authorities sub-national the on impression false the creates condition SBC the that mention SBC of effects different other among (2006) al. et Murylev of asanevent SBC. Sinelnikov- istranslated aid central very additional fact of the analyses The additional financial aid will cause the budget constraint line to shift, but the inclination angle remains angle inclination the but shift, to line constraint budget the cause will aid financial additional The The The working definition of SBC,the outlined in the section: “Hard budget constraint limits revenue sharing 102 60 The underestimation of 59 However, in several CEU eTD Collection certainly vis-à-viscertainly a donor federal the In1996 government’. averagethe balanceof budgetary revenues for the federal budget. In other words, as Popov (2004) puts it, ‘the average region is from are federal that remitted flows arethe willbe regions taxes budgetary the since positive of of balance the mean arithmetic The other. the on inindividual region an local authorities and regional to loans and transfers and hand, one the on subventions federal and region the in budgetary flows (Lavrov balance) of SBC couldbe indicator the and easily observable The most straightforward measurement. the on be usedas alone cannot of mayfactors an indicator SBC, since structural seriously confound forapplying prolongation aresecurely SBC conditions deficitof in budget However, place. avoid,seekfordeficit, budgetary notundeniablegovernments the to to reasons sothat but regional for incentives create constraints budget soft The governments. regional of part was not just result the of a lack of effort tomakeends butinfactmeet, often deliberate on the reasons secured themselves SBC conditions usually SBCconditions usually securedreasons a significant themselves ran The first observable indicator is whether a regional budget is deficient: regions that for several for theresearch. potentially useful methods estimation and theRussian applicableappropriate case. to Thus, the rest of will this section describe is that index acomplex design to in order SBC of indicators indirect developing of issuch expectations virtually impossible. Inthe following section Ievaluate variousthe ways since carry observing is directly out, to very This task difficult stable expectations. have these governments regional the whether identify to necessary is it constraints, budget of softness costs and benefits of such policies balancing of of thanconsiderations rather bailout, of a central lack (or thereof) expectations conditions of SBCcomplex base is a theirSBC of measurement the that shows many, among one just is policywhich example, This decisionsissue. about expenditures increasing expenditures. From and the they borrowingsoff andare better therefore is reduced, any for typeexpenditure the fiscal of that price definition on stableunintentional ‘lucky’ outcome forthe sub-national whoauthorities, are trickedbelieving into two notions by confusing cause the and outcome. SBCgranted to a region is portrayed as an above only aresultas of a region’s opportunistic in behavior,’ previousthe passage they conflate it iset al. 2006,40). Even they though clarify they understandthat SBCas‘the situation emerging clear that regional governments under . This is a per capita difference between the total the revenues total between difference . This isapercapita per se per . Therefore, in order to measure the degree of 103 budgetary deficit balance of . This . CEU eTD Collection constitutional fiscal documents were signed toward such regions as Tulskaya oblast, Buryatia, oblast, Tulskaya as Kalmykia, Tyva, Udmurtia, Kabardino-Balkaria, Kareliya, Komi, Sakha, Dagestan, regions such toward signed were documents fiscal constitutional ratios forthese shared taxes (Popov, 2005). specific negotiated regions some of that, top the on but can retain, region each which revenues, of total portion 62 61 regulations. revenue-sharing tax consideration It wouldbe insufficientto rely only federalon direct without transfers takinginto is necessary. orientedness and investigation of other SBC measures thatare responsible suppressing for market- supporting/opposing governmental behavior. This criterion isthen not effective inisolation market- in notbeen of have of duplicated development/backwardness patterns economic patterns the that show Observations crisis. economic of theconsequences deal to with adopted have governments their policies the of in terms diverge also in Russia regions diversity, from apart Yet, economic the adopt. their marketization governments towards stance whatever majority regionsfuture, the cease willnot poor to be of of recipients net federal the budget, development of industrialtheir base, modernity,and living standards.In foreseeable the the to respect with enormously vary Regions policy. fiscal and economic independent pursue an lackin human the capital to backward and dramatically terms, economic the country’s42 percent aboutGoskomstat, the top of inregionsten regions: 2001produced to according total GDP. Russian in is geographicalfactors. produced GDP a minority of centralization and unfortunate andforemost, structural the between regionsdifferences the from stemming economic first can Several be confounding,factors constraints. or hardbudgetregions soft experiencing between dichotomy a one-to-one yield not does however, dichotomy, straightforward This federal the can budget be distinguished. Evenkiiskii Autonomous Oblast. According to this criterion, net recipients and net donors of from +14,320 rubles per capita inKhanty-Mansiiskii Autonomous Oblast to-3,406 rubles in (Popov 2004). However, aquick glance at the figures reveals months that the variation1.5 for was enormous,income capita per average the or GDP, national 8% of to amounted which flows from center was 1086rubles regionsthe to percapitaal. (Lavrov et 268) 1997, Due to difference in the structure of tax collections, these rules, if applied correctly, would lead to different to lead would correctly, applied if rules, these collections, oftax structure the in difference to Due Goskomstat Rossii: Goskomstat Yearbook for2001. Regiony Rossii2001 in pp.20-21 61 On the other hand, a number of regions are small, remote and 104 62 extra- 100 than more alone, 1996 In CEU eTD Collection without federal andlargerarrears, lobbying for successful transfers. More financetheirregions budgets could loans and transfers, programs,they distributive were better their off paying taxes to the federalwithout budget and their re- central of beneficiaries the as net Therefore, degree. to asignificant federal government strategy was differentto regional level equally.or Beingmajor recipients of federalthe budget, they depended on with respect to federal usuallyrunfewer arrears than regions backward deviant:economically were arrears to arrears: levelsfederal (Klimaniv 2000,Aslund 2008).Nevertheless, of patterns of distribution these payments. This forced situation regional torun governments tax arrears, both at regional and ledenormousreducing hyperinflation and to paymentarrears pervasive non-monetary macroeconomicDuring periodof the 1995-1998, aimed policies central the government at allowed tostay in a region as an offset to an equalization transfer. in cases, VATon several was, of receipt federal share the (FFSR), of Regions the for Support 63 accept). regional with viaoffsets receipts of their share attain to had apossibility regional governments fact that enterprises, level the federal atdueto grewfaster arrears onshared is taxes that explanation alternative while is thisHowever, estimation alsonotfreefrom influencethe factors. of The first confounding the (up to100%in incase of contradiction general Sakha the to the republic), regulations. federal largershares tax retain entitling them to tosign fiscal federal center arrangements forcing the governmentthe regional taxes in total tax collections did the of analysis comparative example, in For not andparticular. general, SBCconditions in relations fiscal (or center-periphery of nature the into insights useful yield rather can disparities such wasthe notbut actual laws, several by isregulated category latter willing the in division revenues of division The governments. differs to significantlygovernment; fromlevel whose to areallocated revenues one of those of maincategories: composed two what is prescribedSamarskaya andby the law. Kemerovskaya, Tymenskaya andKaliningradskayaKarachaevo-Cherkessia, oblast, those The analysisoblast, of whose and Primorskii revenues krai are(Lavrov shared et al. 1997).between As noted both above, federal taxes are and regional Forconvincing a discussion of this issue see Sherbakov (2002, 79-98). 63 Fund Federal the of functions concerning the the regulation according to Second, helps to identify those regions that were capableof helps were that regions toidentify those 105 share of CEU eTD Collection ratios. enterprises regional the of compliance tax and conditions and objective the given collect, to government.is able it that The final of failed toremit amount taxes region the this in that formula indicates ratio second the the formula is a sum Theof interpretation standardized in this case will be closer to the concept values of SBC. A value of more thanof 1 of these two Where SBC SBC be: formula will case the region.this for thatparticular In percapita collections and actual tax the tax obligationof fulfillment of level the by index this adjust to beneficial seems it of analysis the of thepurposes region the for However, distraction. of calculatedinstead division uses but balance, Lavrov of indicator as a ratio of the budgetary transferstothe tax collections ideal tax collectionof ratio the namely relations, inter-budgetary of of asymmetry indicators used widely per capita (ITC)in the region (TC), we mustsubventions). put If we wantthis the budget variable constraints to harden with intheregions via level allmain channelsthe (transfersfrom FFSR and other federal of programs as budgetary the taxdenominator. collections Thisin theresembles formula for SBC. I measured one BT as amountof of thefederal funds so grow, transfers (BT) avalue must of transfers thatin be placed numerator the of any divisions were transferred to the wouldlike tomeasure evaluate SBC. to constraints The budget will soften as budgetthe we variables the Consider follows. as SBC of index an outline now I above, the of light the In debt in the visible is clearly pattern http://pubs.carnegie.ru/ See region. the taxin more leave and center, the to tax less remit to incentives more has region/governor, the is independent more the that states example for Zubarevich, government. regional the of resourcefulness 64 federal reduced theirfederalprograms. to budget contribution tothe arrears running tax Tax remittance patterns were used elsewhere as an estimation of the relative political and economic and political relative of the anestimation as elsewhere used were patterns Tax remittance it . =Standardized (BT it denotes the level of development for region it /TC it ) +Standardized(ITC sharethe of accumulated debtto the federal budgetin total tax . Thisindicator is to arithmetically close the 106 it /TC it ) i for year (i = 1,…, N, t = 1996,…, 2001) t. 64 (5.1) inter- This CEU eTD Collection the reformist nature model incongruent for themodelsspecifications two the periods. illustrating First, tocapture of the legislature The lack period. will later forthe data the of second period cause relevant therefore is not ansomecrisis. the1997-1998 years available However, for are not variables easily for available easy task in itself,1996-2001, can betherefore justifiably into divided distincttwo phases, before and the after and this annum was 2007). The (Golubchikov data samplefor the time-series model with timeboundaries made even 1998 and 2005.During these years the grewby economy percentan per unprecedented 6.8 Russian real GDPrejuvenated theeconomy aremarkableand prompted While recovery. between fell1991 and1998 by 42.6 per The economic crisis in1998 wasamajorof turning point Russiandevelopmentthat cent, or 6.6 per annum,5.6.4 Measurement of political variables in the sub-periodthe 1998-2001 trend was reversed betweenthe variable close to normality by using logarithmic transformation of its component parts. of distribution the shifts second the of concept SBC, tothe measurement adjusting the better Whileappendixthis chapter. first to theformulaamends by the term, thus expenditure adding Two possible Where ITC modifications to construction of the variable of SBC are presented in the ITC asfollows: look will correlated with GRPpercapita (R the correlated Russian Ministryper capita”. Statistical ofanalysis showedGRP that the index their Financeby of tax potential regions the of theof region used ranking by the the with consistent very are that toresults “yield calculatemethods transfers ratio the structure, industrial of all to the proceeds intax base theRussia),tax tofindall that from FFSR GRP, in capita per for regional differences methods (accounting fordifferent several overviewed the year 2001 Kadochnikkov, Sinelnikov-Murylev, Trunin 2000, Popov 2004). In hisis article, Popov (2004) strongly potential has of (Batkibekov,concept of Lugovoy, tax various attention attracted the authors average tax collections per capita (ATC) by the level of tax potentialIn order to evaluate valuethe of idealthe percapita, weshouldcollections tax multiply the (LTP) of the region. The it = (5.2) 7& it denotes ideal region levelfor collections the denotes tax of t * GRPpercapita it / *53 2 = 0.98) (Popov, 2004). Hence the formula for the ITC the for formula the Hence 2004). (Popov, 0.98) = 107 percapita t ( i = 1,…, N, t = 1996,…, 2001) i for year for t. CEU eTD Collection elections. In the event that a governor was not re-elected, the coding decision has to bemade has to coding decision the re-elected, a wasnot governor that eventthe In elections. period encapsulates would that being preference. governors’ political First, indicate twice accurately aslong, this the end of findit however,was problematic themeasure For thesecond to (1998-2001), areliable period first and the beginningof power. of the second from discussion the cyclebelow,first during the period a of executive1998, onein 1995, and two regions remained parliamentary republics). As will become clear in (six andwere elected of twenty-one republican presidents twelverepublic regions), out appointees, were replaced by popularly elected governors (in sixty-four out of sixty-eight non- firstthe electoral cycle: during 1996andfirst half of 1997 almost all Yeltsin’s governors, the NotInstitute. and is only butit conveniently Expert thisperiod the short, quite with coincides StateBank MoscowatUniversity, State Moscow the Department Geographic Entrepreneurs, (1997), which are reliable datacollected Russian bythe Union of Industrialists and too frequently. first Forthe sub-period (1996-1997),I used figures published byLavrov et al. changed they that but time, over changing were preferences political observable or affiliations formedparty itself in earlythe 2000s. The problem thatindividualwas not political 1990s, parties androse fell, mergedand split constantly, eventually until a single dominant in Russia (Glubotskii KynevKynev and Onthe 2003, 2007). rough political landscape of the 65 abnormal not is which times, several careers political their over affiliations they their changed that feature common isa It time. over preferences of their political character erratic the weobserve politicians, lies individual If we cycle in into political account electoral take theirpreferences. unclear second in the governors of attitude political the of measurement the with problem The discussed at some length below. codingthe of governors’the of)(lack political affiliation. The nature of these problems is would severalSecond, be in compromised. methodological arose problems with connection samplesdata twobetween methodological the compatibility hadbeen legislatures available, regional the of orientedness reformist the of index the construct might one which of basis 1996 was not made available by authors. the more difficult by the fact that the exactmethodology of the procedure of the coding for year The data was published only 1996 foryear (Lavrov et 1997), al. and of projectthe did not have afollow up. per se per , given unstable, given the party system, which was caseinthe the 90s 108 65 This means that even if relevant data on the on data if relevant even that means This single party, NDR was reputed asaparty party, NDRwasreputed CEU eTD Collection they they announced publicly. which fact a block, electoral new the with beassociated to want not did Declaration signed that governors the by the Presidential administration as the Kremlin was eager to find received well a viable very was which opposition block, to electoral Otechestvo. anew initiated However, Nazarov time same At the republic. Altai and AO, Kalinigradskaya,Kurskaya, Belgorodskaya of and Tverskaya oblast,Primorskii governors and Stavropolskiiwere kraj, Chukotskii declaration ofthe initiators The of Edinstvo. founders the for practices, electoral fair for plead and Russia, in held was campaign electoral way the with dissatisfaction their expressing declaration a signed that 67 dv (i.e. Aman Tuleev, fromprevent them for otherlists, party running where they the theconstituted top of partylistthe governor of Kemerovowith(Panorama n.d.), some of them declaring that their for Edinstvo support wouldnot oblast, was in andfrom person headof presidential administration, Putin Shabdurasulov,the the a number four in thetwo governors whowere in initial an list joinedparty theparty Communistunderfrom pressure which was publicly supported by YeltsinPresident and Prime Minister Putin. movement, head anewelectoral AO) to of Chukotskaya (governor from Nazarov an offer At end the of a Russian September, minister of situations,emergency Sergei Shojgu, accepted in for the Duma -All run seats. the Russia) OVR (Fatherland party movement’ ‘interregional an predecessor, ‘Edinstvo’reasons. 1999 was the year of the formation of the later omnipotent ‘Edinayawas Rossia’ party. Its officiallyHowever, a practical solution to the second problem registeredwas not possiblefind to for the following on supported the elected executive. or party nominated the dummy the coded which to according October 15, 1999 under I of between alitmusrevealing 1998and for regions preferences. as test 2001served political the category of 66 the As far for asthefirst dilemmapractical is Icoded party for reasons the concerned, affiliation below. explained be will it as difficult, be especially 2001. Second, in yearsthe 1998-1999 problemthe indication partyof the provedpower of to meanwouldnot thatthey their had they kept affiliation (if period the one) throughout 1998- whichwas re-elected, governorinthe happened more than half regions (forty-six),of this whether to consider the political affiliation of the former or the latter governor. And even if It is worth mentioning a confusion in the most of the Russian media, that mistook a group of the 39 governors 39 of the a group mistook that media, Russian of the most in the confusion a mentioning worth is It Its unofficial dubbing "Medved’" (The Bear) originates from the acronym of its full name: full of its acronym the from originates Bear) (The "Medved’" dubbing unofficial Its izhene newly elected ed instvo. governor, since gubernatorial elections that took place in the vast majority vast in the place took that elections gubernatorial since governor, 66 powerful to then movementcounterbalancingpolitical as a 109 67 In fact, thirty- me zhregionalnoe CEU eTD Collection equation isequation as follows: models. formal The regression regression andmultivariate with I start simple bi-variate in care ofirregularities error take the term. to techniques specifications allow model abetter fit given structure the of data,i.e.the employ I multi-level regression models to the cross-regional or time-series cross-regional data. Different linear multiple Ifitinstitutions market of on development the data variation of regional explain to order In in question. hypothesis the testing for employed be will models Several 5.6.5 Models specification and estimation results close party tothe politically of power. and organizationally whogovernors belonged tothe OVR listparty and in won their seats 2001, whenitdrifted of the opposition KPRFparties, and Yabloko. However, Idecided toincludein list the the list Vinogradov, governors who Lubimov,for Tkachev, along Egorov time weresupporters during elections by parties as other decidewell.it If I wereto includewould otherwise, in the as affiliatedwith a governorparty code the I decidedif notto supported of they power were positioned itself from being aclear rival party to the tobeingpower, of acomponent it.part of opposition party and OVR as OVRasan between makeadistinction the whether to Thesecond was problem of power. party party the with of power,affiliated be to governors these as consider to within whether made be to has thedecision The period of consideration, as well. by supported Edinstvo it bymore seventeen were party, one were supported than who re- regions), three (in five), four (in three), or five (in one region) parties.Among those governors were elected due or thirty all governors percent of supportof to the elected, sixteen (in two in thattwenty-five shows The table appendix rivals. the occasion political parties, on different of banners the under a seat for ran governor the cases many in that was problem Edinaya Rossia. considered asparty considered NDR ( Chernomyrdin’sof power: becausePower”, during period the 1998-2001 three could parties be equally reasonably madedevelophardAll it clear to these rules for coding“Party the developments cut of of years. two for thepreceding political rival in December 2001,more and more governors thewere willing to affiliate themselves newwith it. What is more important, party list).party of Throughout theperiod 1999-2001,as party the gained credibility and popularity, power merged with OVR, Fatherland - All Russia, its However, thisproblem wasnot biggest coding.forthe biggest the The 110 Nash Dom Rossia ), Edinstvo and CEU eTD Collection µ and standard deviation standard The model deviations estimate will Į The second level model the by of is represented followingformula: the 1,…N. district, membership; in this case it denotes for in membership; it districtdenotes the a category case this region where DMI DMI follows: isas model the of level first the of description mathematical A formal regression. linear the into level an additional by modeling in variation Therefore, among third introduce districts. the these specification I The grouping of regions into 12 economic-administrative districts can be taken into account two or three variables three or two - DMI DMI mentioned equation: above intothe terms interaction andthree-way two- inserts model specification The second disturbance term for regions term disturbance regressions coefficients, consisting of one, in case of bi-variate, and bi-variate, of in case one, of consisting coefficients, with the highest level of development of market institutions; ß institutions; market of development of level highest the with i.e.institutions, market region 1 denotes the of higherdevelopment lower represents value Where DMI DMI j a vector of coefficients of vector ~ N (µ ~ N - overall mean, i i i i denotes the level of development of market institutions for institutions market of development of level the denotes = = = ß X a , is the matrix of , ı i - denotes the development of market institutions in region i ß a denotes denotes level the developmentof of institutionsmarket for X 2 0 0 ) Į is the matrix of j[i] + ß + ß ı a 2 – , + ß and variance of the district-level errors. district-level of variance the j X k X ı explanatory and control variables and variables control and explanatory y + + X for unexplained variation between within regions The districts. k i is the matrix of İ X variables, and İ = 1,…N. i i + k İ explanatory and control variables, and i (i (i = 1,…, N, j = 1,…, 12, g = 1,…, K ) (i (i = 1,…, N (i (i = 1,…, N, j=1,…,K) k+l 111 İ ı i is arandom term for regionsdisturbance a variables. for unexplained variation between districts, between variation unexplained for , j=1,…, K+L) k elements, in case of multivariate of in case elements, 0 i l – th interaction between interaction terms an intercept region, ß i , i , j[i] i Į th j region, where the - intercept for j 0 – İ codes a group , an intercept, ß an intercept, is a random ß (5.4) (5.3) (5.5) - vector of i = th CEU eTD Collection the dependent variable. If controlled for the degree of initial endowment, even though the though even endowment, initial of degree the for controlled If variable. dependent the in of variation 14percent alone explains constraints ofthebudget of softness the variable the in model variation the a bivariate synergy. In andexecutive-legislative legislature executive, the of orientation political the of dummies the than institutions market of development I begin with the 5.6.5.1 Bi-variate and multivariatestrongest models result in table 5.1 below: the SBC is a better predictor of the µ Į regions: The second variation across level models matrix of matrix membership, in this case the region in region casethe category membership, this DMI Subscript through through periodthe of intime terms ofindividual observations iton measuresmultiple wouldobjects the model: bethe specifies repeated As mentioned four, inChapter one of most the appropriate model in specifications this case model dependence. temporal regression model, butinstead modelingof spatial in dependence model’sthe iterrors, will Inthis same caseIagain of use amultilevel number andfor the years regions. several amuchlarger is for specification data fourth appliedto The last, whichincludesthe sample, two. level the two levels, designated to be the first level, and the former is at the higher level, called locations. The formal model can be stated asfollows: be model stated can formal The locations. isdependence similarto spatialthe observations for madein dependence geographically close will not be independentof a time-series from model, observations it usually consists taken of far from fewer the time same points. profile. Any single This observation type of time hierarchy of two levels of variation,levels of of two hierarchy i a ~ N (µ ~ N - overall mean between regions, regions, mean - between overall it denotes the development of market institutions in region marketinstitutions of development the denotes DMI a , k i variables for the region forthe variables ı denotes the regional dimension, and dimension, regional denotes the it a 2 = ) Į i + ß X it + ı i in year a İ ı 2 2 – a between regions variance. regions between and t ı , and, (i = 1,…, N, (5.6)j = 1,…, K, t=1,…, T) 112 , 2 Į y t i is explicit: the former will belower of former atthe will is the explicit: denotes the temporal dimension of data. the dimension temporal the denotes denotes the intercept for i for the intercept denotes profiles İ is a random term. disturbance isarandom . While each profile has the qualities the has profile each . While i in yearthe t , i th region, codes a group X isthe CEU eTD Collection R²adj reformist legislature and executive oriented synergy. Kremlin- Executive-legislative Independent (1) variables Initial Endowment Control variable Reformist towards market: orientation Legislative Power of Party orientation: Executive’s political Soft 4.95 Budget Constraints member of the High Council of the party. ofthe Council High of the member are of them most and Russia United of the members the are 76 governors of 83 out analysis: the to problem 68 this finding: theeffect of this independent variable is notstatistically significant once the DMI than the general mean valueof ofthis DMI for model. allexpected an is thewhich regions.2.0), Thisa outcome. However, very low level Rsquared meansthe (t-statistics of implies explanatory inadequate Modelspower institutions fourthatmarket of and ninethisdevelopment the with reinforce modelassociated provides no betteris Russia’. Home ‘Our prediction fororientation. Out of eighty-eightthe governors, fifty-six were party membersvalue or supporters of the of the models fourth The third estimation of effect andexecutive’s the of the represent the political Note: Dependent variable – Development of Market Institutions Table 5.1What Explainsthe Development ofMarket Institutions?(Model Yearfor 1996). 2). statistics (t- it to2.8, is significant from size4.95 still foreffect the shrinks statistically estimate If one were to conduct similar analysis on the basis of data for 2009, the lack of variation in data would pose a t-values in parentheses in t-values 0.14 (3.6) 68 0.22 (2) (-3.7) -5.0 (2.0) 2.8 significantlywas power of party the to attitude A favorable 0.04 (3) (-2.0) -11.4 0.30 (4) (-5.2) -4.5 (-1.6) -7.6 113 0.09 (5) (-3.3) -18.9 0.32 (6) (-5.2) -4.3 (-2.3) -11.9 0.12 (7) (-3.6) -22.0 0.35 (8) (-4.9) -4.1 (-2.8) -15.1 0.26 (9) (-3.2) -4.4 (0.5) 5.9 (-1.5) -19.7 (0.1) 0.4 (2.2) 3.0 0.28 (10) 5.8) -4.8 (- CEU eTD Collection show that if we hold the budget constraints constant, the effect of the political variables will variables political the of effect the constant, constraints budget the hold if we that show model the including all The discussedabove. variables the model for thefullestimates model The ninth column displays the coefficientssignificant(t-statistics falls to1.5). statistically not is of synergy regression, reformist of effect the constant, held is SBC if the that suggest and corresponding test Theestimates of SBCis full of model the the intoaccount. variable once the however, taken statistics of up in the ranking than otherwise would be the case. The effect of this coincidence fades away, market legislature the isoriented toward reform, the is region to be22points expected higher variables. In the event that for theothertwo estimates in parameter of ishigher corresponding variable the the than a given region a governor haslevel models, significance butthe and tri-variate sizeeffectin both bi-variate have biggest the a party of power affiliation,in the models seven producehighlyand eight, statistically significant Notonly results. itdoes and synergy, ascanbeseen forlast theexecutive-legislative variable, namely The estimations the beproved to insignificant,given level the SBC: t-statisticof 0.5 dropped to in model.a full subsequently, greater share of unexpalined variance. of unexpalined share greater subsequently, and DMI, in variance total the in variables, both by explained ofvariance, area common agretaer to leads then the variable of executive-legislative synergy, itcorrelates to a greaterextent with DMI, in the control variance of the variable,shrare greater whichexplains model, the in alone standing SBC, the even though eight: model 69 models. intotal variance variable dependentascompared –32 the percent, tri-variate to other large,The last model -11.9. was level incapturingremarkably effective the highest the of regressionthe endowments, initial of level the for controlled Even coefficientinstitutions. market of development the of in terms regions other the isof ranking in the up statistically points 19 average on were parliaments significantlegislature fordummy reformist the (-18.9) suggest the regions that with reformist (t-statistics andsize model the effect the of (3.3) bi-variate of the massivethe t-statistic significance: 2.3), and marketof institutions (models 5and 6)show much more stable parameters of statistical the effect size thedevelopment on reforms tothe attitude positive legislative for impact of the The estimates remains 0.1). (t-statistics model full a in away control variable ofinitial isendowments included (t-statistics 1.6), and is completely washed The possible interpretation of the lower estimate for the model two, which includes SBC, as compared to the 69 However, as with the previous variable, the effect of the reformist legislature reformist the of effect the variable, previous the as with However, 114 CEU eTD Collection reformist legislature, or both (categorical variable) can be interpreted as analysis variable)canbe interpreted of orboth co- (categorical legislature, reformist variable) dummy for SBC (continuous the theexecutiveof and affiliation with power party or between The interaction legislature. or executive loyalty of regional of the degrees differing with regions the for same is the institutions market of development on constraints budget of the model. Their introduction into terms included interaction market I institutions of exerton development the legislature or is justified level becauseSBC? In of tocheckorder further much how influence political of preferences executive the given it variables political can the of importance the reveal reject model last the from finding the Does whether the effect of softness 5.6.5.2 Linear regression model with interactions of caused theeffects disappear. all to variables of of SBC importantly, addition the variable the forthe executive, thevariable for and, degree a considerable to t-statistics the lowered variable control the of inclusion However, estimates. show parameters the that for thepertaining variables statistically significant produce power governor wassupported by only models: bi-variate the models three,five andseven all and party of action legislature reformistof the and synergetic parliaments reformist governor, impact of a Kremlin-oriented thepositive of hypothesis the summary, aninterim To present sample. the from is removed outlier influential an after level term,in andespecially error the anadditional interaction terms, of introduction explanatory of power indexthe initialis of endowment considerably with diminished the the of strength the that show will analysis Further pitfalls. certain has model this show, Treisman and hypothesis overmine. (2005) Cai’s as However, diagnostics regression the will model,bi-variate suggest would appearto superiority the of andHanson Bradshaw (2000)and dependentthe variable than SBC (t-statistics 5.8vs. The 3.8). Rsquared, which isfor a 0.28 of predictor developmentmarketinstitutions, andhasthe of an more massiveeven effect on The last column, thattheindex is column suggests ten, initial of endowments avery reliable endowments. among the four hypothetical as predictors, well as control the variable of initial the influential most the far by is constraints budget of softness The too. model in afull significant is statistically endowments initial of level the and one, significant only is the SBC institutions, of market of development the potential predictors Among the completely. be away washed 115 CEU eTD Collection for each extra parameter. While on its own it is of little help, it is useful for comparisons for useful is it help, little of is it own its on While parameter. extra each for isAICas it overparametrization adds 2(p+1)to designedtopenalize superfluous deviance the where = AIC -2*log-likelihood of themodel+ 2 (p+1) as iscalculated which Criterion, Information Akaike likelihood’ ‘penalized called different specifications of the model, it is advisable to also to turn19822) butit saves four degreesoffreedom. tocompare order In the explanatory power of to another estimate, the so- model has marginally larger unexplained variance (residual sums of squares is 20224 vs. hypothesis, the models that two arenotsubstantially isminimaldifferent, 0.86.The adequate null the of probability the because justified, was simplification the shows that The output I compare two models (see Table 6 in the Appendix). legitimate, model of was statistically the simplification the tocheckwhether In order variable. initial whichendowment, explaintogether 40 percent of total variance in dependentthe of variable and variable, for latter the SBCand interaction term legislature, and reformist includes only four variables, namely SBC, dummy variable for Kremlin-oriented governor model, which minimal adequate the I arrived at power, loss of explanatory for the checking stepwise method of deletion smallestof variables t-statistics,with and simultaneously less danger multicollinearity, of whichrenders the regression estimates unstable. Using the of freedom number the aresaved,and more smallerthe variables, degrees The of variable. variables For thepurposes isof itreduce significant. parsimony numberthe statistically to better of are SBC to with interactions their and a variables attitude minimum political the of none that show set model for this estimates Theparameter terms. interaction full including two-way the model, which canThe first column tablethe of regression presents coefficients and corresponding t-values of still adequatelybelow. interaction significant astatistically has explain government the branches of two of the action synergetic the for dummy the only interactions theway three and two- other among variation that reveals terms interaction of model the into inclusion The in response variable. categorical level slope line for intercept and eachfactor of regression aseparate the variance, the of p is the number of parameters in is thenumberof model.parameters the with the SBC, a result that will be discussed at length at be discussed will that a result SBC, the with 116 (5.7) CEU eTD Collection 0. y= 46.6+ 10.4 x set is synergy” “executive-legislative for dummy where of regions group the for line regression A. The Panel which is an expected outcome. There are also statistically significant negative associations negative significant statistically also are There outcome. which isanexpected In addition, dependent the variable isclosely to correlated indexthe natural of endowments, region. in the institutions market of development the and condition constraints budget soft the between a strong association interaction demonstrate terms models the with To summarize, Fig.5.1 Interaction Effects forthe Linear Regression Model aregroups likely continue to toinvestin developmentmarketof institutions. second the of governments the constraints, budget of softening of case in the even that that much less pronounced. The almost horizontal in line panel B, with slopethe 0.28,suggests was institutions market of development (under) of the SBC on effect the legislature, reformist and governor Kremlin-oriented both with regions of group the among is that figures these Kremlin-oriented governor andlegislature. reformist Themainis finding by that supported of SBCand between combination synergetic effects interaction the below depicts Figure 5.1 model best. fitting data one as the latter the minimal and model full the model see Tablevs.421,adequate adds (427 justification more 5.2) to thedecision to keepthe between Comparison parsimony. of restrictions given fit, the between models run on the same database and type of formula: the smaller the AIC, the better market96

20 40 60 80 -1 0 1 sbc96 2 3 4 5 117 set1. y=28.5+ 0.28x where dummy for“executive-legislative synergy” is of regions group the for line regression The B. Panel market96

0 20 40 60 80 0 2 4 sbc96 6 8 10 CEU eTD Collection geographical locationis important in any way, multi-level the model helpwill tocircumvent if model is the that fortwo-level using the rationale spatial scale. The each different variancefor error a differentwe can is expect districting consequential, of administrative the importance the If district. in that regions all the to be common will district the of peculiarities the because errors non-independent have may district same the from taken measurements words, from locations. In takenfrom independentclose other geographically observations be not may observation individual Any design. hierarchical inaspatial level additional close and stillare geographically district same economic the of regions cohesion, economic nor political share some similaritiesdivision by federal introduced by district, administration.Putin’s While they have neither in economic especially in in records, itthough recentyearsreports, hasstatistical started to be replaced by structure, of forecasting. Aggregation data according districts isthese to still inmanyused official and thereforeused by (SovietMinistry forfor Gosplan Planning) purposes the of economic planningand can stand for anset upin industrial proximity 1997, based similarity on geographic and was of specialization, fact that inSoviet times it was a part of the Baltic economic region. 70 districts. is into eleveneconomic Federation divided of The territory Russian belikely dependent, whichto of presents one commonestthe sources of pseudo-replication. inspaceare together close Values federation. ofthe structure geographical to the connected checked for hidden dependencies. One from possibledeviation is independencythe errors of principle isnot possible tofollow; my therefore database of Russianthe shouldregions be sampling random the in sciences, social the data observational thecasewith As iscommonly 5.6.5.3 Fitting multilevel structure development of market institutions in the the Russian regions is affecting almost negated.negatively SBC of likelihood the combination, synergetic the of event the In and SBCandgovernor the legislature. of synergetic combination reformistKremlin-oriented between term interaction market and the institutions of variable ofdevelopment the between To be more precise, twelve districts, as the Kaliningrad oblast is a district on its own. This occurred due to the 118 70 This division, This CEU eTD Collection two columns in the Table 5.2 below. panels arepresented in from both lastresults The estimation the structure. specified error the given effects, fixed the of coefficients regression the represents panel second The variations. and in deviations theform forof standard random the effects parameters and covariance variance of shows estimates the panel in R output expect? The first lead usto would districts within variation greater region-to-region than districts theadministrative between differences variable, dependent andarethe on the fixed andvariables constraints effectbudget other soft defaultis by treated districts within nested are that regions as random.individual between variation The The districts. within model answer two types of thereis for separate noterm random districts; effects the question: between theadministrative variation what is the effect ofvariables included in fullthe themodel. Thelast term in model’sthe formula fits random There are seven fixed effects in this model, namely the soft budget constraints effect and other justified. be not will modeling multilevel of introduction the case, this In it. show will variance for the estimates the then location, geographical tothe attached bear any resemblance more degrees of freedom than there is in reality, which in turn, leads to biased estimates. tobiased leads turn, in which inreality, is there than freedom of degrees more or when they are taken from71 the same object on different time points, and they suggest that the model has far pseudoreplication. Pseudoreplication usually occurs insituations when the observations are made in locations of close proximity, 71 If oppositethe and is true, regionsbelonging samethe to do not district 119 CEU eTD Collection AIC Within-district variation variation Between-district R²adj Initial Endowment Controls executive and reformist legislature and reformist executive Interaction – SBC: Kremlin oriented the regional legislatures regional the of orientation Reformist – SBC: Interaction orientation: Party of Power Party orientation: Interaction - SBC: Executive political oriented executive and reformist legislature reformist and executive oriented Executive-legislative synergy. Kremlin- Reformist Legislative orientation towards market: Power Executive’s political orientation: Party of SBC Independent variables contribute to the variance between administrative districts. In between case, In variation our the districts. administrative between variance to the contribute variation total percentof the 17(16.8) lessthan itexplains that show variation between-district in models introduction the against of fora hierarchical a structure model for 1996. The estimates for threeThe estimation ofmultilevelresults modeling last (the twocolumns in Tablethe advise 5.2) and four. TheNote: variations among regions are nested within and Table 5.2 Single-level ModelVersus Multi-Level Model (Models forYear 1996). Dependent variable t-values in parentheses in t-values – Development ofMarket Institutions 427 0.37 (-2.8) -3.7 (-1.1) -13.2 (0.1) 1.5 (0.9) 4.1 (-1.7) -21.8 (0.6) 6.3 (0.1) 0.1 (linear) Full model (2.6) 7.2 (1) 120 421 0.40 -4.0(-3.3) -9.5(-3.8) (-3.3) -15.8 model (linear) model Minimal adequate (4.5) 9.0 (2) 637.1 (-2.7) -3.6 272.8 46.3 (-1.1) -12.9 (0.2) 1.9 (0.5) 2.2 (-1.7) -19.8 (0.3) 2.9 (0.3) 1.6 multilevel) (linear model Full (3.0) 8.4 (3) 613 (-3.1) -3.8 254.9 51.3 (-4.2) -9.9 (-4.6) -16.4 multilevel) model (linear Minimal adequate (4.8) 9.4 (4) CEU eTD Collection significant, which will be shownfarther in the chapter. the variable political affiliationof the governor will be -2.557. In reality, the effect of variablethis is not and some variables will prove statistically significant, which in reality they are not, forexample, p-statistics for 73 of this study, even if we do not deny the feasibility of the premise. of the development of market institutions in a new region in a given district. But this is far beyond the purposes designed to find the confidence intervals in experimental studies, forexample, to are define the probability calculations These cent). per interval (61 component between-district to compared as cent) per (39 contribution equals an average number among the groups, the within-district component will still have a relatively strong observations in a group) between groups variation/(SD²of between groups variation +SD² of within group variation/number of aformula: to according calculated is number This percent. be61 will random at chosen is that district 72 very easy to ‘spot’ a produce lot of spuriously results,significant as fivewith hundred freedom degrees of itis a significantseries structure, themodels willviolate principlethe independency of error of terms and difference. have 528observations (minus lines missingwith data). Without takingintoaccount time-the subsequent five years.to 2001.Linear models regression which were run for 1996will befor replicated the If we use all theAs a nextstep I introduce an additional file of data, relevantwhich extends thetimedata period up from the six years as a 5.6.5.4. Time-seriessingle analysis theof development marketof institutions sample, we will motivates me, for the sake of parsimony, tokeep the latter, minimal adequate, model. models they that shows significantly are not (See Table different 7intheAppendix), which (multi-level) last two the between differences significant the for check standard The model. non-hierarchical initial, the of estimates the resemble closely model multi-level in the SBC, regressionthe andcoefficients statistics corresponding test for all including variables, the in the multilevel models: and 9.0 9.4as 7.2 andagainstin 8.4 model.single-level Importantly, minimal adequate model. The slope of the regression line (in the dimension of SBC)is steeper initial model: the t-statistic rises from 3.02.6 to in a full model, and from 4.5 to4.8 in a more in SBCinmultilevel models than stable the estimates the for are even The parameter therefore it seems an redundant complication to introduce an additional level. alone, between regions from differences is greater bethan not would expected districts Forexample, the degree of the softness of budget constraints will have superficially blownup t-statistics of 12, of a mean the on effect district the (N=8), a district in of regions number mean the account into wetake If , or 51.3/(51.3+254.9/8). If the design is not balanced, the number of observations number the balanced, not is design the If 51.3/(51.3+254.9/8). 73 121 One of the ways to avoid this is a multi-level 72 SD²of CEU eTD Collection which will be level 2. ‘lower’ levels, i.e., regionwill be a lowerlevel inmodel, level 1, as compared to higher level of municipality, 74 levels. by in variation higherlevel includes hierarchy variation the lowercaptured the at variation: of isIn another. models, thisthese with structure correlated one they betemporally result, will for will in thatregion. features be Asa measurements reflected all the structural because errors non-independent have will region same the on made variable the of measures Repeated modelinghandles technique that thedata depart that from independent the structure. error different levels termsdifferent ofhierarchy, multiple ensure accuracy. as error predictive Instatistical terms,the hierarchy is ‘numbered’ in the opposite direction: ‘higher’ levels are nested within 74 Multilevel modelingmakesinferencespossible it tomake the predictions and on 122 CEU eTD Collection covering the years 1996-1998, and the second covering the years 1998-2001, and reiterate andyearscoveringandyears the second 1996-1998, the the the 1998-2001, reiterate covering first the sub-periods: two into period whole the split I Accordingly, division. the for point cut asaclear- identified which of justifiably becan 1998, was crisis economic the development markets of in of phases for course becheckedthedifferent the development model The therefore can in Russianvariable. dependent of SBC on the effectthe Federation.itin period another within samethe interval, repeatedmeasurements the model will weaken betweenperiod from 1996 and2001was group the different of thatwereexperiencingregions One timeof to theelicit of puzzlethe lies explanation in mechanisms were plausible different over employed that the major SBC conditions. theturning estimateinstitutions: market of development in the variation the doesin explaining constraints If budget not soft thehave a grouppointsstatistically importance of the hypothesis the of the model of mixedwill the estimates effects the discard of regionssignificant in The inspection of suggests thatiftable 5.3 effect, Russiana sample take thatwe for theentire of period study,the experiencedtest statistics economicas lowNote: asSBC 0.4. duringOne some Estimatesof Repeated Measurements Table 5.3Models. Dependent Variable – Development of AIC Within-groups variation Between-groups variation Between-groups Natural Endowment Control variable SBC Independent variable t-values in parentheses in t-values Market Institutions (1) 3097 42.64 regions Random effects = years, 1996-2001) Model (full sample: years Repeated Measurements 6,500,000 (-4.6) -5.6 (-0.4) -0.2 (2) 123 1218 68.79 regions Random effects = years, 1996-1998) Model (sample of years Repeated Measurements 368,000 (-4.4) -4.9 (2.7) 2.5 (3) 1945 23.25 regions Random effects = years, 1998-2001) Model (sample of years Repeated Measurements 4,200,000 (-4.0) -4.8 (2.7) 1.7 (4) CEU eTD Collection AIC Within-groups variation variation Between-groups Endowment Control variable: Natural political orientation: Party of Power Interaction - SBC: Executive of Power Executive political orientation: Party SBC Russian economy. Russian the of resurgence subsequent and collapse financial of years the was period second The arrears. enterprise 75 normality of errors of assumptions 5.1.3) reveal the that section (seeAppendix, diagnostics The regression and variance. of homogeneity and homogeneity errors, of independence and normality namely assumptions, of variance The nextstep entails for checking adequacy the of model the its conformity and model with are violated. The Model5.6.6 diagnosis next section 5.6.6.1 and Note: Estimates of Repeated Table Measurements5.4 Models with Political Orientation Variables. market of constraintsimportance thedevelopmentinstitutions. for of hardthe budget statistical significance (2.0vs. which 3.5), support hypothesisthe diminishingthe of the for the second estimates The timefor periods. both significant remains constraints budget soft of the effect period columns 3andin 4 are the Table 5.3and columns 2andinit 3 Tableis 5.4, the clear the that somewhatrange of political variables tojust theseis two explainedin section the 5.6.4 weaker the why both andSBC.Thereasons I restricted orientation political term for executive interaction in termsincludes of effect two additional above.5.3 Table 5.4below represents the iterations for theextendedmultilevel model, which size (1.4terms: model separately. mixed-effect vs. same linear a dummy 4.2) variable and for executive political orientation, and an The first sub-period is characterized by a steady decline in production, and a rise in tax, wage and inter- and wage tax, in arise and production, in decline steady by a characterized is sub-period first The t-values in parentheses in t-values Independent variables Dependent variable– developmentmarket of institutions (1) 1998 Model for 1996- 1653 70.9 3,400,000 (-4.1) -4.3 (-1.1) -1.1 (-2.8) -5.2 (3.5) 4.2 (2) 75 124 The important estimates are presented in Table presented are estimates important The 1940 23.0 4,051,000 (-3.9) -4.7 (-1.0) -1.3 (-0.9) -4.5 2001 Model for 1998- (2.6) 2.2 (3) . From the CEU eTD Collection which desperately needed the federal transfers to support its needed tosupport ‘poor’ population.which thefederal The desperately transfers percent accountingfor only of of 0.02 most underdevelopedthe GNP, corners federation, the of asone statistics, on basis of official the wasportrayed, itsrepublic This creation. years of ‘traditional’ recipients of federalthe which budget, itselfestablished in this role from firstthe the of is one Ingushetia percent). (89.8 Republic Chechen the after Federation Russian much as 79.3 percent of revenuethe partof the regional budget, secondthe highestin the for extremely as due overvalued highlevelof federal Theyaccounted to equalizing transfers. is valueof SBC the fact that by the is explained Ingushetia of leverage power On side,the one Altai Republic and Ingushetia are5.2and10.7respectively). range than the four deviations standard higher fitted value), than it andis closer tothemaximumobservation value of the Ingushetia ismuch stronger, sinceof is residual the much larger observed (the value of is DMI the Altai republicThe bothregions for observed data linebut pulltheregression downwards, powerof the the (the valuesthirty-secondis point an observation for Ingushetia and the sixty-thirdfor Altai the Republic. of the variabledetermining the form of the regression line. The examination of the raw data indicates that the of SBChaving an extraordinarily large leverage, which implies itthat is aninfluentialfor in point the leverage, is againstpoints drawn residuals standardized 63and attention to latter 32,the the plots which below, 5.2 Figure of Examination ends. extreme the at observations than line much regression the lesspull on middle are close to rangeexert of the the that observations in model. every as Not of the those canbea number point, outlier parameters high leverage The influentialis point the thathas one a leveragevalue higherthan (2p)/n, pis where the following formula following using for the every bepoint, The value leverage.calculated ofleveragecan of measure these I points use one of knownthe methods in identifying influentialthese namely points, distorting distribution the of errors and enlarging the residual standard error.In order to locate model, of the estimates on parameter effect the haveanoticeable more that outliers or one One of the possible explanations for5.6.6.1Remedies to the misspecifiedthe model: deletion influentialof pointsnon-normal distribution of errors ismodels. the presence of sections 5.1.4and in 5.1.5 Appendixofferthe variousremedy ways to misspecifiedthe Leverage =(1/n)+(x i – x mean ) 2 Ȉ (x j -x mean 125 ) 2 (5.8) CEU eTD Collection Development of Entrepreneurship. Development 77 2008. republic, whichconstituted later Ingushthe republic. http://atlas.socpol.ru/graph/3_9.pdf, assessedDecember 6 yearthe for 1989 was calculated as sumthe of three the administrative districts of the Checheno-Ingushskaya 76 469 thousand), from than 186 to doubled natural population (between growth 1989 and 2002 years thepopulation of Ingushetia more downshifting of and effect demographic highfactors: exceptionally rates cultural the of the becauseof misleading, the low are,however, income levels per capita abnormally functioning of functioning of zone.Thisthe prompted the development banks, of financial organizations, and available: fees registration alone for accounted 90 billion rubles in firstthe ninemonths of entrepreneurial especially increased since thenecessary activities, financing wasmade madeand forestablish itinfrastructure abroad necessary marketphysical the and to both Russian regions of from other capital influx its territory. on The wereregistered enterprises economic during in 1994-1999, activities period invigorated the republic: the allowed businessesin Ingushetia keep80 to per cent of their revenues.These privileges example, For budget. of federal attheexpense the prescribed, nationally that level of below taxes the profit of 19 June1994,which allowed the regional toexercisein freedom setting the government tax was This status wasgranted by federal 740 Decree No. according the Government the government reduced type todefacto operate fromon territorythe modernof the Russia and (Kosikov Kosikova2001). 35 to economic13 favor’, per closely resemblingcent. an structurallyoff-shore zone, in The1994. It was the favourablefirst institutionsmarket indeed was higher than in neighboring the any regions,closezone or region other of such to it. of DMIThe development constraint. budget the softness of given the DMI, variable of level of the wastax facilitated regime side,On by high highleverage is other the the of determined region the extraordinarily the by the establishment of Ingushetia. of the in as thecase constraints, of budget so-called level softness the of grossly overestimates that peculiarity “zoneindescribed wasnotsection sufficiently5.6.3 against protected this kindof regional of constraints budget of softness occupied the is evaluating for methodology population the Thus, female the households. of in majority the where employment, of structure traditional The Economic Zone itself functioned until July 1997, after which its rights were passed to the Centerof the Because the Ingush republic as an independent subjectof federation was established in 1992, the population 76 and the high official unemployment rates due to 126 77 7000 new 7000 CEU eTD Collection created in 1994by a federal Law No.16-FZ 30.01.1996 “On center of International Business “Ingushetia”. 78 Standardized Residuals vs. Leverage for the Linear Regression Fig.5.2 (Minimal Adequate Model case. the republic promptedthat developmentthe market of institutions, which otherwise would be not On it constraints. hand, other budgetwas thefederalactivethe helptowards this center’s level of tax collection, low byanextremely wasaccompained level high transfers of the extraordinarily reasonable: which togetherIngushetia”. created an exceptionally Theand resolutions enacted by Ingushthe Republic, suchas the “Law investmenton activity in decision high to excludelevel"Ingushetia” of thethis softness region Center Business International of Russia, territory on the center and only offshore first the the of from the main body of data hence appears This distance evaluates the degree of change in the model associated with the deletion of this residual. ofthis deletion the with associated model the in ofchange degree the evaluates distance This measure. a single in leverage and of residual acombination is which distance Cook’s denote lines Red dotted * Standardized residuals The InternationalThe Business Center was regarded as an off-shore institution of federal importance.Itwas

-4 -2 0 2 0.0 lm(market96reform.governsbc96+ ~ + sbc96:reform.govern + natur) with Interaction Term) Cook's distance 45 78 . The security of the investors’s property rights was warranted by the decrees 0.2 Residuals vs Leverage 0.4 63 Leverage 0.6 0.8 32 127 1.0 1 0.5 0.5 1 CEU eTD Collection important to note that the models run on a smaller sample have higher R-squareds compared sample asmaller modelsnote runon the higherR-squareds have that to important is also It models. in all significance, and estimate parameter of in terms both importance, its loses in contrast, endowment, initial of variable The models. all for consistently significance, size in sample led toincrease andthe SBCvariable both the effect statistical from Ingushetia of deletion the tendency: interesting an detected also comparison The model. of the Akaike Information Criterion suggests the same inference with the exception of the first fit of the models increases substantiallymodelsasymptotic 7and (columns that Pair-wiseindicates of comparison 8). the R squareds with the deletion of the influentialhierarchical models (columns 3and 4),the polynomial point.models (columns 5and 6),and Comparison estimates and t-statistics for both samples: minimal adequate models (columns 1 and 2), parameter the belowfor demonstrates were performed 5.3 the full sample. Table that transformations model the after fit of goodness for model the checking involves step next The of model the (Table 3-6in Appendix).the out taken was Ingushetia of observation the when models the of any in significance scientific important to stressis itHowever, in 5.6.1. section stated expectations theoretical the finding contradicts that the regressionlose theincentives todevelopmarketinstitutions with softening of constraints.budget This estimates for SBCwithout did not Ingushetia, lose eitherboth theits opposite regionsstatistical for to variable shows latter SBC and between the interaction effect the However, whichseems reasonable. theor expectedthe synergy signdummyof test andis statistics,setstatistical to 1 are morelegislature has signan opposite-to-expected (Table 5in Appendix),the butgiven level lowthe the likelysignificance.independence reformist and executive toKremlin-oriented denoting variable dummy the for regression of theThat of DMI coefficient the term, meansvariable interaction the including model adequate minimal in the thatHowever, and in thea samplereformist regression estimates. display attitude very similar for reformist thelegislative variables the synergetic attitude Appendix).the In linear the model without interactionthe terms (Table 4 in Appendix),the fitbetter considerably in(See Fig.9 Appendixthe andlower second, the half of Table the in3 The theregression show that modelsdiagnostics runon Ingushetia samplethe without have The findingsin arereported Tables 3-6in Appendix, and the befollows.can as summarized sample. smaller this for models adequate minimal and full linear the run I Thus sample. models a smaller on the perform and influential observation delete the be would to above tests One of empirical the problemsolutions tothe of fit lackof the by goodness of diagnosed the 128 CEU eTD Collection variation Between-district R²adj Endowment Initial Controls synergy legislative SBC: executive- Interaction synergy. legislative Executive- AIC variation Within-district SBC Samples contributory role of the political attitude of the executive or legislature, or the combination of or thecombination legislature, of executive the or political the role of attitude contributory the regarding hypothesis the to support much lend not does test the Nonetheless, constraints. condition were less likely developto institutions market than regionsthose with hard budget very likely tobe by predetermined regions SBC experiencing the fiscal relationships: was institutions marketof The development follows. as be summarized can results The above Conclusion5.6.7 Note: Comparative Statistics for SamplesTable 5.3 with and without Ingushetia (Models for Year 1996). polynomial model may be considered bestthe fit. model bewill linear hierarchical, whilefor the model Ingushetia thewithout linear Itmayspecifications. befor concluded that samplethe including thebest fitting Ingushetia, different showresultsisvariance thedifferent for different concerned,though model tests Themodels excludingspecifications. far behaveproperly Ingushetia as astheconstancy of a smaller of varianceExamination inthe presented parameters Table 3in for Appendixthe that reveals samplemodel, andfrom 40 to54percent in minimal polynomial adequate model. to samples with Ingushetia:it changes from 40 to 53 percent in minimal linearadequate the error variance was also consistently decreased in all model t-values in parentheses in t-values Dependent variable – Development of Market Institutions – 0.40 (-3.3) -4.0 (-3.8) -9.5 (-3.3) -15.8 (linear) Minimal adequate model 629.7 (4.5) 9.0 Ingushetia With 0.53 (-2.8) -3.1 (3.3) 26.9 (1.9) 15.3 602.7 (5.3) 9.4 Ingushetia Without 51.3 NA (-3.1) -3.8 (-4.2) -9.9 (-3.5) -16.4 (linear multilevel) (linear Minimal adequate model 613 (4.9) 9.4 Ingushetia With 254.9 129 NA (-2.7) -2.9 (3.1) 24.9 (1.7) 13.2 584 (5.6) 9.8 Ingushetia Without 200.3 36.1 0.40 (-3.3) -2.9 (-3.7) -6.4 (-3.2) -11.2 577.4 (4.3) 6.1 Ingushetia With (polynomial) Minimal adequate model 0.54 (2.9) 2.2 (3.3) 19.2 (1.8) 10.6 550.9 (5.2) 6.4 Ingushetia Without c=1.4 b=10.2 a=67.4 624.9 Ingushetia With regression Non-linear asymptotic c=1.1 b=16.2 a=74.1 604.8 Ingushetia Without CEU eTD Collection polynomial linear multivariate model with four predictors, outlined in precedingthe differentspecifications. The sample excluding Ingushetia canbe bestmodeled asa includingsamples, and excluding observation the for Ingushetia, as they are best explained by the variable of the for estimates happens to the whiletheopposite significance, and statistical inestimates slope initial endowment for SBC estimates were improved the both tendency: important revealed an also comparison in all models.Pair-wise models. in all robust remained SBC of variable the for results I keepestimation and the important, more reportis What branches. two the between synergy the political of variable estimates for both the for estimates of regression the and sign the significance from analysischanged the region homogeneity variance andof significantly normalizing the distribution errors. of Deleting this models, the fit improved sameof timeIngushetia atthe substantially the the preserving forThe omission leverage observation the possessof power. proven to considerable of parsimony. The for search important outliers pointed to Ingushthe republic, whichhas also four with model linear the given restrictions power haveexplanatory best for in the foundto earlier analysis the predictors, errors of normality of assumption the to violations reveals testing the statistical reliability of the estimates. The assessment is instrumental of purpose with the using regression diagnostics, different were re-evaluated These patterns in that it included aninfluential outlier. revealed introduction the of that a hierarchy improvedlevels of themodel fit which data the to analysis However, term. error in the level to me additional the lead introducing model of latter rationality the the in question variation district within- and between- the as well as model, hierarchical and one-level between estimates of parameter the model. comparison year The single- the of findings the resemble closely model multi-level the for estimates parameter The reform. market to orientation legislative of the variable be said can about confidence, same,with a certain of far The less this for degree convincing. become variable estimates the wassupportedgovernor inonly abi-variate model, butwith inclusionthe variablesother of of the political importance of affiliation the thehypothesized that proved results estimation variable andSBC.The regression latter the between interaction term and legislature, reformist and executive Kremlin-oriented the for dummy the endowment, initial SBC, isexplanatory linear power hierarchical OLSmodel four themultivariate predictors: with best the with model the 1996, the for general, In government. the of stance political the intwo equation.the The development marketof institutions isfarless sensitive tothe 130 CEU eTD Collection average development. average dependent variable, which does not mean the retrograde development of market institutions, but theirslower than 79 in market development the institutions of both between and regions. within which model,were revealed using the repeated-measurementa considerable to point variety The remarkablein differences profilesthe for Russian betweenregions theyears 1996-2001 hierarchical spatial model is samethe with predictors four applied. paragraph, while data the from samplethe including Ingushetia shows a better fitif the stable regression estimates for SBCvariable regression the stable estimates in runin model all specifications this study reflect However, data. samplebiasesrobust and andtherefore thatthe affected equations, which valid thedata for deriveregression areonly sense was usedto the the that predictions institutions. Finally,itis worth mentioning that usethe formulaeof in modelsthe is limited in market can meaningful of variables totheanalysis that development the add acomponent of both the measurementthe of in SBCvariablethe 5.6.5),and (outlinedsection thepolitical of attitude executiveThe models callfor specifications several lines includingof connectedimprovement, those to and legislative only few very governors’ party was stableaffiliation for wholethe period. four-year especially affiliation rulesparty forrecognizinggovernor’s of when overwhelming, power branches, sometimes loyalty rival split between task renderedthe of different, parties, finding clear-cut membership ofparty highly volatile character andthe theparttendency of on asto governors well availableas the formostly were searchresources open the publicly though Even affiliation. codingexecutives’ of the recognizing for of creating adummy thefor for regional legislatures the somesecond period, arose in difficulties governorspossible lack Apartdata. years from methodological 1998-2001duetothe infeasibility relevant the of (lack of) omittedpoliticalHowever, it was notaffiliation possible to replicate theat be diminished,whichmodel is asubjectfuture investigation to beyond scope the of this thesis. any with politicalgiven orientationtime, should equation SBCinthe the of significance scientific and statistical relative the However, variablesthe to the sub-periodsinto thesplittingcoefficient, confirmed two period the hypothesis. of the model for the fullof the SBC as a reliableperiod variable the of importance the predictorreaffirmed variance, of dimensions both of for casts the accounting developmentwhile doubt of market institutions. on theEven though strength the of the explanatory power of the SBC Moreover, in a many regions the development over the years shows ascent and descent of the values of the values of the descent and ascent shows years the over development the regions a many in Moreover, 131 79 This model, This CEU eTD Collection separate analysis, which lies beyond tasks of the present work. a deserves which subject aninteresting are are an a bargain, of outcome or allies, closest eliciting SBC, whethereconomic relationship withits agents (Nemtsov and Milov 2009). The mechanisms of they are a result Rosneft’,the Rostekhologii)(AvtoVaz, in perpetuates SBCasarecurrentpattern Kremlin’s of paternalistic companies selected of preferential The treatment regional than rather companies governments. relationships betweeneconomicin environment Russia, butthis time they between are struck Kremlinthe and big Putin and characterize the ceased to not have his deals Asymmetric itselfbig business. with repeats from timethestory only centerhasnot fundamentally the this of the changed, resources of allocation the nature the However, executives. regional appointed of system bythe limited waseffectively thecenter threaten tocredibly Their ability actors. powerful as in relevance haswithhowever, Putin’s ceased toexist.Regional recentreforms, diminished governments, regional governments, andautonomous andKremlin between conflict accommodation emergedasanoutcomeinstitutions of relations situation of center-periphery the where The findings in reveal chapter this hazardsthe of SBC in The relations. center-periphery for theSBC. estimates parameter of the robustness didthe seriously not diminish structure interaction andtime-series terms, of aggregation,combination different variables,of deletion of introduction influential the outlier, suggesta wider application of this finding of model.the The trials with levels different of 132 CEU eTD Collection cent. show avery high degreeof the variation,with per variationcoefficient of exceeding 100 minimum values of the variable, the coefficient of variation. of coefficient the variable, the of values minimum and maximum standard deviation,values, the columns meanof the the denote regions’ the as which asfollows: is well in 6.1, is organized effort, as SBC.The summary Table presented tax anddegreeof percapita collection tax capita, per of transfers thedistribution on statistics by accompanied analysis ofitsthe parts. Hence, component Iproceedwith descriptivethe striking.The The diversity analysisbargain,how it helped and boost to bargainingthe power individualof regions. inofin center-periphery employment public by thetheplayed role the on concentrated be will analysis distributiondegree regional disrupt, distinct to threat for theperiod 1995-1996. Themainof focus of subsequentthe softness of more variablesdata to the ones used in Treisman’s work, to give more attentionofon to aspects of the budget variables andmodel SBCcan specification be leftintact. However, itwould add beinteresting to would constraintsvariableslose to their the explanatory power, theory underpinning construction the of core be more Even thoughthe political andeconomic between developments 1992andinformative 1996caused some among Russian pursue. if regions effortthe on partof the regional toreach level desirable government the of SBC toocostly to chapter may help in intergovernmental designing budgetary isinstitutions in a way makesthat the of findings the that is reason second The disruption. economic of threat than credible andsecond,that was perceived threatchallengingthe regions, of more disruptpolitical in biased was thefavor federal that of politically first, center transfers: intergovernmental two mainThe understandinghow of constraint softbudgetthe was achieved is of forinterestanalytical reasons: the analysis can shed light on the plausibility of two theories of abnormally highvalues, as 24.5, or24500 percent. standardized values, its density distribution is close to zero, and hence the coefficient of variation takes 81 80 For the index of SBC the coefficient of variation is not informative: since the index was compiled as a sum of sum a as compiled was index the since informative: not is of variation coefficient the of SBC index the For A measure of variation calculated as a standard deviation, divided by a mean. 81 C HAPTER 6: D ETERMINANTSOF 133 S OFT B UDGET 80 All variables without exception without All variables C ONSTRAINTS CEU eTD Collection SBC index real tax collections Ratio of ideal tax collections to 1996, thousand rub. Tax collections per capita in thousand rub. Transfers per capita in 1996, Variable (Laitin 1991), ‘transgression’(Laitin 1991), (Solnick 1998a), or ‘appeasement’ (Treisman 1998)bargaining ‘co-optation’ into negotiations They model center-periphery federal of course state-building. in the Russian Federation authors haveNumerous bargainingin gametheory utilized an toexplainattempt why regions have Federation. in Russian processes economic and of political aspects specific the to game theory been allotted dissimilar1999)Treisman’s (1996, contributes work tothe literaturegrowing applying the bargaining sets of rights Lobbying ofregional 6.1.1 capacity signinggovernments: early treaties of bi-lateral and obligations in the6.1 SBC Predictors Table 6.1 Cross-regional Differences in SBC and its Components collected only 8%and of 7%, Chukotka idealthe value. Ingushetia government of oblastMoskovskaya collected 500%of valuethe of Ideal Tax collections, the collected circumstances, ideal in collect to able be would it what half approximately to equivalent as isof asheervariation Whilecent. made 139perregional average atax the government effort little as more: coefficient the even to the valuecollections of of varies value tax collection factual tax 6% of the ideal of ratio measured asthe effort Thedegreeof tax cent. variation 115per of of coefficient value mean value for taxcollections of 1,650 rublesof and standard deviation of 1,903 producea Ideal and 14,760 rublesKhanty-Mansiiskii collected 11,100 respectively. percapita regions The Tax collections,Ingushetians collectedcitizens only per 27 rubles of capita, oil-rich andYamalo-Nenetskii while samethe degree: to varies regions across collections for tax ofdata distribution Altai AOwith benefited themost, republic4,500 and in 3,280rubles subsidiesfederal respectively. The of Lipetskaya whogotonly oblast, Koryakskaya AO while those 25 rubles, andEvenkiiskii regional citizen received On cent. average, a of 118 per of variation has acoefficient variable capita per The transfers 581 rubles in transfers from the center: least lucky were citizens of -0.073 2.132 1.65 0.581 Mean 1.788 2.968 1.903 0.688 Deviation Standard 134 -1.338 0.21 0.027 0.026 Min. 10.75 17.25 14.76 4.5 Max. NA 139 115 118 Variation,% of Coefficient CEU eTD Collection of tax payments to the center’ (Treisman 1996, 308). net regions tothe transfers capita ‘per balances), (Lavrov’s flows budgetary net mentioned above the to identical 82 be appearto most by utilized moves,the authors of etc., sequence preferences, of intensity relative andcoalitions, policies of alternative presence acceptance, Amongframeworks. determinants of other such bargaining power, as time risk preferences, contract between contract Moscow the and Kazan’, grantingexceptionally and powers lavishwide tax Tatarstan within Russianthe Constitution. A bi-lateral treaty was invented as a special institution framing the boundaries republic its the sovereignty especially asserted andtroublesome: atthesame time boycotted of the Russian of and by precedents defection. situation The was credibility with creating Tatarstan Federation. It act asdetonators capacity thecenter’s andmight insubordination of undermine wider would was designed as leaders afew national that rather adamant but identity, ethnic becauseof non-Russian separate an exclusive reasons.Thedangerother wasnot somethat independence regions declare would and seekto Turovskii 2003). In spite of include I this, thevariable into of disruptive threat analysisthe for The probability defection outrightof zero by virtually (Treisman1996 was equal to 1999, hypothesis, each having a different variable of threat as a predictor of the SBC. granted SBCconditions. Those regions more capableof posing credible threats to disruptwere more likelyto be hypothesis 3 follows: measuredby variables for year1992.Hence these sharewas19%.Treisman the 1994 their (Freinkman 1994) In and Titov 1992 federal 10% transfers constituted of regional revenues; regions along with federal fund for spendingaccounted off-budget about 29%of GDP in 1994 as secessionistsigning threats in of sovereignty federal declaration tothe 1990. Total transfers concentrated mass such fiscaltobe level as regionally statistically significant, federal of appeasements strikes, popular votebudgetary flows far asthenet against Yeltsin, as than complaisance offbetter mass paid strikes, or voting, public declaration, sovereignty and such estimatorTreisman of credibility demonstratesof that in the early 1990s challenging central government, either by Treisman uses the term ‘net allocations’ or ‘net federal/central transfers’, however the method of calculations method the however transfers’, federal/central ‘net or allocations’ ‘net term the uses Treisman I will test this hypothesis as a series of five subordinate sub- five subordinate of asaseries hypothesis this Iwilltest 82 were concerned. He found several variables explaining the explaining variables several found He concerned. were 135 credibility ofthreats . CEU eTD Collection Ossetia, Kabardino-Balkaria, Krasnodar were potential incubators of a Caucasus independence block, independence ofaCaucasus incubators potential were Krasnodar Kabardino-Balkaria, Ossetia, 84 political concessions. tangible material and jurisdictional privileges then the bi-lateral treaties, the latter focused more on symbolic and relations, higher education, division of the state property, commerce, customs. ministries encompassed special arrangements across wide of range policysuch areas, as inter-budgetary federal and regional authorities, and connected to them agreements ( agreements them to connected and authorities, regional and federal 83 administration would give try to fiscal support to hostile regions. presidential the that wewould expect werecorrect, arguments If Treisman’s (see Table6.4). (one is models separate apartof includedare highlyinto other), correlated they the two are variables two in these Since region. each margin ofvictory (defeat) of that with was compared that region.As in Treisman’s work, the predictive power of the proportion of votes for Yeltsin presidential in elections June 1996, greaterthe likelihood of transfers and tax concessions in measured asa proportion of regional popular vote against Yeltsin in round firstthe of Yeltsin, to opposition the greater The electorate. regional the of patterns voting the of basis the on regions between discriminated center federal the that says sub-hypothesis next The Lobbying6.1.2 capacityof regional governments: voteagainst Yeltsin inpresidential regression shouldbepositive. budget wereever), thesofter signedconstraints are (if likely tobe:the of coefficient Table in sub-hypothesis 1 the Appendix).3.1: Therefore, treaties’ this of bargaininginaspect power game,namely lobbying the faded by considerably replacethus captures it aforementioned1996. I the that with estimate insovereignty status 1990 for thedegree of credibility of region’s threat hadsecessionist its a region claimed of factthat the importance the for example, arenecessary; alterations 1996, for testtheapplicabilitysome of theory on theAccordingly, data to Treisman’s however, only powerful weretroublemakers able tosign them as early as 1994 and 1995. concessions. other and Forexample, Tatarstan andBashkortostanwere potentially disruptive ascatalysts of pan-Turkism;North These bi-lateral treaties, ‘ treaties, bi-lateral These elections , assigning valuehighest code tothe regions whosigned them early as as 1994 (see 83 Later, bi-lateral treaties were signed with forty-six Russian regions, Russian forty-six with signed were treaties bi-lateral Later, Dogovory o razgranichenii predmetov vedenija i polnomochii’ 136 The earlier the bi-lateral treaties soglashenia ‘early signing of bi-lateral ), signed between respective between signed ), Soglashenia , signed between , signed granted more 84 CEU eTD Collection ‘Urals republic’. of the participants core were oblasts Orenburg and Sverdlovsk Chechnya; rebellious to close geographically Self-Government(3.95 percent), Agrarian Party of UnionsRussia (3.78percent), Trade and Party Workers the party-lists), percenton of vote of Union” the the (4.53 Soviet Russia”-“For Union number aconsiderable ofvotes: “Communists”-“Labor of parties thatattracted but percentofvote), intheballot listleft-wing wereseveral (22.7 Russian Federation there Among the partiesleft-wing previousfor in to parties occurred tothe legislature national elections studyyear.the which vote the Iinclude electorate, passed regional the of patterns voting the of measure additional the an As threshold, there was only the Communist Lobbying6.1.3 capacityof regional government: voteforleft-wing in partiesDuma Party of the regions. hostile and recalcitrant potentially most SBC. The positive for the first loyalwith meansnegative variable, then that themost wererewarded regions sign will reportexplanations depending on signthe of popularthe opposition against Yeltsin:if sign the was the opposite margins opposite will have of the two coefficient of regression the The positivesign tendency, that SBC was votes. additional usedof number small to pacify thefailed whichbut means togather strategically,evensignificant, that transfers wereused a more and SBC with correlated negatively are defeat of margins the while significant, less logicThe same to applies case the when vote the Yeltsin against butwas positively regressed explanations, depending on the sign and significance of the first variable: may bethere several (defeat), victory margins of namely variable, second to the With respect presidential elections in1996,themore likely the region toenjoySBC. Sub-hypothesis 3.2 elections difference tofuture electoral outcomes (Treisman 1998,313). insupport regions where asmall number of additional votes mightmake alarge increase Yeltsin’s attempt in to an usedstrategically were “nettransfers means that margins of his victory are more significant and negatively regressed with that SBC, the time same the at but regressed, negatively is Yeltsin against vote popular the if The smaller the proportion of regional electoratewho voted Yeltsinfor in 137 CEU eTD Collection available,in to invigorate suchorder militancy. variable of The change the of inemployment delayed payment of wages in these evensectors, fundswhen earmarked hadbecome militancy publicof in employees lobbying more for federal aid. Moreover, they methodically regional that inflatedgovernments deliberately publicand employment used potential the several Gimpelsonworks. et al. and (2000) Gimpelson andTreisman (2002)provide evidence explanation, basedonthelobbying game hasbeenof framedrelations center-periphery in alternative the center, federal the by budgeting incompetent and ineffective irresponsible, increasing trends for wage arrears in public sector. Even though this can also be attributable to million et al.(Gimpelson These 2000). wereaccompaniedfigures by correspondingly and social andprotection public administration between 1992and 1998went upby 1.415 number inhealthcare, andirrational: actual the sport of employees especially contradictory into onethird thefiguresAgainst public forappear the this backdrop, 1998. employment employmentin enterprisesstate-owned dropped from four-fifths of total employmentin 1990 In the1990sRussia large-scale experiencedof arapidas aresult, process privatization; toregionalsubordinated and from governments funded regionalthe budget. policy becausedecisions, most of public employmenthad been createdin institutions regional particular the of outcome the being as judged be reasonably can trends employment health care and and sport; social Yearbook,1996).The public(Goskomstat protection andscience; art sharethe education, of figures represent These for Tyva republic. per cent limitsand of upper range the were 16percentfor Tyumen’the and andVologda oblasts, 30 Russian regions exhibit a wide variation in the level of higher public employment. to the al. arguethatgreaterfiscal wereconnected et(2000) transfers example, Gimpelson de-facto met,” the not are if demands regional central “disruptpriorities to far threat as Insofar asthe Lobbying ofregional 6.1.4 capacity governments: inflated publicemployment SBC tobe granted tothe region. oppositionpopular vote for parties in Dumaelections, themore likely are theconditions for hypothesis 3.3: votes was Industrialists of Russia (1.55percent), etc. The variation of proportionthe left-wingof the wide, from 8.5 percent in Ingushetia to 59.9 in North Ossetia. Hence, sub- threat described by Treisman was in many cases replaced by a potential threat; for by in was describedmany casesreplaced by a potential threat; threat Treisman The greater theopposition tothecenter,measuredregional asaproportion of 138 public employment; in 1995 lowerthe CEU eTD Collection making: the number of regional representatives in key parliamentary committees and committees parliamentary in key representatives regional of number the making: decision in parliamentary usedavariable ofrepresentatives accessof regional Treisman the 6.2.1 Access to decision-making 6.2 Control variables should be associated with themmore strongly. Sub-hypothesis 3.5: should beinductive for softeningthe of budget constraints. administration than their non-ethnic counterparts. Therefore, counterparts. non-ethnic their than administration madeamounts of (presidents) themcapable federal exertingof greater pressureon fact the also republicsRussian first that werethe regions topublicly electtheir governors Russian republics had longer experience in exercising self-governments institutions. This and Due 2000). ethnictradition Sovietrightsto the self-government to some granting of republics, (Solnick etc. and fiscal relationship in commerce, of customs, also of regulation spheres not rights only spheres, but in and traditional these greater obtained ethnic privileges republics case Russian the In areas. policy linguistic and educational in autonomy granted are societies with centerthe from non-ethnic republics. Ethnically regionsdefined in many culturally plural Ethnic in republics haveRussia hadadifferentadministrativeand status political relationship 6.1.5 Administrative status inconstraints year 1996. that growth the of publicin employment 1995affected the conditions of hard orsoft budget months.included Therefore I into the analysis alagged dependentvariable, capture to ideathe builtgradually byfirst hiring public employees andthen fordelaying theirseveral payments public unpaid which public sector could a credible pose threat todisruption could be only of SBC from described above some federal the takes time.government The magnitude of The measurement of public employment raises the issue of timing. The process of subtraction conditions are tobegranted to that region. Sub-hypothesis 3.4 budgetconstraints. publicthe instudy sector to previous yearhave should a association positive with softening of : Thefasterthegrowthpublic sector of intheregion, themorelikely SBC republican statuswas helpfulinlobbying SBCconditions,for andit 139 ceteris paribus , republican status CEU eTD Collection predictor andthe predictor variable outcome beshould negative. between this association regions, expected the ‘neediest’ to SBC are‘supplied’ that is correct federal budgetary aid. The first measure is Ingushetia, Tyva, Koryaksky, Chukotsky, will Aginsky-Buryatsky okrugs be recipients of the modernity, base, industrial come,some majority to andliving standards.For regions, considerable time their a such as poor of of development the to respect with enormously vary Regions economic andfiscal pursue independent lackinginhuman capital to policy. dramatically and in terms, backward economic few a aresmall, remote, regions, Among Russian capture regionalI includethe that softeningconstraints. four ‘need’for variables budget the 1997, Popov2001, Hanson 2000,Thiessen 2006). unemployment, agedhousing, and change inpopulation (Freinkman employment Haney and with is income aspercapita Russian federal such variables grants associated change, equalize living standards has much scholarly In support. a variety of studies the allocation of Theideaconstraints. financialaidin regionsbeof should to that budget allocated order industrial base, for base relaxing the hardness resource primeandwealth tax were candidates lessregions had those that The ‘economicthat states need’factors. hypothesis natural structural socio-economic becauseof ablemeetconstraints budget hardregions werenot to backward Many budgetary drivingresources. poor intergovernmental of allocation factors, of The examination of determinants the incomplete SBCwould withoutthe ‘supply be side’ 6.2.3 Economic need: structural backwardness massive disruptive actions than their small counterparts. from regions,conditions iffacedwith populous which morethreats morecan the cause magnitude of possible the actions. Central disruptive isgovernment likely more grantSBC to This variableis includedtotest hypothesis the of bargainingthe based power on the Population6.2.2 size parliamentary deputies were likely indulge to in politics.pork-barreling otherwise. If the regression coefficient for this variable has a positive sign, itindicates that the variable memberthe in as 1if wasa of a regional andthis committee representative 1996, 0 was theCommittee on Budget, Taxes, Banks and Finances, consisting members. of 43 Icode commissions pertaining to budgetary allocations (1996). In the Russian Duma at that time that percapita gross regional product 140 in 1996, and if it CEU eTD Collection difficult to bear. to difficult Both failuresbring would social enormous thattensions the federal could state havefound unemploymentand ofsocial infrastructure ruin and benefits provided by enterprises.such enterprises. Theirfailure would trigger catastrophic social such problems, as explosion of 1996, thestate continued tosupport noncompetitivethese strategically but important even if as of purchase it inlowtheirguaranteed the demand. Evenaslate product, was end if and neededwere scarce, they provided them resources, but with prices for such enterprises, fixing lowinput and prices goods of high prices The of output. not state only set favorable distorted both atlifetime. prices endstheir Thestate throughout such anenterprise of by under and SBCfrom outset enterprises, the which operated important system of strategically enterprises inherited federaldensity of is the protracted property responsibility federalthe of federal state towards from the old Sovietin regional economy. The reasonsystem. why SBC conditions were imposed on regions In with a higherthe is of property of relative previous federal the share tothe the variable that Closely connected Soviet economy, the state Economicneed: shareoffederalproperty 6.2.5 created a regional with lessgovernments ‘ability pay’to (Treisman 1996, 312). to‘alleviate to resources andredistribute federal need’, benefitgovernment the of those share in in greater of state industrial the pressure on regional the economy the production put social andsupported providedinfrastructure key atregulated prices.services public The force, or because their managers made them insolvent via asset stripping and diversion ofprofits. and diversion stripping asset via insolvent them made managers their because or force, 85 buyers. lack potential of werelow-profithands and insolvent, often and mostlyremained un-privatized because of the auctions, while mass privatization was ofover. Many of privatizationthe enterprises which were energy By payments). privatization 1996, the process was initsstill final majorstage: the method in and state tax in both arrears of growth settlements, (non-monetary subsidies hidden via regions was no can be to attributed closethe link andmanagers between governors large of in enterprises the longer The failure in 1995-1996to moneytighttranslate into theelimination of producersSBC on voucher privatization, Economic shareofstatein regional6.2.4 need: economy but cash sales of shares and cash Majority of them were insolvent, either because they were operating with obsolete equipment, obsolete labor obsolete equipment, obsolete with operating were they because either insolvent, were them of Majority 85 Other state-owned enterprises were less profitable since they since profitable less were enterprises state-owned Other 141 CEU eTD Collection share dropped itstillforto 25.2%, regionalshare dropped thelargestcontribution accounted budgets. to share of this in source total tax collections was as high as 40%. Even though in 1996 this Thesefigures importance the of emphasize profitfortax theregional inbudgets; 1995 the Source: Regiony Rossii:Finansovye Aspecty Razvitiia 1997 taxes Other Property tax Export import duties tax income Personal Excises Profit tax VAT Taxes Table 6.2Official Sharing Rates ofRevenue from Taxes and Share of Taxes inBudget Revenues levels. federal on the regional and collections tax of as well levelsthe as structure government the of the between ofthecore taxes breakdown both federal andare regional shared levelsbetween taxes most Law, important the of Taxation Basic tothe According Principles fiscal relations. in the1996 levels came fromof interregional of features basic itthe ismakingto reference brief this result, worth To interpret the shared budgetary taxes. system, The Economicneed: low 6.2.6 net profit Table and 6.1the showsmajority the of the revenues enterprisesthe tryingmeet to social (2006,14). obligations” at seekingin caused by tomaintain presence states economy in the form their the to assist this …were system tax in the existing [D]istortions activities… monopolistic of restrictions preferences, deferrals and budget exemptions, low subsidies, interest credits, abolition of tax like state, the from privileges different seek will obligations, such fulfill to “have that maintaining additional As workers. noted by Sinelnikov-Murylev et al, thefederal enterprises absorb redundantlabor force, for which funds wereputaside specifically for purpose the of pension payments and communal services. In addition to this they socially were to obliged state functions of social support employeesto the andfamilies, their especially inhousing, enterprises shouldered a substantial part andin important by wereborne many services state, andthe strategically communal cases of these expenditures. They continueIn Soviet-typethe financing economy,health to pension of care, education,housing,payments, fulfill quasi- 0 100 10 50-100 37 75 Sharing rate Federal 100 0 90 50-100 63 25 Regional 142 5.2 0 10.4 2.3 20.7 14.9 46.5 % revenues, tax total in Share Federal 20.7 14.2 0 20.2 3.2 25.2 16.5 Regional CEU eTD Collection the index will capture the urban-rural dichotomy. urban-rural the capture will index the composing variables, four all since infrastructure, of social index bythe approximated well be fairly can which 86 development social of the infrastructure. the of indicator the of duplicative somewhat is mix urban-rural the view my in since analysis, social urban-ruralinfrastructure, mix and the profits per capita. I include two of inthese my of the underdevelopment regions: between the variability Russian capture to appropriate suited Russianto the case, using and indicators suggests three needof social especially Treisman (1996, 311)argues thatmost of indicators Western the of regional need arepoorly Economicneed: development6.2.7 of socialinfrastructure sign. will anegative have coefficient regression regions, the more profitable from away resources redistribute to continued If state the benefit. their to transfers redistribute to federal side’ ‘supply pressureon government in region,created collections which this Decline in the profits of the regional enterprises has a direct negative effect on the tax presented belowpresented in 6.3. Table weights, as loadings factor used and analysis, factor ran I measurement each for weights find Using themethodsuggestedby Treisman, Icompiled aweightedsum of these Inorder terms. index. a single into variables these compiled of freedom, I on economize degrees In order to urban families in 1996. beds per ten thousand in inhabitants number1996, the of land telephone linesperhundred in number 1996, the of doctors per inhabitantsten thousand in 1996, thenumber of hospital based on social infrastructure, valuesthe offour variables: spacepercapita averagehousing underdevelopment of the social infrastructure, of I constructed variable the a inconstructing measure work of developmentin Treisman’s as of methodology same the Using of development social infrastructure. above mentioned net profit indicator; below is the description for the indicator of Treisman argues that rural areas were disadvantaged in terms of inadequate electrification and transportation, and electrification of inadequate terms in disadvantaged were areas rural that argues Treisman 86 Profits per capita indicator is equivalent to the to isequivalent indicator capita per Profits 143 CEU eTD Collection Models parties in Duma in parties Votefor the left 1996,% in asecondround Vote for Yeltsin due 11.1996 Wage arrears, and 1995 between 1994 employment, total employment in public share of the of the Growth (Dependent variable is index of SBC) of index is variable (Dependent Table 6.4 What Explains Softer Budget Constraints in Russian Regions? infor whichshown last column estimates the in is Table6.4. are the the performed, together seven control regressors. Third, a full model with all explanatory and control variables in hypothesis and regressor(s) representing each thefirstturn, (two) explanatory regressors, controllingfor othervariables. Second, Irun multivariate regressions, with eight ornine findFirst, I impact of the each regressor on variablethe SBC separately, of without error. The results are shown in columns 1 to11 of Table 6.4. with Where SBC SBC I run simple bi- or multivariate regression models, which are described as follows: 6.3 Results ofthe regression analysis Table 6.3Weights for the Index of Social Infrastructure Development Variable The numberof land telephone lines per hundred urban families in 1996. The numberof hospital beds per ten thousands inhabitants in 1996 The numberof doctors per ten thousands inhabitants in 1996 Average housing space per capita in 1996 i k elements, = ß i denotes the level of SBC for 0 (1) (5.07) 0.07 (3.1) 55.52 + ß X is the matrix of explanatory and control variables, and and variables, control and explanatory of matrix isthe (2) (2.9) 0.03 (2.9) 33.9 X + İ (3) (2.48) 0.042 i (4) (1.6) 0.013 (i (i = 1,…, N, j=1,…,K) i th (5) (-1.3) -0.03 region, ß 144 (6) (-0.01) -0.001 0 – an intercept (7) (8) (9) (6.1) , ß - vector of coefficients of vector (10) (11) İ loadings factor 0.997 0.248 0.517 0.368 isarandom (12) (0.7) 0.01 (1.2) 0.02 (1.7) 0.02 (2.7) 32.0 CEU eTD Collection Population production industrial regional enterprises in Share of state per capita thousands rub. enterprises, regional of profit Net Controls: region property in a Share of federal Commission Duma’s representative in Regional bilateral treaties of signing Early R² adjusted Constant capita per GRP infrastructure social of development Index of status Administrative elections,% in presidential victory (defeat) of Margins elections in1995 coefficients for the votes in presidential elections are statistically significant, or close to it, in it, to close or significant, statistically are elections in presidential votes the for coefficients regression the ismuch stronger: first trend However, the their counterparts. more than Regionsobservable. is pattern expected the whichlegislature, national the to vote the for as but castconstraints, a greater proportion contrary expectations, pro-Yeltsin the favorablevote, to to was softeningthe of budget of their on effectof SBC:the the the regional electorate on is theeffectof behavior voting puzzling votes for the leftistA number parties wereof interestingrewardedNote: results emerge as a result of the regression analysis. The most t-values in parentheses in t-values 0.38 (-5.9) -2.27 (-2.7) -0.0003 (2.0) 0.23 (-1.7) -0.0003 (1.2) 0.09 0.57 (-1.8) -1.5 (0.4) 0.09 (0.2) 0.0001 (0.5) 0.002 0.07 (-2.5) -2.3 -0.0004 (2.5) 0.31 0.44 (-1.4) -1.3 -0.0004 (1.1) 0.1 (0.6) 0.15 -0.0001 (0.6) 0.0003 (-0.9) (-2.9) (-2.2) 0.01 0.42 (1.2) 0.8 145 (2.6) 0.33 (-0.7) -7.7 (0.9) 0.08 (0.4) 0.14 (0.8) 0.0004 (-0.3) -0.0001 (-2.7) -0.0004 (-2.3) -0.0004 (-1.1) -0.24 0.06 (2.3) 0.02 (-2.1) -0.5 0.13 0.47 (3.4) 1.5 (2.3) 0.28 (1.3) 0.1 (0.6) 0.15 (2.6) 0.69 (0.9) 0.0004 (-0.06) -0.0001 (-2.2) -0.0003 (-2.7) -0.0005 (-1.4) -1.2 0.06 0.42 (-2.4) -0.75 (1.4) 0.4 (2.6) 0.32 (0.9) 0.08 (-0.9) -0.2 (0.6) 0.15 (0.6) 0.003 (0.04) 0.0001 (-2.7) -0.0003 (-2.0) -0.0004 (-0.6) -0.6 (1.8) 0.2 0.58 (1.5) 0.13 (-1.2) -0.24 (0.8) 0.19 (-0.2) -0.0007 (1.3) 0.4 (0.2) 0.0001 (-2.6) -0.0003 (-1.7) -0.0003 (-1.6) -2.5 CEU eTD Collection measures ceased from the political agendas even most powerful regions. powerful most even agendas political the from ceased measures Penza, Chelyabinsk and Briansk oblasts (Vishnevsky,8). 1994, By 1996the suchinstances of obstructive the presidential administration, as in early 1993 his appointees lost to the KPRF inelections inOrel, Smolensk, national referendumon Constitution the in late1993. The regional elections 1993-1994 were disappointing for sovereignty, and three-quarters of the population either rejected, boycotted orfailed to reach quorum on the declared a new Ural’s republic in November1993, Tatar president M. Shaimiev publicly declared his republic’s 87 from itwhat wasin 1993. metdemands werenotby However, (Treisman, 1999). 1996 thefederal wasdifferent center ifregional central todisruptpriorities tomake credible leaders threats enabled region declarations, separatist failure gestures, support in to moments of crisis. These activities his Yeltsin againstand allies, sovereignty activity’, vote the namely ‘protest of concept be explained? In his book,Treisman under later (1999)united theumbrella severalindicators however 2.53), effectthe loses its controls once included significance can How are (-0.9). this model (t-statistics - for therepublicanstatus variate and soevenwhencontrolled remains likely it is that it was granted SBC the treaty, the signed region the earlier conditions. the expectations, to Contrary by data. the rebutted The result is highly significant is clearly effectof variable of treaties’ the bi-lateral The hypothesized ‘early signing (-2.4) in the bi- constraints. reinforced: the indicatewas that this 2.3and pattern positivemargins sign) victory (t-statistics variable of of most the of significance loyal and sign the shows, seven model as Moreover, 1.6). regions(t-statistic significant (with greaterincluded, residual the effect of for votes the inYeltsin ispresidential elections nearly margins) were if are controls all even vote SBC conditions stable: on isquite of pro-Yeltsin the The effect rewarded with softer thesis. loyalty’ political ‘rewarding the of favor in budget argument betweenmodels: the of all in interaction the will investigation show, aslater Moreover, 1.3. neverexceeds the t-statistic significant statistically not is theit but model), full a (in much as half voteparty for in favor opposition the of cast point on SBC of percentage each effects estimated only are the leftist-partiesCompared to this,andin minimalthe model adequate effect estimated isthe (t-value highly significant 3.3). the parameters two In models exceeds t-statistic the three waspresent. any variable models where the the of ofand the variable the of votegrowth to the Duma are ofmore fragile:public not employment bolsters the yearsIn 1992-1994,the instances of activity’‘protestwere Sverdlovsknumerous: RosselE. governor 87 defusing concerns were the In 1992-1994thekey of center the 146 less CEU eTD Collection Our Home isRussiasupporting in the Duma elections shrank actively to 4.5 percent. were who electorate regional the of proportion the percent, of 64.4 turnout voter a With p.p.). 28.6 (Tatarstan) and4 percent (Chukotka) between was variation the of power party forthe while points, percentage of 12 deviation standard and percent Duma. A considerable88 share of votes was cast in favor of them among a highlysize of unit.the Model demonstrated seven of the positivesignificant republican effect regions, with was inimportant rolethe median budgetconstraints, status butnot of softening of administrative the share of 33 suggest The data that supported. only factinthis butpartially SBCconditions, was receiving size the of regionthe in terms of to havepositive population effect on likelihood the of and size status administrative ismixed: normally and wouldboth one republican status expect The evidence supporting hypothesis the difference inbargainingof due power to loyal regions. appease ittroublemakers,beproved but to unfeasible whenthe strategy was namely opposite, the to of strategy the pacifying center adopted hadbe the understandable, would Duma elections government votes in the Duma elections. Totake intoconsideration the voting patterns for the optimal years. nextfour for the majority for the member districts14.3percent(58 seats) formed abasiscentral for ared-brown parliamentary KPRF, camefirst with 22.7 percent (99seats), which together with votes won inauthorities single- party “Ourof power, Home isRussia” came only third with while10.3 percent, its old rival, to the for thecentral government: werevery of disappointing Dumaelections the The results base the them. rewardingin identifying difficulties faced have of rewarding the regions which by itpleased voting in pro-central Duma elections, it would principle intention the had had administration presidential the If conditions. SBC and parties opposition on the why between explains correlation also wasno there ofthecentral newgovernment attitude share changedattitude from appeasing politically regions torewardingloyalrecalcitrant Thisones. of pro- Thecenter’s considerable costs. without rules institutional pose a toobstruct able tothreat and theregions werenot by were moreof center army.the powers consolidated, But 1996 the institutions in withholdingcourts, grain supplies refusingor tosend conscripts toserve in the refusing toremitprovinces autonomous, claimingtaxes, suing natural federal resources, defective momentum of those regions which employed a repertoire of declaring their The fragmented party system of Russia prevented the votes for other left parties from being represented inthe represented being from parties left other for votes the prevented of Russia system party fragmented The 88 Without having asolid base, electoral itfar wouldfrom be 88 ; the median vote was only 8 percent (standard deviation being 6 147 CEU eTD Collection benefits for their region. He also noted that contacts necessary to elicit SBC were informal rather than formal. than rather informal were SBC elicit to necessary contacts that noted He also region. their for benefits stressed that the complicated process of getting legislation passed made it difficult for deputies to sneak in Abdulatipov, who noted that lobbying via this channel was largely ineffective. Based on his experience, he 90 lack of data. representative underthe President orRussian Council of Ministers, whichwere omitted in this study due to the 89 channel was not effective for eliciting fiscalparliament the privileges. that shows My research committee. budget inparliament’s or administration, in by formal presidential ofaccess,i.e., the eventthe representative signs of permanent possible explanation could actual bethat makingaccess todecision be cannot measured by Banks and Finances Taxes, in onBudget, fact Commission aregion the the hasarepresentative that empirically: did not havebargaining’. any statistically to ‘access for variables Treisman’s the oneof was politics pork-barrel of the The variable significant in level variation the SBC. of effect interregional explain to fail all product on regional gross and the infrastructure, social commission, SBC level. The of in measurements presenceof control Duma the Amongrepresentative the variables, SBC.receiving however,andis This ishardly evidence opentofurther conclusive, research. rather than geographic disadvantages size the of made population for them prime candidates inhabitants orless, two-thirds (21regions) werenorthern regions, which suggests that with harsh climatic conditions. Out of 34 regions with a population equal one millionto confounded by the fact that mostreceive of the small regions are locatedin fact, card likely In weremore thecenter. a bargain with relatively to the small regions in the northSBC of the country of was expected.opposite Thiswhat the means that did playnot big regions importance their conditionsmassive in population the size is robust: is reaching modelsquite all wellabove thet-statistic two, a 3.9 thanin the though to alessersignificant, degree (1.6),in afinal model. minimal The effect of adequate minimaltheirincludedin (t-statistics model2.6 nine). The estimated effects of variablethis also remain adequatemore status on SBCconditionsthe (3.4),anditremains highwhenall supplysidethe are controls populous model. But thecounterparts. sign of the estimated However, effect is the this can be This finding is inline with the arguments made by the chairof upper the house in1992-1993 Ramazan Additional measures of ‘access’ used by Treisman were visits by senior officials, and permanent and officials, by senior visits were Treisman by used of ‘access’ measures Additional 89 The significance of variablethis indefining the level supported wasof SBC not 148 90 CEU eTD Collection column besideit) by leaststep-wise of deletion terms. significant represents finalthe form isof equation.the It from derived fullthe model in (exposed the The minimalmodel, adequate which is shownin lastthe column inthe 6.5below,Table sign. expected the bears coefficient regression corresponding the and 3.7), (t-value conditions SBC on effect enterprisesstate in industrial in minimalproduction the model a adequate demonstrates strong is production secondbest the predictor of of level the population SBC, after size. share The of enterprisesindustrial in shareof the variables,state amongAs thedatasuggest, control the however, it is present in the minimal adequate model with a nearly significant estimate (1.7). property modelfull in the only two below drops t-statistic the andin regressions: variable corresponding the in the model budgetary revenue. The federal tofill willingness this gapis evidentfrom significancethe of with smallerbaserelatively for thistax,which in needturn the created tocompensate gap in this variables of revenue compared toany taxinother The low-profitregionsregional budgets. had a of public employment. The level of the The mission to mitigate differences in income, and actually mitigated them. from better performing worse performing’ to (Popov 2001, 876). The a governmentundertook and todo,‘redistributing topoorer, was supposed incomerelatively [wealthy] from regions some federalfrom center, was FFSR hadaneffect.The to doingit extent, equalizing what Kuznetsova etal. and (1999), Popov(2001), who also found evidence toshow that transfers benefita certain most’ ‘neediest to finding isindegree. This by line resultsreported with the logic of followedthe the netfederal transfers pattern of theredistributive that be stated level with the SBC. Itcanthus association of in region showsignificant the all did enterprises levelthe industrialstate of shareproduction, of federal the andproperty net profits of of and infrastructure social gross regional failed tohaveproduct anyvisible impacton SBC, development the While clear. less far is hypothesis need’ ‘economic the of in favor Evidence net profit has a stable but much hasastable lesseffect between but vary significant (t-statistics 0.9), 1.5 and of regional enterprises forms a base for the tax, which accounts for a larger part 149 federal CEU eTD Collection R² adjusted Constant capita per GRP Population Share of state enterprises in regional industrial production industrial regional in enterprises state of Share Share of federalproperty in a region Commission Duma’s in representative Regional Index of development of social infrastructure capita per rub. thousands enterprises, regional of profit Net Controls: Early signing of bilateral treaties Administrative status Vote for the left parties in Duma elections 1995 Vote for Yeltsin in a second round of presidential elections in 1996,% in elections presidential of round second a in Yeltsin for Vote Wage arrears, due 11.1996 1994 and 1995 Growth of the share of the public employment in total employment, between This is the most important resultin all model in specifications: 1996 the higher rate of growth variablethe variables, six only of consists model of adequate minimal The share model. improve significantly of the public usingEach deletionandwas tested Ftest, wasvalidatedbe if notemployment variable deletedto does the in total employmentNote: being the most influential. What Explains Softer Budget Constraints in RussianTable 6.5 Regions? Full and Minimal Adequate t-values in parentheses in t-values Models. (DependentModels. Variable isIndex of SBC) 150 0.58 (-1.6) -2.5 (0.2) 0.0001 (-2.6) -0.0003 (1.8) 0.2 (1.5) 0.13 (0.8) 0.19 (-0.2) -0.0007 (-1.7) -0.0003 (-1.2) -0.24 (1.3) 0.4 (0.7) 0.01 (1.2) 0.02 (1.7) 0.02 (2.7) 32.0 Full Model Minimal Adequate -0.0004 Model (-4.0) (-3.9) (3.7) (1.7) (1.6) (3.3) (4.3) 0.54 0.19 0.57 0.04 66.8 -2.9 0.6 CEU eTD Collection employment variables. SBCandpublic between the ofassociation pattern the demonstrates below graphically investinstead part of butin even proceeds inflating the Figure more. publicsector the 6.1. was 2002). Itin interests,governors’ and they had means, the keepsome to arrearsunpaid, more not usedfor often than not, thatpurpose (Gimpelson etal.Enikolopov etal. 2000, were, for wagearrears alleviating transfers by earmarked fact those that the SBC issupported The undercurrentof public employment. this game asagame of of subtracting conditions threaten them with anda likelihood scale ofstrikes magnitude whose depended onthelevel of werevulnerablefederal in authorities regions bargainingthe game against those whocould made pronewages sector the to strikes economy. and facilitated across the theirThe spread mountingthe in upof Theaccumulation wage arrears overdue establishments. of public was constraints budget of softening the of mechanisms key the of One center. federal the with 25).2000, Public were employees effectively were who‘hostages’ used in fiscal bargaining al. et (Gimpelson aid’ financial federal greater attracting of hope in the payrolls administrative SBC: “Governors may have consciously chosen to boost… local education, health and This hypothesisthe and resultsupports employment causal the between public relationship of employment is even more impressive, with massive t-value of 4.3. Moreover,percent). in minimalthe model adequate effectthe of growth the of publicthe and for 24percent, account together lateral treaties account votingonly the for patterns 6 levelmore - thanof SBC, of any other andalternative (republican explanations status bi- for in accounts total 38percentvariation of the the wagearrears of variable accumulated public upheavalin region.the caseof of the with variable, under-financing together This the of indicated apermanent threat becauseit factors, Treisman’s than game center-periphery the statisticalthe inflation analysis, of public employmentwas a more stable bargaining chipin by conferring 175). Asharm party 1992, excessive demonstrated without (Elster on oneself” seek waysof boosting center,as vis-à-vis theirthe capacity a “capacity to harm the other from relative federal the By tocollected tax. continued to center 1996 regional governments of publicin employment previousthe year very the reliably risingpredicts transfers andloans 151 CEU eTD Collection Fig.6.1. Dependence of theSoft Budget Constraints Index on theGrowth of Public Employment for the several ways: first, a non-parametric density histogram, presented in The anon-parametric histogram,histogram density Fig. 4.3. presented first, several ways: The distribution of the residuals as a way to discover the distribution of errors6.4.1 Normality of mayerrors be done in model. the of fit the improving for be suggested will remedies empirical Finally will be examined, then model the will be tested for heteroscedasticity and influential outliers. The model diagnostics will proceed in the following order: firstly, the normality of error term 6.4 Model diagnostics than 1.5 times value forthe bigger not thirdbut quartile, value, and –biggest outliers. point) zero the from away ofline (end value maximum quartile, first the for value minimum value (end of line closeOnoverlaid. margins:box-and-whisker plots,toindicating interquartile (box),range medianthe (line inside box),a zero are line point) regression (solid) non-parametric and 4.17) – the t-statistics 82.57, smallestcoefficient regression (dotted, line value, but not smaller than Notes: 1.5 times than the Sources:

SBC for 1996 Growth of public employment between 1994 and 1995 in percentage points. The least squares regression squares least The points. percentage in 1995 and 1994 between employment of public Growth

Goskomstat Rossii 0 2 4 6 8 10 Russia’s Regions, 1996 -0.01 Tyva 0.00 Growth of employmentpublic Evreiskaya 0.01 Chukotka 0.02 152 Samarskaya Karachaevo-Cherkessia Karelia Ingushetia 0.03 Altr CEU eTD Collection republic. suggested measurements of SBC, which caused overvaluation of degreeof the SBC for that abnormally high degree of softness of budget constraintwas caused by imperfectionthe in the As in the previous chapter, the outlying observation (32 observation outlying the chapter, previous in the As values. from fitted the abnormally differ that greatly localizes the also itgraph, observations describedmethod While below. from deviation visualizing normality as previous the does ispower found buttheexact using variable, by better the response the transforming corrected illuminates4.4), tailbehaviorthe of is it residuals: the positively tailed, which be can (Fig. againstt-distribution residuals of The nextgraph, aquantile-quantilestudentized plot Fig. 6.2 Non-parametric Density Estimates for the Distribution of Studentized Residuals in the outlier(s). presenceof the the indicating deviation in the small in leptokurtic hump slightly areaaround standard the ninth the character, model,adequate whilethe main body approximatesof thenormal errors the distribution, minimal inthe errors of distribution the of normality the from deviation diagnoses clearly Density

0.0 0.1 0.2 0.3 0.4 0.5 -2 Minimal Adequate Model (Linear Regression with Six Predictors). density.default(x = rstudent(model1)) 0 N = 74 Bandwidth = 0.2548 Bandwidth N = 74 2 4 6 8 153 nd ) is the one for Ingushetia. The Ingushetia. for one is the ) CEU eTD Collection i.64 Plot for the Residuals vs. Fitted values for Fig.the Minimal6.4 Adequate Model (Linear test(1979). Iused Breusch-Pagan the values, seeFigure6.4, heterogeneity of diagnosing variance by standardizedthe againstfitted residuals plotting varianceconstant display should residuals the that demands requirement homoscedasticity The regardless6.4.2 Homoscedasticity of the level of the value of residuals. Along with visual ways of Residuals Studentized Residuals(model1) Fig.6.3 Quantile-comparison Plot for the Distribution of Studentized Residuals from the Minimal

lm(sbc ~ employment + for.Yelt + federal.prop + republ + state.pr.4 + popul ... + popul + state.pr.4 + republ + federal.prop + for.Yelt employment ~ lm(sbc -2 0 2 4 6 8 -2 0 2 4 6 19 -2 -2 Regression with SixPredictors) -1 -1 0 Residuals vsFitted Residuals t Quantiles Fitted values Fitted 0 87 1 Adequate Model (Linear Regression with SixPredictors) 2 1 19 3 2 87 32 4 32 154 Residuals

-2 0 2 4 6 lm(sbc96~ employment + for.Yelt + repub + fed.prop + state.pr.4+ populati... -2 -1 0 Residualsvs Fitted Fitted values Fitted 1 81 19 2 3 4 32 CEU eTD Collection random error term for regions vector of coefficients of vector where SBC denotes the level of development of soft budget constraints, budget soft of development of level the denotes SBC where (SBC gives the followinglook to model’sthe formula: of the model,likelihood the maximizes that lambda for value given a I found it Using environment. R in the built the data. The value can Thefound power procedure be exact variable. Box-Cox transformation response usingthe is close to -1.8 (seesuggest, themodel is likely benefitfromto a shiftdown ladder the of powers the for the Fig. 6 in the Appendix),power transformation of the response variable. As the previouswhich test of normality of errors poses a serious (foundpredictors tobeproblem. aminimal modelnon-constancy adequate specification), variance of One of model with six thatfor the basic linear for regression revealed heteroscedasticity The tests the typical ways to stabilize6.4.3.2 Variable transformation the variation Appendix. in the 2 Table insee model: residuals non-hierarchical in the ones the from substantially differ is a andtest-statistics estimates the parameter none of Importantly, seem notreasonable. does regions alone, and therefore the introduction of an additional level to the model as a remedy between from bedifferences than expected greater would isnot districts economic between and variation 0.11317 respectively).(1.39516 Similarly previousthe to model, variation total of cent per 7.5 about explains former the that show they case this In districts. within variation of those against variation in toweighmodel between-district for estimates the order that indicatescircumvent problemthe byintroducing anadditional term.error By adding avariable vector an economicIn the districtsame 6.4.3.1 Introduction of an additionalway hierarchical level to whichas in an chapterobservation6.4.3 Remedies to the misspecified model five, belongs,with probabilitylessthe of than 0.0001 (see Table 6.5below, first column). I suspectI run a alsois by supported which Breusch-Pagan the test, shows that residualsthe arehomogeneous mixed-effect non-independency diagnosis This heteroscedasticity. sign of aclear afunnel, resembles scatter the of The shape of errors, and try to -1.8 -1)/-1.8= ß 0 , + ß X is thematrix k explanatory of and control variables, and j X i = 1,…N. + İ 155 (i (i = 1,…, N), (j=1,…,K) ß 0 – an intercept (6.1) İ , is a ß j - CEU eTD Collection Breusch-Pagan test is not significan at level 0.1. the one, where the fit of the model complies with the requirement of homogeneity variance,of is federal (employment,and population) property model the However, predictors three with with one compared of half tothe approximately explanatory the power six predictors. lost models thatthese show regressors, andtwo three models, with two for the estimates Therefore, it seemsindustrial lostproduction considerably in statistical significance (see Appendix, Table 4). reasonablein enterprises state of share and status, republican Yeltsin, for to voting for variances leave consistent only three heteroscedasticity- the for Ftests orthe test, this In errors. standard evenheteroscedasticity-consistent two predictors isThe nextstep use method byWhitethe suggested to (1980)andintroduce in the model. The of growth the (decline) of publicwas employment by not supported data. the value variance the and error the of hypothesis proportionality of the the model,OLS therefore asin theBreusch-Pagan remainingwas not reduced, heteroscedasticity (p=0.0001), test 22.7 from 54 to50per cent and, most importantly, target was the notachieved in that model Running the WLSwith brought following the the explained results: variance decreased value of [-0.013] (which growth the is 1.3percent in reduction public employment). values, Iadded 0.015 to each value of change, employmentthe soas to offset the minimal 91 growth of public employment. the of level the to proportion would in move inversely observation each reasonable a weighing model the fit Therefore be to employment. of level the to proportional is variance error the that chance high is a there and models, specified previously the in all regressor significant (WLS)instead of ordinary least squares.The value of employmentpublic was most the The nextstrategy in trying tostabilizevariance error involves using weightedleastsquares two and six predictors). decreased onlyby Rsquaredadjusted 0.66and 0.69 respectively3 percent: for models with 5.2against11.6), (heteroscedasticity improved test while proportion the of explained variance significantly model the of fit the only, variables two these with regression same the ran I When and population. for employment those significant: of them are statistically only that two revealed transformation Box-Cox the with model polynomial the of estimates regression The The procedure ispresented Foxin (2002, 209) 91 Since theprogram returns anerrormessagefornegative 156 CEU eTD Collection R adj R Residual standard Error standard Residual AIC test Breusch-Pagan homoscedasticity ersincefcet o oig 0,04 Regression coefficients for Voting predictors, whichpredictors, was arrived atby step-wise deletion of variables, using vs.fitted values for fourthe most plausible modelshand: at basic linear regression with six The next four plots (on Figure 6.5) give a comparative overview on the scatter of the residuals Note: Employment for coefficients Regression Model Table 6.5 Regression Diagnostic Estimates for Six Different Model Specifications main totwo accordance sub-hypothesis. in chosen were which elections, presidential the in Yeltsin for vote and employment in changepredictors public of SBC,the the two forthe with slope the estimates together forTable 6.5summarizes thesix theresultsdiagnostics of models inquestion,regression population level population is thebestpredictor of levelSBC. the of the regression in polynomial one: but models, in all t-statistics largest the has it predictors: best the of is one variable employment the is that models in all estimates parameter of comparison the from is clear What choice. best be the would regression polynomial the then with three t- of reliablity the predictors.prioritizes statistic one if and predictive power of model,the best model then the wouldbe thebasicpriorities: regression selected the on depends Ifregions priorityRussian on is givenwhich in Theis thedata better decision as to describing regression only with regressors. three to the model andbasic predictors, with two forregression polynomial the arepresent scatter of the with the highestshapes is besttwo big).It the clearthat were too errors standard corrected heteroscedasticity explanatoryfrom model were eliminated (three otherregressors their the with predictors as three power, leastsquares (WLS) weighted and regression with six predictors, basicthe linear regression polynomial model arrived atusingBox-Cox powertransformation responsevariable,the of t-values in parentheses in t-values 0.54 1.22 247.9 (0.001) 22.7 (4.3) (4.3) 66.8 (1) predictors six OLS with 0.69 0.03 -305.2 (0.07) 11.6 (1.3) 0.0004 (2.9) 1.1 (2) predictors with six OLS l Polynomia 157 0.66 0.03 -300.8 (0.07) 5.2 - (3.1) 1.2 (3) predictors two with al OLS Polynomi 0.55 7.34 220.85 (0.001) 22.7 (3,2) 0.03 (3.7) 43.9 (4) predictors six WLS with 0.34 1.46 272.2 (0.13) 5.6 - (4.3) 80.1 (5) predictors three OLS with anova operand; the 0.33 1.47 272.4 (0.04) 6.3 - (4.1) 74.8 (6) predictors two OLS with CEU eTD Collection data data set. Following logic, this Iidentified the observationtroublesome using the graph that observation(s),justifyingisolation from their set, and data the running the model on a reduced The problem lack of of fitgoodness of is by often circumvented identifying influential 6.4.3.3 Removal of high-leverage points six regressors with regression (WLS) squares least Weighted C. Panel model regression linear adequate Minimal A. Panel theFour for Heteroscedasticity DifferentModel Diagnostics Fig. 6.5 Specification Residuals Residuals

-2 0 2 4 6 8 -2 0 2 4 6 lm(sbc ~employment + for.Yelt + repub+ state.pr.4+ federal.property + po... lm(sbc ~ employment + for.Yelt + repub + state.pr.4 + federal.property + po ... po + federal.property + state.pr.4 + repub + for.Yelt + employment ~ lm(sbc -2 -2 -1 -1 0 Residuals vs Fitted 0 Residuals vs Fitted Fitted values Fitted values 87 1 87 1 2 19 2 3 3 63 32 4 32 158 Panel D. Linear regression model with three predictors three with model regression Linear D. Panel regressors two with regression Polynomial B. Panel Residuals Residuals

-2 0 2 4 6 8 10 -0.05 0.00 0.05 -0.25 -2 lm(sbc ~ employment + federal.property + population) lm(((sbc + 3)^-1.8)/-1.8 ~ employment + population) -0.20 -1 Residuals vs Fitted Residuals vs Fitted vs Residuals Fitted values Fitted values Fitted -0.15 65 0 31 1 -0.10 65 32 32 2 -0.05 63 3 CEU eTD Collection it was different from the one identified forthe full sample in that it excuded the variable forvote forYeltsin, 93 square, thay do not distort the regression equation. mean of error increasing to contribute they though even points: very influential not are they However, 64. 92 for asmaller sample without the observation for Ingushetia. together with the slope estimatesTable 6.6 below reports results of regression diagnostics for the six models inquestion, for the two potential predictors of the SBCmodels for asample without Ingushetia. which were run the for diagnostics andregression estimates of regression description tothe straight proceed in I region. is explanation Asthe it rationale the excluding presented for of section 6.6.6.1, due to level that SBC for overvaluation of the sameasinof the previous chapter, the Both graphs identify numberobservation 32as a highly influential which happenpoint, tobe predictors six with regression Panel. A. Fitted values vs. Residuals for basic OLS Fig.6.6 Diagnostic Plots for Identifying Influential Points leverage was described earlier,in section 5.6.6.1 ) (Panel B on Figure 6.6) residuals vs. leverage plot, which identifies points with leveragehighest (the formula for and residuals, largest with observations localizes which vs.residuals, values fitted plots

I identified the set of regressors which has unacceptable level of heteroscedasticity corrected standard errors; standard corrected heteroscedasticity of level unacceptable has which of regressors set the I identified Fig.The 2in Appendix shows with that deletion the of observationother 32, points became outliers: 86, 62, Standardized residuals

lm(sbc ~ employment + for.Yelt + federal.prop + republ + state.pr.4 + popul ... 0.0 0.5 1.0 1.5 2.0 2.5 -2 -1 0 Scale-Location Fitted values 87 1 2 19 3 4 32 92 159 regression with six predictors six with regression OLS basic for Residuals vs. Leverage B. Panel. Standardized residuals

lm(sbc ~ employment + for.Yelt + federal.prop + republ + state.pr.4 + popul ... +popul + state.pr.4 + republ +for.Yelt~ employment +federal.prop lm(sbc -2 0 2 4 6 0.00 93 Cook's distance 0.05 0.10 Residuals vs Leverage 19 Leverage 0.15 81 0.20 32 0.25 0.30 0.5 0.5 1 CEU eTD Collection R adj R Residual standard Error standard Residual AIC Homoscedasticity test ersincefcet o oig 0.02 Regression coefficients for Voting hence the model that was specified regarding the heteroscedasticity corrected standard errors includes four (not four includes errors standard corrected heteroscedasticity the regarding specified was that model the hence best behavior of residuals, and also explains a greater share of However, for asample Ingushetia,variation without polynomial the model regression (3) exhibits the than any other model. sample. on reduced the run regression the than variance less cent per 9 explains sample full the for one the results: different the two identical models (model performed6), on differentdata sets, produce markedly be additional This the cannot dueonly variable,full sample(33percent). to as improvement whichismuch morein model than variable, analogous run the total response on a variance the This model, model basic explains four linear the regression predictors, 48percentwith of the is careof 5). (model errors taken of standard correction heteroscedasticity the after significant arestatistically estimates whoseregression inthecaseof model noticeable the especially is observation one only of omission the to due variance explained of share in the difference The variable. response in the variance explained larger and AIC smaller variance, error concerned. All runfor regressions samplethe Ingushetia without consistently exhibitsmaller are variance explained level of andthe power, predictive problem, heteroscedasticity models six same the that show in Appendix 3 in Table and above table inthe reported runfindings The on the sampleNote: without Ingushetia have a somewhat better fitEmployment as for coefficients farRegression as theModel Table 6.6 Regression Diagnostic Estimates for Six Different Model Specifications (Sample without t-values in parentheses in t-values Ingushetia) 0.55 0.85 193.5 (0.001) 25.5 (2.1) predictors six OLS with (4.2) 47.5 (1) 0.68 0.03 -302.4 (0.07) 11.7 (0.9) 0.0003 predictors with six OLS l Polynomia (2.6) 0.98 (2) 160 0.66 0.03 -301.9 (0.10) 4.6 - predictors two with al OLS Polynomi (2.5) 0.9 (3) 0.52 5.7 180.7 (0.001) 25.5 (2.8) 0.02 predictors six WLS with (3.3) 30.7 (4) 0.48 0.90 201.8 9.5 (0.05) (2.1) 0.02 predictors four OLS with (4.3) 51.7 (5) 0.42 0.97 207.7 (0.01) 9.1 - predictors two OLS with (3.7) 45.1 (6) CEU eTD Collection employment. coefficient by 5207, the value will be 3.02, which is still smallerby one order thanthe coefficient for much smaller thanOLSthree with or four regressors) by the 590, regression coefficient forpopulation wouldthe be 0.342, which is one for theinto comparableemployment scale. Even if we multiply the (80.1,greatestthousand inhabitants. Therefore we should multiply regressionthe coefficientvalue by order590 into bring the two of the slopeor for51.7 this variable, inwhich withis amedianthesevalue of 590 0.00058thousands, the increase by one pointpopulation in variable mean increase by (inone models). by one point, wouldAndgrowth mean by from 45.5 thousands to 5million207.7 thousands depending on employment the of region, even variable the of change The ofpersons. thousands if is which variable, we population the of multiply format the the initial format, which is percentage change in public employment (0.013 would mean increase by 1.3 per cent), to betweenemployment and populationwill not be so striking if we convert the employment variable from its 94 three) regressors. in may fit; predictor all be chosenasbest best the predictors with three linear basic regression while for asampleincluding Ingushetia twomodels: polynomial predictors andwith two the For Ingushetia,sample without model best the fitting is polynomial predictors, with two employment. public of variable to comparison in small is relatively a on reduced sample,itis but important for theregressioncoefficientto note that variablethe in models itsall run significance in increases statistical of The variable contrast, population, isof correction is account, the takeninto variable standard errors statistically significant. not heteroscedasticity the after models in the and specification, in polynomial loyalty: political robust: test-statisticsthe neverfalls below 2.5,which cannot be said for variablethe for loyalty to consistentlyYeltsin. for in both sizesignificance, decrease effectstatistical and all to employment of public variable In models, all butcases, so theypoints do forthough, its hypotheticalwithin all but theone themodel rival, estimates(2) thedeletion sharetheIf comparesone Rsquaredsbetween models runforanalogous thefull and reducedsamples, variableof explained variance of forpolitical increases ofthe bythe twovariable with treated itscaution,or residualsadegree as show inconsistency of variance. of more influentialpercentagebe should it variance, of share larger even an explains (2) predictors six with model ofthe While employment point. are The exclusion of Ingushetia caused the The level of the regression estimate of the population variable should not be underestimated. The difference The be underestimated. not should variable population ofthe estimate regression the of level The 161 94 CEU eTD Collection R² adjusted constant a great effort to reduce wagearrears. effortto reduce a great possibility of accumulating unpaid salaries was reduced,as in 1996 central madegovernment wouldpublic sector presidential havesharply the importantly,agenda. More the contradicted Gimpelson 2004).Even though his ideaswerescarcely implemented, inflationoutright of the spring 1998Yeltsin toreduce pledged sizethe of bureaucratic staff by half and(Brym in already much agenda earlier: presidential economy the the appearedon bureaucratizing However,theideainflated of presentfordiscussion employment. de- the – reducing improvingcategories,qualification system the of pay scales and rewards, and –most relevant predictability advancement, andof transparency settingpromotions, upasystem of bureaucracy. streamline the state The list includedmeritocratic of tasks ensuring main the a Commission, of which wasto task He signed setting up Putin. adirective This can be partially explained bythebureaucratic in reform August wasstarted that 2001 by ȕ t-value Table 6.7 Decline of the Association between theSBC and Public Employment modelsthe from dropped 18 percentto afraction of a percent(0.01). andlonger wereno statistically (t-statisticssignificant 0.51vs. The 4.17). goodness of fitof hadvery low, become estimates that regression shows and the analysis regression bivariate their bargaininggame with federalthe Table authorities. 6.7below presents resultsthe of after financialthe crisis, regions couldnolonger useinflated employmentand wagearrears in samethe analysis for subsequentthe years 1997and 1998, datathe for 1999suggests that further longitudinal analysis.Although lackthe of available datamakes itimpossible torun The analysis effectthe of of publicon employmentSBC conditions for 1996yearthe invites 6.5 Discussion we look for both statistical significance, and magnitude of the effect size. models (with and without Ingushetia)is thelevel of growth/decline of public if employment, 0.18 -0.62 82 4.17 1996 0.01 -0.14 1.67 0.51 1999 162 0.03 -0.55 4.47 1.74 2000 0.07 -0.09 2.57 1.85 2001 CEU eTD Collection Public health Public Education Social services, total Social work Social evidence thatthis continued todrive fiscal inappeasement mid 1990s. is little there from Moscow, concessions tax inextracting more successful were government in early for whichthe federal 1990s regions threatening political possessed the resources if But loyal than more grantedsoftertheir budgetconstraints were counterparts. documented, ashasfor voted been leaders federal challenged that center, Regions the that transfers. fiscal itwith greater opposed that regions placate those tried to center federal the that A wide range of studies of Russian fiscal federalism have proved that there is indeed evidence 6.6 Conclusion budgetary revenues has from grown 10 percentin 1999 16-17 into 2001-2004. moremore on dependent and federal sharein whilethe the help, federal of regional transfers and only 13% about of municipalthe budgets (Klimanov 2000). Theregions have become regions: in less covered 40% than 2001 regional of taxes budgetary regional expenditures the the of fiscal autonomy the of leddeterioration the to resources of the centralization The 2005. However, on the revenue side ratioisthe imbalanced: 64:36in favor of federal budgetin hand, and regional municipaland expenditures reached 50:50and stabilized at this level. between on federal,one The ratiothe budget. for federal the expenditures an increaseof the expenditure part of the federal budget. federal of the part expenditure 95 sector. partially explained by implementationthe of federal law onincrease of paymentthe topublic of 3.3 per cent of GDP whentheshareof federal toregionsactivities, federal reached apeak re-distribution transfers (rocketing by 2.5 level Center year tothe yearof Fiscal The according wasthe of greatest 2002, of Policy, per cent in three years). This steep growth can be Table 6.8 Share of the Budgets in the Socially Oriented Expenditures (1998-2001) During 2004-2006 financialthe transfers to the regional budgets stabilized on the level 13-14per cent of the 95 This concentration of the financial resources on the federal level was associated with 1998 13 17 56 9 Federal budget 2001 19 27 52 12 163 1998 87 83 44 91 Regional budget 2001 81 73 48 88 CEU eTD Collection the analysis have relatively low information content. analysislow have relatively the information of in processed course the data the foremost, andfirst of analysis: limitations methodological growth Anyof establishments. public offered be hereneed to conclusions temperedby the whocould threaten of them with a likelihood strikes, the magnitude of which depended on the The federal likelymore yieldwere authorities in to regions bargaining the those against game for SBC, which were not discussed in their research. power of the variable of growth of public employmentagainst the other plausible explanations transfers thenvice versa. My analysis adds to theirfindings by evaluating the explanatory is andthatbetween predictor public abetter 1995 -1998public employmentof employment, with larger werestrongly from sources) associated other regional revenues (not transfers accumulating wage arrears for public employees. Gimpelson for public employees. wagearrears accumulating employmentGimpelson andTreisman’s (2002) hypothesis of causalthe relationship between public percentof total the invariation level the GimpelsonSBC. This of resultsupports etal. (2000) and for 40 about a wagearrears) of with the variable accounting (together power, explanatory SBC substantial possesses wherebyvariable this As Ihaveshown, constraints. budget of hardening in caseof implied of itthe public upheaval athreat because center with the bargaining governorsin later periods. Thelevel growth of of publichad employment become a stable inchip in forrelation notaccount does in interregional transfers the variation early budget the 1990s, wereMy analysis explains whyTreisman’s choice of variables, applicable tointer-budgetary able tofor the softer budget constraints. soften ratherunderpaid (or wage-delayed) publicwas sector used as a powerful inbargainingtrump budgetconditionsthe elicit to in order employed were mechanisms new that I found However, my analysis. in of SBCconstraints from the andof this theoretical construction variables the reasonIpreservedTreisman’s underpinning center. The integrity country the of continued tobewidely by used Russian in regions mid-1990s.the For second findingbyThe important finding of chapterthe is thecredibilitythat disruptof threats economicto of the chapterloyalregions incumbent less were president constraints.the to punished with harder budget is that inflated basisthe votingof wasthe level of support forelectoral Yeltsin in 1996presidential elections: on distinguishing for benchmark main andthe that shows analysis My regions. loyal politically of support Treisman’s argument inthat midthe this 1990s trendwas by replaced a bias in favor and models more complex datasets is collected newly the main that chapter The claim this of 164 et al. argue largerfederal that CEU eTD Collection deficits, andlarge sums tobe uncontrolled of transfers inter-budgetary transmitted. the with itsnascent markets, imbalances, which longpermitted spansof wage arrears,budgetary between the growth of relationship reinterpretation the Thepresented conduciveof SBC. the was particularly of public employmentfacto lead always not would it and government regional the of policy SBC intentional an was if it Even is present in specific ingrowth numbers may also beexplained structural factors such as growth of population. The conditions. SBC gain to circumstances governments regional of part the on action intentional an always of theoretical findings. of contribution is The these of employmentexpansion public sector not as regards the arewarranted precautions meanthat underinvestigation period of the thepeculiarities of Moreover, politicalthe in mid-1990ssituation in shortRussia and the span to softening constraints: of budget naturethe of economic and political situation of 1996 165 de CEU eTD Collection on factorson thatlead the emergence tothe of institutions.these study My by thisadds to debate 2000, institutions (Campos RolandHowever, 2002). very limited has work been undertaken and economic political growth-promoting of asfunction sees economic performance that democratic of development or institutions, that capital, motivate or constrain these policy choices. A new strandinfrastructural of research and emerged human natural, with endowment pointed out, it is progress of reform measures vs.institutional capacity/change measures. As Roland has more important and of performance This overemphasizesinstitutional importance the attitude settings. the to understand policy thechoices on economic moregrowth, viewing these policy choicesgeneral as exogenous to economic impact hasthe of observed extensively on transition literature The empirical of the thesis. conditions, suchandconstraints) ofsoft studies budget which provided the aframework for ultimate objective as initial (studies makingof market studies states, federalism, including of theories of fiscal federalism, from relevantfindingsthe drawing previous work, on bodiesthree literature of academic Chapter providedtwo foundation the for subsequentthe empirical by analysis summarizing by addressing the role of ingrowth promoting theinstitutions federalism. of research has sought toshed newlight on problem the of lackthe of marketrobustinstitutions explainto variables. phenomenon using different Incontributingthe this debate,the present to hard topinpoint, and have extensive prompted debate amongst scholars,have who attempted and marketization the hindering of economy.the reasons for The this variation proved have actors other of part the on behavior rent-seeking stimulating way, predatory more distinctly in market, behaved a of institutions others a robust of economic the to theconsolidation some regional in Russiagovernments weremore insupportive establishing amarket, leading failure success or individual necessary institutions. While tosecurethe market of regions is in one marketization The story RussianFederation the of of level in wide variations the of interface. 16). (1997, intentions” with The consistent policies implement to are if we is essential goaldevelopment its but of theories, inour state a primitive in is still the politics and economics the between present hisresearch words, “[w]e simply do not North rightlyknow that itrecognized is hard developto durable, socially desirable institutions. In hashow to create been efficient politicalto contributemarkets. The interface to the development of this C HAPTER 7: 166 C ONCLUSION CEU eTD Collection growing literature on Russian fiscal federalism. Drawing on insights from Weingast’s theory Weingast’s from insights on Drawing federalism. fiscal Russian on literature growing Thus governments. findingsthe five in asignificant constitute chapter contribution to the aspects behavior of of the regional canrevealimportant relations fiscal center-periphery behaviorregional of andinwork thisgovernments, the gap present is bridged by showing that of the fiscal tothe has determinants been paid attention insufficient Hitherto, territories. intheir economies market of development the promote madegovernments that regional conditions specific the identified I five in Chapter regions, Russian the on analyses empirical Building on institutionalthe explanations of economic and growth, resultsthe of previous the strongest, and were informed by the reality of the center-periphery relations. faced, under that influencegovernments of fiscal of the one circumstances being economic weremade experiencing.choices Policy were theregional economicgovernments incentives little visibly made others while capital, effort todevelop agrowth-promotingmarket reflectsinfrastructure, thedeviantpolitical and attract to competition jurisdictional a in institutions at regional the level. Thesome factthat and developed market regions infrastructure depends on situation alsothe development their but level, federal that atthe recommendations inpolicy importance institutions and rolethe recognize of their declare conceptually to enough not is it that is us taught has transformation economic Russian the lesson The officials and regional citizens. government of incentives the of alignment the for important are institutions these that proved has four in Chapter analysis The region. in a institutions market of stability and development of level the at attentively more look and subsidization, of level the and liberalization, price privatization, of level the as such reforms, policy of measurement on less focus should indeed dependent on market progress the reform.of in order Buttodiscernlink, research this (time-series run long in the especially variables, policy the against variable institutional 1996-2001). the of strength The point Whatisgrowth. in is empirical new thatthe recognizedtheexplanatory models this debate I make in theChapter four confirmfourth in the hypothesis outcomes of importance statistical The of development. initialchapter endowmentsinstitutional and for conditions economicinitial policies, of impact is relative thatthe in quantifying lies research economic present the of novelty the above, the to addition In growth is institutions. market of development the and relations center-periphery of institutions between link the second, and performance, economic and institutions market of development the between link the first exploring 167 CEU eTD Collection during during 1997-1998 show taxarrearsthat were notonly objectivedue to reasons, such asthelack of liquidity, but Ponomareva Zhuravskaya and Ponomareva 2004). and Zhuravskaya (2004),basedevidence on from 73 regions 97 Brennanand (1980) 96 incentives. the given so become can they that but benevolent, naturally are all assume governments that not does federalism on fiscal literature The secondgeneration were highly insomedeveloped regions butnotin others. institutions market a situation where created of SBC toindividual allocation regions selective mechanism market-preserving federalismof doesnot work for all Russian regions. The the that shown have I relations, center-periphery in Russian tendencies empirical and the softness of budget constraints. budget of softness the of largedue also determine amounts taxes but regions’ regarding ‘withholding’ tolerance its periphery fiscal Notonly relations. bail center’swillingnessthe to by out ‘giving out’funds, in center- distortion real of the growth-impeding degree little about relatively communicates its own, on from center, the of transfers of volume SBC. The theconcept them using of anddeterminants transfersfor andtax in arrears both by evasions Russia of accounting debate on the research brings together measuring The task forpresentuseful the of SBC. are that indicators identify and tendencies some disclose can flows fiscal of analysis The dissertation. the of argument central the with consistent are regions Russian in institutions market of development in the variation of patterns the that reveals thus Chapter fifth in the analysis seeking, counterproductive behavior partthe on of regional the Theempirical governments. by supported in reform institutions, whichincenter-periphery Russianthe case induced rent- the behavior of regional governments. The second point is that economic reform needs to be providing evidence empirical demonstrates that the importance of incentivethe problem for added of my as thisresearch regards fiscal second generation liesfederalism literature in value The market. the to detrimental behavior adopt to governments regional rational led but powerful didincentives, logic incentives the create of institutions those Russia’s political market institutionsunderdevelopment wereproduced of by set a concrete incentives. of extends this area of study by providing empirical evidence that such economic outcomes as Tax evasions were apervasive feature throughout the nineties (Black etal.2000, Shleiferand Treisman 2000, of Buchanan work the in described as government, ‘malevolent’ assume to be necessary not it should Though 97 A tax-evasive is attitude conventionally by quantified the 168 96 The present research The present CEU eTD Collection active role of regional governments. ofregional role active the tax evasions, at least in the magnitudes seeninRussia during the nineties, would notthat be possible message without important the the communicate studies These collectors. tax from them by protecting taxes federal of Cai andTreisman(2004) have demonstrated that regional governments lowered regional enterprises’ the burden center. federal the and it between tension higher the and power bargaining greater region’s ofthe result the also achieved. AsIhave particularity shown,the of Russian the insituation mid-nineties the central between the howSBCconditionsand demonstrated were and regional government in have thatgame a transferswere bargaining I these fact analysis. shown function of political volumes of such transfers, in variation great asthe alike, andpolicy-makers of academics attention intensive the attracted and the puzzling has five. allocation Federation behindthe Chapter The rationale central inRussian of transfers the than way patternsin adifferent but federalism, fiscal Russian on literature the to of contributes their allocation six,offered addresses rich data from The the forfinal actors. pressure overwhelming economic powerful Chapter thesis, the part of question why in since central democratic will governments nascent federations have tocope with SBC conditionsimportant, is relations fiscal in federal SBC the limit and drive that factors Understanding vary across the Russian performance. in economic regional differences Federation. It model the Therefore, in fiveChapter can alsobe regardedas a buildinginblock explanationthe of measures growth. is varying economic of between and association there DMI a strong four has aschapter However, economicnot demonstrated, amply growth. institutions, and market of degreeof the variable development fivehas as level. Chapter dependent ‘ideal’ budgetary levelexpenditure as benchmarkagainst which measureto real expenditure estimated individually use should one SBC of level the in calculating therefore enormously; interregional diversity, costs the of equal providing levels of public welfare differ wideexceptionally overspending.Dueto of budgetary but thealso region’s remittance’ taxes way improvingof itwould beadjust to itnot only regard to with region’sthe ‘under- to remit. The method but shareof is tax agivenby the the that able tocollect, hasfailedevasion region calculating of compiling measurementin of The method of SBC suggested degreeof the this thesis tax captures an SBC index, however,tax obligations thatwould belevied revenuesconcealed from on the federal the authorities. non-established namely evasion, tax of calls component important very a overlooks for approach an further research. such been have measured not fulfilled. However, of that arrears, amount tax astax obligations One 169 CEU eTD Collection be promoted, this thesis offers some partial answers toit. answers partial thesisofferssome this be promoted, can institutions good how namely air, in the hangs still question unanswered largely a While federations in in of period regional transition. governmental performance asymmetrical the regional by governments identifying the political factors accountthat for differencesin on literature economic political tothecomparative contributes research present In sum,the came about. type Russian federalism asymmetrical government adds also to ourunderstanding of how distributionthe of between powers levelsthe of research present The collective benefits. on calculations rather than self-interest, to maximize (Knight 1992,41), suchinstitutions as SBC emerged out imbalances,of power in an attempt institutions of emergence of theory distributive the the According to behave strategically. can who between actors of bargaining power-seeking can be as by-products recognized The bargainingwas applied approach toa case institutional of federational institutions choice: transfers. threats to disrupt integrity economicthe of country the as an opportunity to elicitmore federal inpursuit fiscal of certain privileges sphere, that credibility regionsRussian usedthe of answering question as towhat the exactly bargainingboosted the power of regionthe in its lies into game. vacuum of in be set bargaining this Thethe work contribution can zero-sum part of work the reveals howinstitutional in choice periodthe of political instability legal and This them. among SBC institutions, specific of form in the outcomes distributional beneficial supplied some regions with bargaininggreater power, which motivated them to obtain 170 CEU eTD Collection Barro, Robert and Xavier“Convergence.” Sala-i-Martin. 1992. 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Valerie. ------. 2003. “Why the Rich May Favor Poor Protection of Property Rights.” Sonin, Konstantin. 1999. “Inequality, Property Rights Protection, and Economic Growth in ------. 2000c. “Russia between States and Markets: Transnational and Subnational 2000a.------. “Big Deals: Territorial Bargaining andFate the of Post-Colonial Post-Soviet Affairs D.C. for theMeeting Annual prepared APSA, of the Crisis.” Washington, Governance Paper the Devolution Process in Russia.” Governance 133-176.16(2): Democratic Governance Journal ofComparativeEconomics 2300. London: Centre for Economic Policy Research. Transition Economies: Theory and Russian Evidence.” CEPR Discussion Paper No. Globalization Pressures in Transition.” In Aseem Prakash and Jeffrey A. Hart eds. London School of Economics. Paper presented at ESRC Research Seminar: Russia’s Regional Transformation, at States.” and Post-Soviet . Princeton, NJ: Princeton University Press. University Princeton NJ: . Princeton, . 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Post-Soviet Affairs Responding to ” CEU eTD Collection ------. 1995. “The Economic Role of Political Institutions: Market-Preserving Weingast, Barry.Weingast, “Constitutions 1993. as Governance The Political Structures: Foundations of Vigneault, Marianne. 2005. “Intergovernmental Fiscal Relations and the Soft Budget ------2003. “Conflicts on the Sub-National Level: Typology, Contentand the Turovskii Rostislav. 2002. “Politika v Regionakh: Gubernatory i Gruppy Vliyania.” Working ------. 2001. ------. 1999. “Decentralization and Corruption: Why are Federal States Perceived Treisman, Daniel and Hongbin Cai.2005.“Does competition for capital discipline Tiebout, C. 1956. “A Pure Theory of Local Expenditures.” ------. 1998. “Deciphering Russia'sFederal Finance: Fiscal inAppeasement 1995 Treisman, Daniel.“The 1996. of Politics Intergovernmental Transfers in Russia.” Post-Soviet Organization Development.” Economic and Federalism Secure Markets.” Secure University. 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CEU eTD Collection Zhuravskaya, Ekaterina. 2000.“Incentives Provide to Local FiscalPublic Goods: Federalism, Communism Zlotnik, Marc.1996.“Russia's Governors: All Men?” President's the Zubarevich, Natalia. 2002. “Prishel, Uvidel, Pobedil?” Working Paper. Moscow: Carnegie Williamson, Oliver E.1985 ------. 1996. Wibbels, Eric. 2000. “Federalism and the Politics of Macroeconomic Policy and White, Halbert. 1980. “A Heteroscedasticity Consistent Covariance Matrix Estimator and a ------. 1997. “The Political Foundations of Democracy and the Rule of Law.” Russian Style.” Press. Moscow Center for International forPeace. Center International Moscow Relational Contracting. Performance.” Direct Test of Heteroscedasticity.” Test of Direct ScienceReview American Political 43(6): 26-34. 43(6): American Journal of Political Science American Journalof Journal ofPublicEconomics . The Economic Institutions ofCapitalism: Firms, Markets, The Mechanisms ofGovernance New York, London: Free Press. 91(2): 245-263. 91(2): Econometrica 188 76(3): 337-368. 48(4): 817-838. 48(4): 44(4): 687-702. 44(4): . New York: Oxford University . NewYork: Problems ofPost- CEU eTD Collection 98 1999 separately. [y-axis- logofGRP, x-axis- index DMI] Russia’s regions(the greater thevalue, the less developed). Eachyear from 1996 to Fig.4.1 Log Gross RegionalProduct Growth and Development ofMarketInstitutions

Data: N=87 in most regressions, excluding two regions: Komi-Permyak AO and Chechen republic log(grp98) log(grp96)

8.5 9.5 10.5 8.0 9.0 10.0 11.0 0 0 20 20 40 40 i98 i96 60 60 Appendix to chapter 4 tochapter Appendix 80 80 A PPENDIX 189 log(grp99) log(grp97)

8.5 9.5 10.5 11.5 8.5 9.5 10.5 0 0 98 20 20 40 40 i99 i97 60 60 80 80 CEU eTD Collection Each year from 1997 to2001separately. output] Russia’s regions. [y-axis- annual growth ofGRP, x-axis-annualgrowth ofindustrial Fig.4.2 Gross RegionalProduct Growth and Growth ofIndustrial Production of fgrp01 fgrp99 fgrp97

95 110 125 95 110 125 85 95 105 80 70 90 100 80 0 110 100 120 find2001 find1999 find1997 90 2 130 120 140 100 160 110 140 190 fgrp00 fgrp98

100 140 180 80 90 100 100 70 110 80 120 find1998 find2000 90 130 100 140 110 150 CEU eTD Collection Table 4.2 Components ofIndex of InitialEndowment R²adjusted t-statistics Output (ii)Industrial R²adjusted t-statistics GRP (i)Real variables Dependent Are Real GRP and Industrial Output Dependent Table on 4.1 the Initial ɝ ɨɛɥɚɫɬɶ əɪɨɫɥɚɜɫɤɚɹ Ɍɭɥɶɫɤɚɹɨɛɥɚɫɬɶ Ɍɜɟɪɫɤɚɹɨɛɥɚɫɬɶ Ɍɚɦɛɨɜɫɤɚɹɨɛɥɚɫɬɶ ɋɦɨɥɟɧɫɤɚɹɨɛɥɚɫɬɶ Ɋɹɡɚɧɫɤɚɹɨɛɥɚɫɬɶ Ɉɪɥɨɜɫɤɚɹɨɛɥɚɫɬɶ Ɇɨɫɤɨɜɫɤɚɹɨɛɥɚɫɬɶ Ʌɢɩɟɰɤɚɹɨɛɥɚɫɬɶ Ʉɭɪɫɤɚɹɨɛɥɚɫɬɶ ɨɛɥɚɫɬɶ Ʉɨɫɬɪɨɦɫɤɚɹ Ʉɚɥɭɠɫɤɚɹɨɛɥɚɫɬɶ ɂɜɚɧɨɜɫɤɚɹɨɛɥɚɫɬɶ ɨɛɥɚɫɬɶ ȼɨɪɨɧɟɠɫɤɚɹ ɨɛɥɚɫɬɶ ȼɥɚɞɢɦɢɪɫɤɚɹ Ȼɪɹɧɫɤɚɹɨɛɥɚɫɬɶ ɨɛɥɚɫɬɶ Ȼɟɥɝɨɪɨɞɫɤɚɹ . Ɇɨɫɤɜɚ Initial Endowment) Endowments inRussianRegions? (Independent variable is Indexof -0.01 0.6 0.2 1996 Endowment Initial ofIndex 12,59651 0,064534 1,334087 1,003726 0,614887 -0,72364 -1,82076 -2,13114 -0,96657 -0,97227 -0,79573 -2,77699 -0,30174 -0,85683 -0,23568 -1,39882 -0,45416 -0,74381 0.05 2.2 0.5 0.01 1.2 0.3 1997 population educated higher ofShare Endowment ofInitial the Index of Components 0,967261 0,900445 0,544098 0,098664 0,789087 5,154343 0,120935 0,076392 -0,56949 -0,90356 -0,25768 -0,27996 -0,70312 -0,50267 -0,94811 -0,34677 0,83363 -0,3245 -0.01 -0.04 -0.01 -0.01 0.2 0.1 1998 191 institutions R & D of Number 0,002735 1,060164 0,066545 -0,15223 -0,12489 -0,21604 -0,23428 -0,17958 -0,17958 -0,24339 -0,17958 -0,38924 -0,10665 -0,12489 -0,15223 -0,14312 7,57794 -0,134 -0.01 0.4 0.11 0.01 1.2 0.5 1999 roads paved of Percentage 0,856031128 0,068093385 0,661478599 0,544747082 0,418287938 0,642023346 0,252918288 0,710116732 0,252918288 1,011673152 0,690661479 0,622568093 0,778210117 0,729571984 1,284046693 0,76848249 0,60311284 0,60311284 - - - - -0.01 -0.5 -0.2 -0.01 -0.8 -0.2 2000 resources natural of logarithm Natural 0,700167 -0,64244 -0,64244 -0,88089 -0,64244 -0,64967 -0,64244 -0,64244 -0,64244 -0,64244 -0,64244 -0,64244 -0,82731 -0,64244 -0,64244 -0,64244 -0,64244 -0,64244 population per 1000of buses public of Number 0,093670886 0,283544304 0,283544304 0,536708861 0,349367089 0,539240506 0,507594937 0,729113924 0,824050633 0,634177215 0,475949367 0,602531646 0,412658228 0,381012658 0,697468354 0,064556962 -0,22278481 -0.01 0.1 -.01 -0.01 -0.8 -0.3 2001 0,6 ------CEU eTD Collection ɑɭɜɚɲɫɤɚɹ Ɋɟɫɩɭɛɥɢɤɚ ɍɞɦɭɪɬɫɤɚɹ Ɍɚɬɚɪɫɬɚɧ Ɋɟɫɩɭɛɥɢɤɚ Ɇɨɪɞɨɜɢɹ Ɋɟɫɩɭɛɥɢɤɚ ɗɥ Ɇɚɪɢɣ Ɋɟɫɩɭɛɥɢɤɚ Ȼɚɲɤɨɪɬɨɫɬɚɧ Ɋɟɫɩɭɛɥɢɤɚ Ɋɨɫɬɨɜɫɤɚɹɨɛɥɚɫɬɶ ɨɛɥɚɫɬɶ ȼɨɥɝɨɝɪɚɞɫɤɚɹ ɨɛɥɚɫɬɶ Ⱥɫɬɪɚɯɚɧɫɤɚɹ ɤɪɚɣ ɋɬɚɜɪɨɩɨɥɶɫɤɢɣ Ʉɪɚɫɧɨɞɚɪɫɤɢɣɤɪɚɣ Ɋɟɫɩɭɛɥɢɤɚ ɑɟɱɟɧɫɤɚɹ Ⱥɥɚɧɢɹ Ɉɫɟɬɢɹ ɋɟɜɟɪɧɚɹ Ɋɟɫɩɭɛɥɢɤɚ Ɋɟɫɩɭɛɥɢɤɚ ɑɟɪɤɟɫɫɤɚɹ Ʉɚɪɚɱɚɟɜɨ Ʉɚɥɦɵɤɢɹ Ɋɟɫɩɭɛɥɢɤɚ Ɋɟɫɩɭɛɥɢɤɚ Ȼɚɥɤɚɪɫɤɚɹ Ʉɚɛɚɪɞɢɧɨ ɂɧɝɭɲɟɬɢɹ Ɋɟɫɩɭɛɥɢɤɚ Ⱦɚɝɟɫɬɚɧ Ɋɟɫɩɭɛɥɢɤɚ ɊɟɫɩɭɛɥɢɤɚȺɞɵɝɟɹ ɝ ɉɫɤɨɜɫɤɚɹɨɛɥɚɫɬɶ ɨɛɥɚɫɬɶ ɇɨɜɝɨɪɨɞɫɤɚɹ Ɇɭɪɦɚɧɫɤɚɹɨɛɥɚɫɬɶ ɨɛɥɚɫɬɶ Ʌɟɧɢɧɝɪɚɞɫɤɚɹ ɨɛɥɚɫɬɶ Ʉɚɥɢɧɢɧɝɪɚɞɫɤɚɹ ɨɛɥɚɫɬɶ ȼɨɥɨɝɨɞɫɤɚɹ ɇɟɧɟɰɤɢɣȺɈ ɨɛɥɚɫɬɶ Ⱥɪɯɚɧɝɟɥɶɫɤɚɹ ɊɟɫɩɭɛɥɢɤɚɄɨɦɢ ɊɟɫɩɭɛɥɢɤɚɄɚɪɟɥɢɹ . ɋɚɧɤɬɉɟɬɟɪɛɭɪɝ ɬɦ ɱɢɫɥɟ ɬɨɦ ɜ - - - 6,970667 3,113598 0,367537 2,819115 0,776774 0,885944 1,699564 1,226731 0,317034 0,935661 0,070081 0,172457 0,449799 -2,80198 -0,18813 -1,13491 -0,03569 -1,55197 -0,61175 -0,89658 -0,82624 -1,46264 -1,49684 -0,52672 -0,98088 -0,19852 -4,66076 -2,12743 -2,7489 0,143207 0,588641 0,455011 0,855902 1,568597 0,143207 0,143207 0,455011 -1,01492 -0,74766 -0,07951 -0,25768 -0,12405 -0,85902 -0,90356 -0,70312 -0,65857 -0,43586 -0,19087 -0,83675 -0,50267 -0,56949 -0,01269 -0,12405 -0,99265 -0,54722 1,34588 3,55078 -0,6363 192 3,840474 0,449407 0,431176 0,704649 0,075661 0,221513 -0,44394 -0,24339 -0,42571 -0,33455 -0,17958 -0,23428 -0,21604 -0,33455 -0,43482 -0,25251 -0,27985 -0,32543 -0,23428 -0,24339 -0,38013 -0,19781 -0,10665 -0,34366 -0,41659 -0,37101 -0,31632 -0,3619 -0,3619 0,573929961 1,021400778 0,564202335 0,856031128 0,856031128 0,817120623 0,671206226 0,369649805 0,554474708 0,856031128 2,402723735 0,447470817 0,963035019 0,515564202 0,379377432 0,661478599 0,642023346 0,612840467 0,554474708 0,252918288 1,157587549 0,087548638 0,593385214 0,846303502 0,836575875 0,544747082 3,112840467 0,758754864 -0,63229572 0,30155642 ------0,555842 1,650289 1,042996 1,529162 1,326524 1,471093 0,575597 0,668227 0,099044 -0,82029 -0,03476 -0,46561 -0,64244 -0,64244 -0,64244 -0,12975 -0,64244 -0,64244 -0,64244 -0,64244 -0,64244 -0,64244 -0,64244 -0,00715 -0,64244 -1,08224 -0,20052 -0,64244 0,01818 0,51095 0,536708861 1,106329114 0,410126582 0,726582278 1,043037975 0,125316456 0,156962025 0,156962025 0,473417722 0,156962025 0,378481013 0,030379747 0,251898734 0,346835443 0,062025316 0,634177215 0,096202532 0,064556962 0,032911392 0,918987342 0,602531646 0,634177215 0,665822785 0,444303797 0,539240506 0,412658228 0,570886076 -0,22278481 -2,72278481 ------CEU eTD Collection ȻɭɪɹɬɫɤɢɣȺɈ Ɉɪɞɵɧɫɤɢɣ AO ɑɢɬɢɧɫɤɚɹɨɛɥɚɫɬɶ Ɍɨɦɫɤɚɹɨɛɥɚɫɬɶ Ɉɦɫɤɚɹɨɛɥɚɫɬɶ ɨɛɥɚɫɬɶ ɇɨɜɨɫɢɛɢɪɫɤɚɹ ɨɛɥɚɫɬɶ Ʉɟɦɟɪɨɜɫɤɚɹ ɂɪɤɭɬɫɤɚɹɨɛɥɚɫɬɶ Ⱦɨɥɝɚɧɨɇɟɧɟɰɤɢɣ Ʉɪɚɫɧɨɹɪɫɤɢɣɤɪɚɣ Ⱥɥɬɚɣɫɤɢɣɤɪɚɣ Ɋɟɫɩɭɛɥɢɤɚɏɚɤɚɫɢɹ ɊɟɫɩɭɛɥɢɤɚɌɵɜɚ ɊɟɫɩɭɛɥɢɤɚȻɭɪɹɬɢɹ ɊɟɫɩɭɛɥɢɤɚȺɥɬɚɣ ɨɛɥɚɫɬɶ ɑɟɥɹɛɢɧɫɤɚɹ AO Ɍɸɦɟɧɫɤɚɹɨɛɥɚɫɬɶ ɨɛɥɚɫɬɶ ɋɜɟɪɞɥɨɜɫɤɚɹ Ʉɭɪɝɚɧɫɤɚɹɨɛɥɚɫɬɶ ɨɛɥɚɫɬɶ ɍɥɶɹɧɨɜɫɤɚɹ ɨɛɥɚɫɬɶ ɋɚɪɚɬɨɜɫɤɚɹ ɋɚɦɚɪɫɤɚɹɨɛɥɚɫɬɶ ɉɟɧɡɟɧɫɤɚɹɨɛɥɚɫɬɶ ɨɛɥɚɫɬɶ Ɉɪɟɧɛɭɪɝɫɤɚɹ ɨɛɥɚɫɬɶ ɇɢɠɟɝɨɪɨɞɫɤɚɹ Ʉɢɪɨɜɫɤɚɹɨɛɥɚɫɬɶ ɉɟɪɦɫɤɢɣɤɪɚɣ Ɋɟɫɩɭɛɥɢɤɚ ɚɫɣɤɣ ȺɈ ɘɝɪɚ Ɇɚɧɫɢɣɫɤɢɣ ɬɦ ɢɥɍɫɬɶ ɱɢɫɥɟ ɬɨɦ ɜ ɗɜɟɧɤɢɣɫɤɢɣȺɈ Ɍɚɣɦɵɪɫɤɢɣ əɦɚɥɨɇɟɧɟɰɤɢɣ ɏɚɧɬɵ - ) - 0,107167 0,523365 0,017617 4,438096 3,645379 1,234823 1,568984 0,864047 5,268382 0,794097 1,304222 0,165131 2,219322 1,054892 0,569658 -6,66651 -2,65944 -1,17878 -3,25636 -2,42226 -3,00041 -4,13791 -1,80375 -0,3727 -0,9284 -1,7637 1,0545 0,455011 1,390423 0,076392 0,120935 1,546325 0,900445 0,210022 -0,85902 -0,43586 -0,14633 -0,01269 -1,41581 -0,90356 -0,59176 -0,45813 -0,39131 -1,03719 -0,21314 -0,41359 -0,05724 -1,05947 -0,30223 -0,36904 -0,52494 -3,7098 -3,7098 -3,7098 -3,7098 -3,7098 193 0,112124 0,823154 0,148587 0,157703 0,385597 0,030082 0,750228 0,057429 -0,37101 -0,26162 -0,20693 -0,25251 -0,05196 -0,08842 -0,02461 -0,45305 -0,08842 -0,42571 -0,38924 -0,28897 -0,41659 -0,06108 -0,41659 -0,3072 -0,3072 -0,3619 -0,1887 0,194552529 2,529182879 0,116731518 2,149805447 0,535019455 1,215953307 0,671206226 0,408560311 0,749027237 0,175097276 0,009727626 1,906614786 2,159533074 1,536964981 0,856031128 0,593385214 0,856031128 0,437743191 0,272373541 0,856031128 0,437743191 0,836575875 -0,46692607 0,60311284 0,60311284 0,16536965 0,13618677 0,79766537 ------2,354699 2,784475 0,276123 1,082193 1,539189 1,163406 1,277038 0,949775 2,170862 1,683803 1,039978 0,043329 0,807293 0,966382 2,585714 -0,64244 -0,62637 -1,71392 -0,64244 -0,64244 -0,64244 -0,06318 -0,64244 -0,64244 -0,45435 -1,05033 -1,88821 -0,64244 0,66198 0,156962025 0,884810127 0,093670886 0,125316456 2,118987342 0,378481013 0,473417722 0,441772152 0,125316456 1,960759494 1,011392405 6,011392405 0,096202532 0,032911392 2,026582278 0,064556962 0,760759494 0,475949367 0,570886076 0,286075949 0,001265823 0,381012658 0,096202532 0,001265823 -2,72278481 -2,72278481 -0,22278481 -0,22278481 0,6 ------CEU eTD Collection R² adjusted Endowments (ii) Initial minus Savings (i) Investments variables Independent Regions? (Dependent variable isGRP perCapita) Are GRP Dependent on Investments and Initial Endowments Table in 4.3 Russian ɚɜɬɨɧɨɦɧɵɣɨɤɪɭɝ ɑɭɤɨɬɫɤɢɣ ɚɜɬɨɧɨɦɧɚɹɨɛɥɚɫɬɶ ȿɜɪɟɣɫɤɚɹ ɨɛɥɚɫɬɶ ɋɚɯɚɥɢɧɫɤɚɹ ɨɛɥɚɫɬɶ Ɇɚɝɚɞɚɧɫɤɚɹ ɄɨɪɹɤɫɤɢɣȺɈ Ʉɚɦɱɚɬɫɤɚɹɨɛɥɚɫɬɶ Ⱥɦɭɪɫɤɚɹɨɛɥɚɫɬɶ ɏɚɛɚɪɨɜɫɤɢɣɤɪɚɣ ɉɪɢɦɨɪɫɤɢɣɤɪɚɣ ɋɚɯɚ əɤɭɬɢɹ ɱɢɫɥɟ Ɋɟɫɩɭɛɥɢɤɚ ȺɈ ɬɨɦ Ȼɭɪɹɬɫɤɢɣ Ⱥɝɢɧɫɤɢɣ ɜ ɬɦ ɱɢɫɥɟ ɬɨɦ ɜ ) 0.84 593 3.1 1996 3,528265 0,803184 0,291131 1,946317 -0,30175 -1,06103 -2,04678 -0,37879 -11,8201 -0,50331 -7,68879 0.81 810 2.9 1997 0,789087 0,299109 0,432739 1,457238 0,210022 -0,21314 -1,72762 -0,45813 -3,7098 -3,7098 -1,5 0.74 827 3.6 1998 194 0,020966 -0,44394 -0,44394 -0,39836 -0,37101 -0,45305 -0,33455 -0,37101 -0,17958 -0,27985 -0,45305 0.77 1982 4.0 1999 0,846303502 0,807392996 0,856031128 3,570038911 0,583657588 0,680933852 0,758754864 0,564202335 1,060311284 0,642023346 0,76848249 - - - - - 0.80 3727 2.4 2000 0,132812 0,356691 0,852928 1,215683 1,284463 -0,64244 -1,36445 -0,64244 -1,88821 0,87496 0,37476 0,410126582 1,897468354 0,758227848 1,108860759 0,096202532 0,001265823 0,792405063 0,602531646 0,064556962 0,032911392 2,279746835 -2,72278481 0.80 4790 2.9 2001 ------CEU eTD Collection two regions) oil-rich Institutions: Dependent Variable –Investments Minus Savings per Capita (without Fig.4.3 DMI -1014.0500.7 -2.025 7725.7 (Intercept) 1286.0 6.008 Estimate Std. Error valuet Fixed effects: Residual 3.7115e+07 6092.2 year 7.5729e+07 8702.3 -1.000 region 3.0163e+1417367483.2(Intercept) Groups Name Variance Std.Dev. Corr Formula: GRP ~ DMI + (year | region) Linear mixed model fitby REML (Repeated Measurement) Table AreGRP Dependent onDMI? RoutputforMixed Effect Model 4.4 for the group 4: average DMI for the period between 66 and 88,3 = 23 regions = 23 and88,3 66 between period for the DMI average 4: group for the regions = 23 and65 44.5 between period for the DMI average 3: group for the regions = 20 and44,2 26 between period for the DMI average 2: group for the =22regions 22.5 than less period for the DMI average 1: group for the Time-Series Plots for the Different LevelsDevelopment of ofMarket

I nvest ment s 10000 15000 20000 25000 5000 0 9619 2002 1999 1996 4 9619 2002 1999 1996 2 195 year 9619 2002 1999 1996 3 9619 2002 1999 1996 1 CEU eTD Collection Best 5 models (cumulative posterior probability = 0.61 ): 18 models wereselected Dep.Var =industry.real.growth postprob 0.420 0.115 0.079 0.074 0.068 BIC -14.76 -12.17 -11.43 -11.29 -11.12 r2 0.265 0.282 0.187 0.273 0.272 nVar 2 3 1 3 3 repub 11.5 -2.2182 7.985 . -19.33 . . -30.9046 15.999 -39.03indcore -34.10 89.2 .-34.46-33.85 natur 8.8 0.2440 1.247 . . . . riskihs 4.8 0.0010 0.830 . . . lavrov 6.8 0.6786 4.078 . . . 9.98 100.0i96 -1.12490.269-1.16 -1.06 -1.09 -1.15 -1.14 price 7.4 -0.0215 0.116 . . -0.29 . sm.pr 5.2 0.0055 0.065 . . . big.pr5.5 0.1494 1.397 . . . . 100.0Intercept 158.059718.743 162.05165.66 137.55167.31 151.28 p!=0 EV SD model model1 2 model 3 model model4 5 Best 5 models (cumulative posterior probability = 0.76 ): 10 models wereselected Var =grp.corrected postprob 0.128 0.118 0.106 0.081 0.055Dep. BIC -28.83 -28.67 -28.46 -27.92 -27.16 r2 0.423 0.388 0.420 0.346 0.443 nVar 3 2 3 1 4 repub 36.1 -0.46091 0.7500 -1.40 . . . -1.16 icore 75.8 -1.17825 0.8639 -1.77 -1.32 -1.36 . -1.72 natur 100.0 0.65330 0.1306 0.63 0.68 0.63 0.74 0.60 riskihs 14.3 -0.03138 0.1017 . . . . lavrov 35.6 0.37656 0.6173 . . 1.15 . 0.92 i96 8.6 -0.00094 0.0053 . . . price 7.5 -0.00113 0.0059 . . . . sm.pr 6.5 0.00032 0.0037 . . . big.pr6.2 -0.00200 0.0717 . . . . Intercept 100.0 5.96730 1.1182 6.81 6.17 5.08 5.33 5.82 p!=0 EV SD model model1 2 model 3 model model4 5 Best 5 models (cumulative posterior probability = 0.49 ): 34 models wereselected =Income.correced Dep.Var Table 4.5Output ofBMA analysis (9iterations) 196 CEU eTD Collection price 6.6 -0.0208 0.132 . . . . sm.pr 5.0 0.0034 0.077 . . . big.pr5.2 0.0959 1.660 . . . 100.0Intercept 170.002838.594 200.18179.87 116.51177.49 142.36 p!=0 EV SD model model1 2 model 3 model model4 5 Best 5 models (cumulative posterior probability = 0.54 ): 27models wereselected =grp.corrected Dep.Var postprob 0.147 0.146 0.086 0.085 0.063 BIC -29.42 -29.40 -28.35 -28.32 -27.72 r2 0.394 0.428 0.349 0.419 0.380 nVar 2 3 1 3 2 repub 22.3 -0.30629 0.7263 . . -1.56 . indcore 75.3 -1.48624 1.1029 -1.79 -1.84 . -2.29 . natur 100.0 0.87525 0.1684 0.90 0.84 0.98 0.84 0.93 riskihs 13.7 -0.03748 0.1275 . . . . lavrov 39.0 0.57207 0.8627 . 1.54 . . 1.48 i97 6.7 -0.00074 0.0058 . . . price 8.9 -0.00172 0.0086 . . . . sm.pr 5.6 0.00063 0.0047 . . . big.pr5.6 0.00072 0.0837 . . . Intercept 100.0 7.72049 1.4044 8.26 6.80 7.13 8.97 5.69 p!=0 EV SD model model1 2 model 3 model model4 5 Best 5 models (cumulative posterior probability = 0.53 ): 29 models wereselected =income.corrected Dep.var 1997 postprob 0.299 0.181 0.048 0.045 0.040 BIC -1.011 0.000 2.639 2.800 3.027 r2 0.068 0.000 0.076 0.074 0.017 nVar 1 0 2 2 1 repub 6.2 -0.04859 0.667 . . . indcore 7.6 0.12845 0.737 . . 1.478 . natur 7.4 0.01846 0.157 . . . 0.486 riskihs 5.7 0.00781 0.159 . . . lavrov 5.7 -0.02728 0.521 . . . i96 60.4 -0.06015 0.059 -0.099 . -0.097 -0.096 . price 5.6 0.00056 0.013 . . . . sm.pr 5.6 -0.00022 0.011 . . . big.pr8.1 0.06353 0.336 . 0.729 . . 100.0Intercept 89.722613.017 91.51987.507 89.734 90.45787.485 p!=0 EV SD model 1 model model2 3 model model4 5 197 CEU eTD Collection indcore 80.6 -1.14099 0.7508 -1.22 -1.61 -1.25 . -1.57 natur 100.0 0.56018 0.1132 0.58 0.54 0.54 0.64 0.51 riskihs 14.2 -0.02630 0.0869 . . . . lavrov 26.2 0.22030 0.4562 . . 0.90 . 0.71 i98 6.6 -0.00039 0.0037 . . . price 6.7 -0.00040 0.0041 . . . . sm.pr 6.3 0.00019 0.0031 . . . big.pr7.7 -0.01297 0.0846 . . . . Intercept 100.0 5.49357 0.9440 5.53 6.07 4.67 4.76 5.31 p!=0 EV SD model model1 2 model 3 model model4 5 Best 5 models (cumulative posterior probability = 0.54 ): 29 models wereselected = income.corrected Dep.var. 1998 postprob 0.203 0.092 0.070 0.061 0.054 BIC -10.2 -8.6 -8.0 -7.7 -7.5 r2 0.263 0.156 0.197 0.194 0.236 nVar 312 2 3 repub 51.2 1.88089 2.211 4.0 . 3.0 . indcore 100.0 5.88441 1.493 6.3 5.1 5.2 6.0 5.4 natur 8.7 0.02510 0.128 . . . riskihs 3.8 -0.00730 0.090 . . . . lavrov 62.4 2.04199 1.946 3.5 . 2.6 . 2.8 i97 21.5 0.01022 0.025 . . . price 5.0 -0.00020 0.010 . . . sm.pr 6.2 -0.00157 0.010 . . . . . big.pr 19.5 -0.18464 0.468 . . . -1.1 Intercept 100.0 93.33639 3.292 90.9 96.1 93.5 94.8 95.8 p!=0 EV SD model 1 model model2 3 model model4 5 Best 5 models (cumulative posterior probability = 0.48 ): 28 models wereselected dep.var. =inusry.real.growth postprob 0.205 0.122 0.094 0.063 0.055 BIC -11.14 -10.11 -9.59 -8.79 -8.50 r2 0.229 0.262 0.167 0.249 0.202 nVar 2 3 1 3 2 repub 13.9 -3.3270 10.961 . . . indcore 74.4 -34.3558 25.313 -50.72 -40.07 . -50.04 . natur 54.9 5.0551 5.600 . 6.51 12.39 . 9.68 riskihs 4.9 -0.0283 1.069 . . . . lavrov 13.0 2.4371 8.501 . . 21.20 . i97 75.6 -0.8446 0.599 -1.31 -0.97 . -1.27 -0.66 198 CEU eTD Collection postprob 0.192 0.134 0.119 0.092 0.069 BIC 0.000 0.719 0.950 1.461 2.041 r2 0.000 0.046 0.044 0.037 0.083 1 2 0 1 nVar repub 7.1 -0.1399 0.856 . . . indcore 3.9 -0.0237 0.462 . . . . . natur 5.2 -0.0018 0.124 . . . . riskihs 5.1 -0.0267 0.192 . . . lavrov 7.0 -0.0452 0.755 . . . i98 36.6 -0.0306 0.049 . -0.086 . . -0.080 price 29.4 -0.0303 0.057 . -0.106 . -0.098 sm.pr 18.0 0.0125 0.033 . . 0.078 . big.pr2.2 0.0030 0.146 . . . 100.0Intercept 18.39463.94717.342 20.787 19.428 11.51422.476 p!=0 EV SD model model1 2 model 3 model model4 5 Best 5 models (cumulative posterior probability = 0.61 ): 23 models wereselected Dep.Var. =inusry.real.growth postprob 0.337 0.094 0.088 0.075 0.073 BIC -9.82 -7.27 -7.14 -6.81 -6.77 r2 0.216 0.234 0.233 0.229 0.136 nVar 2 3 3 3 1 repub 15.4 -2.9986 8.903 . -17.96 . . -32.3001indcore 90.2 15.765 -37.01-41.27 -36.61-31.49 . natur 30.2 1.7285 3.143 . 3.47 . 7.99 riskihs 4.3 -0.0656 0.778 . . . . lavrov 7.5 0.9446 4.514 . . 12.59 . i98 83.5 -0.6401 0.373 -0.83 -0.72 -0.63 -0.80 . price 6.1 -0.0167 0.098 . . . . sm.pr 4.7 0.0072 0.062 . . . big.pr4.0 0.0454 1.000 . . . 100.0Intercept 128.034323.416 138.82141.73 127.44 125.19 82.06 p!=0 EV SD model model1 2 model 3 model model4 5 Best 5 models (cumulative posterior probability = 0.67 ): 13 models wereselected = grp.corrected Dep.var. postprob 0.162 0.150 0.097 0.083 0.048 BIC -27.96 -27.81 -26.95 -26.62 -25.52 r2 0.382 0.415 0.409 0.335 0.431 nVar 2 3 3 1 4 repub 36.6 -0.42398 0.6761 . -1.19 . . -1.00 199 CEU eTD Collection oblasts, Moscow and S.Petersburg cities. MoscowS.Petersburg and oblasts, Ordynskii AO, Aginskii AO, Korjakskii AO, Evrejskaya AO and Chukotskii AO, Lipetskaya and Tyumenskaya republic, Nenetskii AO, Khanty-Mansiiskii AO, Yamalo-Nenetskii AO, Tajmyrskii AO, Evenkiiskii AO, Ust- 99 this particular region, the average Russian level average level this the of particularRussian and region, rates tax compliance, tax and in conditions objective the collect, given to is able region the that taxes between difference developedby (2004), which hePopov in defines such a way “ideal are that the transfers need Thisheavily ontheof formula (LEN). draws Ideal concept Transfers percapita expenditure (ABE) of regional percapitagovernments multiplied by level the of expenditure which (IBE), is averagebudgetary per capita the ITC, calculation of inlinewith the iscalculate it toperform idealIn order the level this, necessary budgetary to of expenditure (5.1) Index ofSBC = Standardized (BT/TC) +Standardized (ATC*LTP/TC)+ Standardized (BE/IBE) follows: as look would formula The in denominator. The greater (IBE) ratio,expressingthe thebudgetary softeroverspent, the theSBC. expenditure budgetary ideal of level the and numerator, in the (BE) expenditure budgetary weplacelevel of actual revenuesideadjustment, the the Analogously to comparing the budgetary flows between these two regions, both sides have be to adjusted. the to closer in in being in Therefore, case, and negative first the second. extreme to the the extreme positive substantially, differ must they be equal; not should transfers standards, when andin fair, toprovide transfers the impartial, living are completely order equal transparent situation, type ideal an In oblast. Tyumen’ in than higher is inEvenkiya goods public level inThe costof standard tax base, and the providing captured of SBCindex. this was the inthan backwardEvenkiiskii a AO, or Tyva because greater simply oil generates production is AOs) higher Yamalo-Nenetskii and Khanty-Mansiiskii sub-parts, its (and oblast’ Tyumen also but side) with region’s inbudgetary Tax-generatingneed (expenditure side). potential oil-rich the (revenue potential tax region’s the to respect with only not it adjust be would Another possibleimproving way of the indexof SBC for purposes the of presentthe research periphery. and center between the relationships the of togain infairpicture account a order into taken the of Extra-budgetarygovernment. flowslevels and redistribution the of property canrights additionally between be resources of redistribution the of indicator comprehensive The evaluation of budgetary flows can be complemented by variablesother todevelop a overspent 5.1.1 Modifications on the variable ofSBC: adding an additional term for budgetary variable, mainthe independent SBC,andthe adequacy regression models.the of is This section to theexamination devoted of methodology forthe obtaining andevaluating Model5.1 diagnosis Data: N=73 inall regressions, excluding sixteen regions, due to missing data: Komi-Permyak AO, Chechen Appendix to Chapter 5 Chapter to Appendix 200 99 CEU eTD Collection frequency distribution for the year 1977 is almost normal, if we ignore several outliers, and distribution forthe 1996is improvedcomparedsomewhat unmodified the to version. The outliers, several ignore if we normal, is almost 1977 year the for distribution frequency The two panels below show the distributions for the thus modified variable of SBC. The SBC = variable: for may of if formula construction the This bethe problem resolved we usethefollowing Fig. 5.1Histograms offrequency distributions of SBC of variations variable.the both skewed for and standardized un-standardized the main independent variable, SBC.The two panelsthe belowshow of that histogramthe is positively distribution of non-normality in the lies data the with problems the of One need. level expenditure formula the of for to the contribute of population the can urban/rural structure income ageand percapita, variables as average and social care spending arealsomajor items in regional budgetary spending; therefore, such 20 and 50%(Popov 2004, Kadotchnikov, and Lugovoi Trunin Education 1999). and health for housing eatupmajor partof total regionalspending: government proportion vary between budgetary subsidies since Theseexpenditures, influence greatly structure. variables regional and/or major seaports, development infrastructure, of climatic conditions, and demographic need into totake account costthe living, of whichwouldinclude distance from Moscow roughly regionalapproximate in differences cost of provision of public One goods. would indices among regions. the regional But in variations costthe of basic consumer goods only expenditure need.Themost straightforward approach would be compare to consumer price The main is limitation at this point thelack available datafor evaluating level the of his study. Here my formula differs from Popov’s as he is notconcerned with SBC. compared inreal with of arenot purposes tothe keeping transfers, idealtransfers calculations average level Russian publicof services tolocal inhabitants” (Popov 2004). Butin his expenditure the regional that should ensure makegovernment to inorder the provision of the Frequency Transformation of component 5.1.2. parts of the variable of SBC

0 5 10 15 20 25 30 Histogram of SBC for1996, calculatedaccording toformula 5.5 -2 (BT/TC) + (IT/TC) - (BT/TC) - (IT/TC) - (BT/TC) - + (IT/TC) (BT/TC) 0 2 SBC for 1996 foryear 1996 SBC 4 6 8 10 201

Frequency

0 5 10 15 20 25 30 Histogram of SBC for 1997, calculated according to formula 5.5 formula to according calculated 1997, for SBC of Histogram -2 0 2 SBC for year 1997 SBC 4 6 8 (5.2) 10 CEU eTD Collection SBC before summing them up. parts of componentof of the variable transformation the is logarithmic possibility a Another Fig. 5.2Histograms offrequency distributions of modified SBC of SBC. variable the for especially of robustness, degree have some estimates regression the that proves andfound estimates remained the that basically the columnssame (seeTable This 5.1, 2-6). variable 5,replacingthe models,SBC with one modified of the inChapter selected specified lesser degreesoffreedom is forwith 30. Iran tails, than t-distribution typical the which distribution of variablethe of SBC for 2001follows a bell-shape distribution with rather thick Frequency Frequency

0 2 4 6 8 10 0 5 10 15 -15000 -5000 -4000 Histogram of modified SBC for 2001 for SBC modified of Histogram 1996 for SBC modified of Histogram SBC -10000 -3000 = SBC for 2001 foryear 2001 SBC foryear 1996 SBC log(BT/TC) + log(IT/TC) -2000 -5000 -1000 0 0 202

Frequency

0 5 10 15 20 25 30 -40 Histogram of modified SBC for 1997 for SBC modified of Histogram -20 SBC for 1997year 0 (5.3) 20 CEU eTD Collection Fig 5.4Histogram of frequency distribution of SBC afterlog transformation transformationafter log Fig 5.3Histograms offrequency distribution ofcomponent partsof theSBC formula more strongly than in the models with untransformed SBC. regressionthe estimates. Columns 7-10of table 5.1show that SBCvariablethe changed performs even transformations these whether check be to would step next The normality. has transformation log after parts component of distribution the that show panels improvedfollowing The greatly, and that the distribution of SBC variable has become close to Frequency Frequency

0 5 10 15 0 5 10 15 20 Histogram of Budgetary Transfers to Tax Collections for 1996 for Collections Tax to Transfers Budgetary of Histogram -2 -4 Histogram of log transformed SBC for 1996 Log of Ratio of Budgetary to Transfers Budgetary Tax Collections of Ratio of Log -3 -1 SBC forSBC 1996 year -2 0 -1 0 1 1 2 2 203

Frequency Frequency 0 2 4 6 8 10 12

0 2 4 6 8 Histogram of collectionsIdeal Tax Collectionsto Tax 1996 for -6 -1 Histogram of log transformed SBC for2001 Log of Ideal Tax Collections to Tax Collections -5 0 SBC for SBC 2001 year -4 1 -3 2 -2 3 CEU eTD Collection R²adj Initial Endowment Control variable reformist legislature and executive oriented synergy. Kremlin- Executive-legislative Reformist towards market: Legislative orientation Power of Party orientation: Executive’s political Soft 0.02 Budget Constraints (1) Independent Bi- variables Tambovskaya Betin oblast Smolenskaya Prokhorov oblast Ryazanskaya Lubimov oblast oblastOrlovskaya Moskovskaya Gromov oblast oblastLipetskaya oblast Kurskaya Kostromskaya Shershunov* oblast oblastKaluzhskaya Ivanovskaya oblast oblast Voronezhskaya Vladimirskaya Vinogradov* oblast Bryanskaya oblast Belgorodskata Savchenko* oblast Region Political Affiliation of the Governors in the Russian Table region 5.2 in the Second Note: construction of variableof SBC Table 5.1 Regression estimates fortheselected models with differentmethods of t-values in parentheses in t-values Electoral Cycle 0.52 (-0.5) -0.5 p. 207 on 5.2 formula to according modified SBC With (6.8) (2) 1996 for variate Stroev* O.Korolev Mikhajlov Artamonov Tikhonov Kulakov Lodkin* Governor 0.52 (-0.3) -0.2 (-1.2) -13.6 (0.6) 5.4 (0.2) 0.01 (6.2) 0.02 (3) 1996 for riate Multiva 0.25 (-1.3) -1.7 (3.8) 0.8 (4) 1997 for variate Bi- 1999 1998 2000 2001 2000 1998 2000 2000 2000 2000 2000 2000 2000 1999 election Year of 0.25 (-1.4) -2.1 (0.8) 17.8 (-1.0) -21.1 (-0.2) -1.3 (3.9) 0.8 (5) 1997 for variate Multi- 204 0 0 0 0 0 0 0 0 0 0 1 0 0 0 partisan Non- 0.24 (-3.1) -3.3 (-0.03) -0.2 (3.1) 0.01 (6) 2001 for riate Multiva 0 0 0 0 0 0 0 0 0 0 0 0 0 1(NDR) power. ofparty Supported by 0.49 (-2.6) -3.14 (6.4) 16.9 (7) 1996 for variate Bi- to formula 5.2 on p. 208 With SBC, log-transformed according 0.48 (-2.1) -2.6 (0.5) 8.4 (-0.1) -2.2 (-0.8) -3.1 (6.6) 18.0 (8) 1996 for variate Multi- 0 1(KPRF) 0 1(KPRF) 1(Otechestvo) 0 0 1(NPSR) 1(KPRF) 0 1 (KPRF) 0 0 0 0 another party Supported by 0.49 (-0.8) -0.9 (7.2) 16.2 (9) 2001 for variate Bi- 0.49 (-0.7) -0.9 (0.7) 2.7 (7.2) 16.4 (10) 2001 for riate Multiva Edinstvo) 1(NDR, 0 Edinstvo) Otechestvo, NPSR, 1(KPRF, 0 Yabloko) 1(KPRF, 0 0 Edinstvo) 1(NPRS, 0 0 Otechestvo) Edinstvo, NPSR, 1(KPRF, NPSR) 1(KPRF, 0 parties several Supported by CEU eTD Collection Permskaya obalst Chuvashia Udmurtija Tatarstan Mordovia Marii El Bashkortostan Rostovskaya oblast oblast Volgogradskaya Astrakanskaya Guzhvin* oblast krai Stavropolskii Krasnodarskii Kraj Chechnya S.Ossetia Cherkessia Karachaevo- Kalmykia Kabardino-Balkaria Ingushetia Dagestan Adygeya S. Petersburg Pskovskaya oblast oblast Novgorodksaya Murmanskaya Evdokimov oblast oblast Leningradskaya oblast Kaliningradskaya Vologodskaya Pozgalev oblast Nenetskaya oblast oblast Arkhangelskaya Komi Karelia Moscow city Lisitsyn Yaroslavskaya oblast Tulskaya oblast Tverskaya oblast Trutnev Fedorov* A.Volkov Shaimiev* Merkushin* Markelov Rakhimov* Chub* Maksyuta* Chernogorov* Tkachev Dzasokhov Semenov Ilumzhinov Aushev* Magomedov Yakovlev Mikhailov* Prusak* Serdyukov* Egorov Butov* Efremov* Torlopov Katanandov Luzhkov* Starodubtsev* Platov* 2000 2001 2000 2001 1998 2000 1998 2000 2000 2000 2000 2000 1998 1999 1995 1998 1998 1999 2000 1999 2000 1999 2000 1999 2001 2000 2001 1998 1999 1999 2001 2000 205 0 1 0 0 1 0 1 0 0 0 0 0 0 1 0 1 0 0 0 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 1(Otechestvo) 0 0 0 0 1(Edinstvo) 0 0 0 0 0 0 1 (Edinstvo) 0 0 0 1(Edinstvo) 0 0 0 0 1(NDR) 1(Edinstvo) 0 0 1 (NDR) 0 0 0 1(Edinstvo) 0 0 0 0 0 0 0 1(KPRF) 0 0 0 (Narodovlastie) 1 0 0 0 0 0 0 0 0 0 0 0 0 0 1(Yabloko) 0 1(Otechestvo) 0 0 0 0 1(Yabloko. 0 leftist parties) (Otechestvo, 1 0 Yabloko) Edinstvo, 1(LDPR, 0 0 0 Yabloko, SPS) 1(Otechestvo, NPSR) 1(KPRF, NPSR) Edinstvo, Otechestvo, 1(KPRF, APR, 0 0 0 0 0 1(OVR, KPRF) 0 0 0 0 Edinstvo) Otechestvo, 1(Yabloko, 0 0 Edinstvo, SPS) 1(Otechestvo, 0 0 Otechestvo) 1( Edinstvo, APR) 1(KPRF, 0 0 CEU eTD Collection Sakhalinskaya Sakhalinskaya Farhutdinov* oblast oblast Magadanskaya Koryakskii AO Kamchatskaya Mashkovtsev oblast Amurskaya oblast Khabarovskii kraj kraj Primorskii Sakha AO BuryatskiiAginskii oblast Chitinskaya ˃̨̡̨̥̭̣̭̯̌́̍̌̽ Omskaya oblast oblast Novosibirskaya Kemerovskaya Tuleev* oblast Ust-Ordynskii AO Irkutskaya oblast krajAltaiskii Khakassia Tyva Buryatia Respublika Altaj Taimyrskii AO Evenkiiskii AO Krasnoyarskii kraj oblast Chelyabinskaya Neelov* Yamalo-Nenetskii AO Khanty-Mansiiskii Filipenko* AO Sobyanin Tumenskaya oblast Rossel* Sverdlovskaya oblast Kurganskaya Bogomolov* oblast Ulyanovskaya Gorjachev* oblast Saratovskaya Ajatskov* oblast Samarskaya oblast Penzenskaya Bochkarev oblast oblast Orenburgskaya oblast Nizhegorodskaya oblastKirovskaya Tsvetkov* Loginov Korotkov Ishaev* Nazdratenko Shtyrov Zhamsuev* Geniatullin* Kress* L.Polezhaev* Tolokonskii Maleev* Govorin* Surikov* Aleksej Lebed* Oorzhak* Potapov* Lapshin Khloponin Zolotarev A. Lebed P. Sumin* Titov Chernyshev Khodyrev Sergeenkov* 2000 2000 2000 2000 2001 2000 1999 2002 2000 2000 1999 1999 2000 2000 2000 2001 2000 2000 1997 1998 2002 2001 2001 1998 2000 2000 2000 2001 1999 2000 2000 2000 2000 1998 1999 2001 2000 206 0 0 1 0 1 0 0 1 0 0 1 0 1 0 0 1 0 0 1 0 0 0 1 0 0 1 1 0 0 0 1 0 0 1 0 0 0 0 0 0 0 0 1(Edinstvo) 1(Edinstvo) 0 0 0 0 1(Edinstvo) 0 0 0 0 0 0 0 0 1 (ER) 0 0 0 0 0 0 0 1(NDR) 0 0 1 0 0 0 0 0 0 0 0 1(KPRF) 0 0 0 0 0 1 (NPSR) 0 0 0 0 1(Otechestvo) 0 0 1 (NPSR) 0 0 1(KPRF) 0 1(Yabloko) 0 1 (RNRP) 0 0 0 1(Yabloko) 0 0 0 0 1(SPS) 0 1(APR) 1(KPRF) 1 0 (Otechestvo) Otechestvo, 1 (Edinstvo, Edinstvo) 1(NPSR, 0 0 0 0 0 0 Otechestvo) 1 (NPSR, 0 0 0 0 Edinstvo) 1(KPRF, 0 0 NPSR) 1(Otechestvo, 0 0 0 0 0 0 Edinstvo) 1 (NPSR, 0 0 0 (Latyshev) 0 NPSR) Otechestvo, Edinstvo, 1(KPRF, 0 Edinstvo) 1(NDR, 0 0 0 0 SPS) CEU eTD Collection statistics on the basis of robust variance-covariance matrix variance-covariance ofrobust basis onthe statistics 100 news, buton basisthe it of thisis scatter hard decide is variance to whether the indeed The scatter of residualsthe fitted values not against does have afunnel shape, whichis good remedies. specified using established of model be the model,the power the predictive re- seriously should damages therefore unreliable t-statistic.andbe inefficient to estimates regression This resulting the causes parameter estimates, affects the variance of the regression parameters, which in turn produces an doeseven it of though variance, not Heterogeneity variance. homogeneity of produce biased systematic trends in the goodness of fit. Residuals (observed less fitted values) should display for a search includes of assumptions these verification of built. procedure The was analysis step is which the The next validity analysis of the the on regression assumptions of the Regression5.1.3 diagnostics Source Chukotskaya AO Evrejskaya AO Fig. 5.5 Residuals versus Fitted Values for the Linear Regression (Minimal Adequate Model residualsvalues.standardized fitted against Figure 3.2 below represents the visual assessment of the homogeneity of variance, plotting the in change linearthe combination of predictors. with a or values, fitted in the a change with decreases or increases variance error the that H the tests which variance, non-constant for test score I usethe addition In Rprogram. into the arebuilt tests asthese reasons, practical Breusch-Pagan test (1979).In presentthe research, Iuse firstthe and thirdthe of forthese homogeneity variance areLevene’sof test (1960),White's General (1980) and the test Anotherpossible solutionis touse White’s corrected errors. This methodproduces standard errors fort- : Authors calculations Authors : with Interaction Term) Abramovich N.Volkov*

Residuals

-20 0 20 40 20 lm(market96 ~ sbc96 + reform.govern + sbc96:reform.govern + natur) 2000 2000 100 27 45 66 The most widely used formal tests that check for the for check that tests formal used widely most The 0 40 that error variance is constant against the alternative against the is error constant variance that 207 Residuals vs Fitted 1 1 Fitted values Fitted 60 0 0 80 100 0 0 0 0 Yabloko) CEU eTD Collection Fig 5.6 Log-likelihood of the Model Versus Lambda model the against data the rangegiven of oflambda.values possible likelihoodthe of modelthe given data.the The plot in Fig. 3.4visualizeslog-likelihood the of The Box-Cox transformation offers amethod of finding value the lambda of maximizes that the specified set of predictors is fitted to a response variable which takes the following form: advanced empirical solution to this problem goodnesslow of of fit. According to this method, Another possibilityis Chi-square)Smornov, employed. (Kolmogorov- measure tests of goodness-of-fit the one select optimal the transformations, to transformations on variable,the such as logarithms, antilogs and reciprocals. Subsequently, wouldisa common method available, totry different isnot forout transformation theory adequate the When is readily not variable envisaged. of response the the hence optimal transformation be to areunknown, andfunctional relationship form structure of is casethat it error the often the use significantimprovements in model performance. In statistical modeling of the observational data Box-CoxIt is well known that5.1.4 Remediestransformation, to the misspecified model: variablea transformationsimple transformationpossibility of improving thefit of model.the investigatesubsections and0.98. the Thefurther score testtwo nextwill Pagan’s -0.91, of the Levene’sincreased invariance probability - constantthe of variablesthe 0.56, Breusch- all tests: three residuals: of which homoscedasticity the increasing in beneficial was design inthe level the that additional shows which inmodel, hierarchical the thefor p-values offers corresponding equationthe the and values represent table this in column second The justified. is fit better and simplicity canbetween a producemore of trade andwhetherthe model off specifications, with level changes different homoscedasticity the how investigate to interesting be would it However, homoscedasticity. of satisfies the assumption minimal adequate), terms, interaction with regression model (linear 0.46) and Breusch-Pagan’s and(0.74), score (0.8) test which indicate that sothe farfitted best homogeneous. In Table 5.3 the first column represents the values for the Levene’s (p-value log-Likelihood

-366 -365 -364 -363 -362 -361 y Ȝ 95% Ȝ -1 0.6 0.8 (3.1) 1.0 O 1.2 208 1.4 CEU eTD Collection presented. also B) are method (Panel Box-Cox using data of transformation model power after variate for comparativefor display,plots thebi-variate the linear model with raw data(panel bi-A), line offitted values for asymptoticthe exponential function DMI= 67.5-10.2 * e fairlyFig.3.5, model thescatterplot andPanel thedata. well added the C represents describes whichfrom imply thatthis p<0.05, 0 at appeartobesignificantly different All theparameters 1.3921 0.3147 c 10.1934 b 4.2816 a and c. in for the coefficients following a, b modelingThe non-linear estimates package R produced exponential function,exponential by described formula: the concludeandbe ledwould asymptotic me curves besta3-parameter their the candidate to that functions non-linear range of investigation the model. linearthan of better the different The involvesmodeling for asearch possible function can the that potentially data the describe transformation independentof dependent or variables. The preliminary step tothe non-linear and modelingis transformation non-linear in that latter fitsthe thatcannot relationships be linearized by Box-Cox the the between difference The explanators. and explanand the between variable, with which I made anattempt tolinearizeinitially the curvilinearrelationship The above-outlined atdescribingpolynomial data. better itthat will be expectation significantly linearity.regression from departs significantly ascatterplot that produces market development variable the of was basedrelationship between these two variables. Plotting softthe budgetconstraintson variable against the transformation searchfor the model involves the adequate formula describe will specification that the best the to improvement Onepossible another hence institutions, market of development the ofof the theresponseAs shown by the precedingpossible analysis, Remedies tothe5.1.5 misspecified asymptotic fitting function model: exponential the SBC is the most reliable predictorsolutionsin presented Table 3. formula of the are transformation Box-Cox with the in the formula random term disturbance for regions of would be fitting non-linear regression, in the vector of coefficients of vector Where DMI denotes the level of development of market institutions, market of development of level the denotes DMI Where (DMI follows: as look will formula model new the variable, response the of transformation The plot suggests that the likelihood is maximized when likelihood the that suggests The plot 0.9 67.4003 4.6866 Estimate -1)/0.9= ß 0 + ß , Std. Error t Error Std. X is thematrix k explanatory of and control variables, and j X Y = a – be a = Y + İ i = 1,…N. The parameter estimates of of newmodel the estimates = 1,…N. The parameter -cx (i (i = 1,…, N), (j=1,…,K) 209 Ȝ = 0.9; therefore, after the after therefore, =0.9; ß 0 (5) (4) – an intercept -1.4*SBC İ , ß , and , is a j - CEU eTD Collection linearity of relationship between the response and explanatory variables. The formula The variables. explanatory and response the between model, relationship of the by linearity explained variation the of proportion the as increases well terms interaction with model multivariate linear as the into transformation) the(Box-Cox variable response the of transformation AkaikeThe Information interim conclusionagainstspecifications0.45, 0.46, (0.26 0.56for or othermodels).model other the in Criterion. than withhomogeneous less much is variance the regard that indicates test to model residual isstandard error increased compared tothe polynomial andLevene’s Ittransformation, transformations alsomodels, three term, description to the Iturn error variance.its of Table the 2showsthat and leads is Astests. comparisons usingthe toas follows.a substantial variable andlinear it a of asexplanators, combination isvariables useformal necessary to Introducinghave both a single because butmodels that wearecomparing to SBC, model respect with theincreaseThe asymptotic intransformation the seems to offer an improvement to the goodness of fit of the function exponential Asymptotic C. Panel linearPanel A.function Bi-variate Fig. 5.7Plots ofLinear, Polynomial andAsymptotic Exponential Functions market96 market96

0 20 40 60 80 0 20 40 60 80 -1 -1 0 0 1 1 sbc96 2 sbc96 2 3 3 4 anova 4 5 operand or the AIC criterion are not possible for these 5 210 Panel B. Polynomial function Polynomial B. Panel market96

0 20 40 60 80 -1 0 1 sbc96 2 3 4 5 CEU eTD Collection 1)/0.9~sbc96+reformist.government+reformist.government:sbc96+initial.endowment) Polynomial: lm((market96^0.9- ) lm(market96~sbc96+reformist.government+reformist.government:sbc96+initial.endowment Fig. 5.8Regression diagnostics forthe models including Ingushetia: thesis offers some empirical solutions to this problem. errors in the model are not from the normal distribution. The section 5.6.6.4 in the body of the show up as sortsstraight of non-linearity. line. outlier the on Intheideal is plot. a the normal, case,whenthedistribution graphapproximates the indicate to ability in its is graph this of The usefulness The departures distribution. normal a from The plot fromdistribution presented the normal which quantile-quantile plots, plots, or display rankedsamplesfrom data observed the the in againstthedistribution Fig.from normal (Gaussian)a distribution,5.8 such similaras the Shapiro-Wilk test, I use normalbelow quantile are of deviation the assessments of ways Among alternative errors. of for normality be check the numberrevealseasy to of spot thatleastranked squares regression analysis, by thereforethe the second after theeye: check of homoscedasticityquantiles will Thethey commonare that assumption are expected5.1.6 Check for normality of errors of ifthe scientific thenormally datastraightforward at arrive to were conclusions. difficult distributedis it development, market SBC between errors liesparsimony, as with three parameters (a, b and c) involvedin in the description of the therelationship interpretation.basis scientific the of simplicity of loss corresponding of the of because be rational the not also would ordinary againstargument using this model Thespecification. introduction of exponential the term isa strong increased, which both model are the of andtheheteroscedasticity error standard for theresidual However, may models, purposes. predictive linearthe be afactthat important Thetransformation next namely tested, model, asymptotic the hasavisual fitsuperior tothat of choice of fitting curvilinear relations compromises the principle of Residuals

-20 0 20 40 20 lm(market96 ~ sbc96+ reform.govern + sbc96:reform.govern + natur) 27 45 66 40 Residuals vs Fitted Fitted values 60 80 100 211

Standardized residuals

-4 -3 -2 -1 0 1 2 3 32 lm(market96 ~ sbc96+ reform.govern + sbc96:reform.govern + natur) -2 -1 Theoretical Quantiles Normal Q-Q 0 1 66 2 45 CEU eTD Collection error variance changes with the level of the response (fitted values), or with a linear combination of predictors. combination a linear with or values), (fitted response of the level the with changes variance error H the tests variance fornon-constant test score *** parentheses in offreedom degrees ** p-values* inparentheses Error** Standard Residual Levene test* Score test* test Breusch-Pagan* Ingushetia Sample without Error** Standard Residual Levene test* Score test* test* Breusch-Pagan Ingushetia Sample with The Homoscedasticity Tests Estimates for Models Table including 5.3 and Residuals

-20 -10 0 10 20 30 lm((market96^0.9)/0.9 ~ sbc96 + reform.govern + natur + reform.govern:sbc96 ... 20 27 45 66 excluding Ingushetia 30 Residuals vs Fitted vs Residuals 40 15.17 (67) 15.17 0.06(0.8) 0.68(0.41) 2.9(0.54) (68) 17.25 0.53(0.46) (0.8) 0.06 (0.74) 1.47 Linear Fitted values Fitted 50 60 70 NA 0.001(0.96) 0.68(0.41) 2.9(0.71) NA 0.3(0.56) (0.98) 0.012 1.47(0.91) Hierarchical Linear 0 that error variance is constant against the alternative that the that alternative the against constant is variance error that 212

Standardized residuals

-4 -3 -2 -1 0 1 2 3 lm((market96^0.9)/0.9 ~sbc96 +reform.govern + natur + reform.govern:sbc96 ... 32 -2 10.58 (67) 10.58 0.02(0.89) 0.52(0.47) 2.56(0.63) 12.05(68) 0.59(0.45) 0.01(0.91) 1.67(0.79) Polynomial -1 Theoretical Quantiles Normal Q-Q Normal 0 13.93(71) 0.04(0.84) NA NA (72) 15.1 (0.26) 1.21 NA NA Exponential Asymptotic 1 66 2 45 CEU eTD Collection 1)/0.9~sbc96+reformist.government+reformist.government:sbc96+initial.endowment) Polynomial: lm((market96^0.9- lm(market96~sbc96+reformist.government+reformist.government:sbc96+initial.endowment) Fig.5.9 Regression diagnostics for the models, excluding Ingushetia: Residuals Residuals

-20 -10 0 10 20 30 -20 0 20 40 lm((market96^0.9)/0.9 ~ sbc96 + reform.govern + natur + reform.govern:sbc96 ... 10 lm(market96 ~ sbc96 + reform.govern + natur + reform.govern:sbc96) 20 20 1 65 8 8 30 40 65 Residuals vsFitted Residuals vsResiduals Fitted Fitted values Fitted Fitted values 40 60 50 80 60 70 100 62 213

Standardized residuals Standardized residuals

-2 -1 0 1 2 3 -2 -1 0 1 2 3 lm((market96^0.9)/0.9 ~ sbc96 + reform.govern + natur + reform.govern:sbc96 ... 62 62 lm(market96 ~ sbc96+ reform.govern + natur + reform.govern:sbc96) -2 -2 -1 -1 Theoretical Quantiles Theoretical Theoretical Quantiles Normal Q-Q Normal Normal Q-Q 0 0 1 1 8 2 8 2 65 65 CEU eTD Collection Fig 5.10TheAdministrative-Economic Division oftheRussian Federation 12. 11. 10. 9. 8. 7. 6. 5. 4. 3. 2. 1. Pribaltiiskii Zapadno-Sibirskii Volgo-Vyatskii Uralskii Povolzhskii Severo-Zapadnyi Severo-Kavkazskii Severnyi Dalnevostochnyi Vostochno-Sibirskii Tsentralno-Chernozemnyi (Central) Tsentralnyi 214 CEU eTD Collection reformist legislature reformist orientedexecutive and Kremlin- synergy. Executive-legislative Reformist towards market: orientation Legislative Power of Party orientation: political Executive’s Soft Budget Constraints needn aibe (1) Independent variables AIC Within-district variation, Between-district variation R² Initial Endowment Controls reformist legislature oriented executive and Interaction – SBC: Kremlin legislatures of orientation the regional Interaction – SBC: Reformist Power orientation:political Partyof Interaction - SBC: Executive and reformist legislature Kremlin-oriented executive Executive-legislative synergy. Reformisttowards market: Legislative orientation of Partyorientation: Power Executive’s political SBC Independent variables adj Dependent Variable: DMI Ingushetia Table 5.5 TheBi-variate and Multivariate Models Run for a Sample Excluding Note: Variable: DMI Dependent Summary Table for the Models Run for a Sample Table Excluding5.4 Ingushetia t-values in parentheses in t-values (7.6) 12.1 multivariate) (linear interactions with Full model 0.52 608 (-2.3) -2.7 (1.7) 22.7 (0.2) 2.3 (1.3) 4.6 (0.7) 8.7 (-0.1) -0.1 (0.7) 7.4 (2.9) 7.3 (1) (5.9) 10.9 (2) multivariate) model (linear adequate Minimal 0.53 602.7 (-2.8) -3.1 (3.2) 26.9 (1.9) 15.3 (5.3) 9.4 (2) (3) (-1.9) -11.0 215 (4) (-1.4) -6.9 n transformatio After Box-Cox 0.54 550.9 (2.9) 2.2 (3.3) 19.2 (1.8) 10.6 (5.2) 6.4 (3) (5) (-3.1) -18.5 (6) (-2.1) -10.9 regression asymptotic Non-linear (4) (7) (-3.4) -21.6 level) multi- (linear Full model (5) 569 (-2.3) -2.7 (1.7) 22.9 (0.7) 7.9 (3.4) 8.2 217.2 23.4 (0.1) 1.5 (0.9) 3.2 (0.7) 6.2 (0.1) 0.6 (8) (-2.6) -14.0 (9) (-1.0) -11.6 (0.6) 5.8 (5.4) 10.4 (0.2) -0.8 multilevel) model (linear adequate Minimal (6) 584 (-2.7) -2.9 (3.1) 24.9 (1.7) 13.2 (5.6) 9.8 200.4 36.1 CEU eTD Collection R²adj Endowment Initial variable Control o1 11 637.14 mod13 662.34 629.58 7 mod12 645.62 0.8603 -4 min -402.5 adequate 20224.3 model 68 full model AIC variation, Within-groups Between-groups variation variation, Between-groups Endowment Natural variable Control SBC variable Independent Table 5.8 ROutput forComparing Two Models Table 5.7 ROutput forComparing Two Models Note: Variable: DMI Dependent Table 5.6 Repeated Measurements Model for a SampleExcluding Ingushetia. Note: t-values in parentheses in t-values parentheses in t-values Df AICBIC Pr(>F) 0.44 0.46 0.03 0.31 0.09 0.33 0.12 0.45 0.35 0.12 0.33 0.09 0.31 0.460.03 0.44 Res.Df RSS 64 (-3.2) -3.8 regions years, effects = Random 2001) 1996- years sample: (full Model nts Measureme Repeated 2991 37.1 3,400,000 0.85 (-4.6) -5.1 (3.4) 2.5 (2) 19821.8 -4 0.9788 Df Pr(>Chisq) 216 (-5.3) -4.5 regions years, effects = Random 1997) 1996- years of (sample Model nts Measureme Repeated 1162 70.6 98.1 0.000024 (-3.5) -3.4 (7.0) 9.8 (3) Df Sumof (-5.3) -4.4 regions years, effects = Random 2001) 1998- years of (sample Model nts Measureme Repeated 1912 23.8 17.1 0.00012 (-3.9) -4.4 (3.6) 2.6 (4) Sq F 0.3249 (-5.0) -4.2 (-2.9) -3.5 CEU eTD Collection Source: Krasnoyarsk oblast with Taimyrand Evenk AO. region, Ust-Ordynsk Autonomous Okrug (AO). The same applies to Perm oblast withKomi-Permyak Notes: AO and 13.06 11.06 08.06 31.05 29.05 27.05 27.05 19.05 24.04 20.03 30.01 30.01 12.01 12.01 1996 17.10 11.07 29.06 23.03 1995 03.08 01.06 15.02 1994 Moscow and S.Petersburg cities. S.Petersburg Moscow and Evenkiiskii AO, Ust-Ordynskii AO, Aginskii AO, Korjakskii AO, Lipetskaya and Tyumenskaya oblasts, Balkarskaya republic, Nenetskii AO, Khanty-Mansiiskii AO, Yamalo-Nenetskii AO, Tajmyrskii AO, 101 Date Table 6.1 Signing ofBi-Lateral Treaties, Codes Data: N=74 in all regressions, excluding fifteen regions: Komi-Permyak AO, Chechen and Kabardino- and Chechen AO, Komi-Permyak regions: fifteen excluding regressions, inall N=74 Data: Irkutsk oblast signed a bi-lateral treaty together with its sub-territory, which is also an independent Solnick (2000) 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 3 3 3 Code Region S. Petersburg city Petersburg S. Rostovskaya oblast Nizhegorodskaya oblast Perm oblast Sakhalin oblast Republic of Chuvash Irkutsk oblast Omsk oblast Khabarovsk krai Republic of Komi Krasnodar krai Orenburg oblast Kaliningrad oblast Sverdlovsk oblast Republic of Udmurtia Republic of Buryatia Republic of Sakha Republic of North Ossetia Republic of Bashkortostan Republic of Kabardino-Balkaria Republic of Tatarstan Appendix to Chapter 6 toChapter Appendix 217 16.06 20.05 20.05 20.05 20.05 20.05 1998 01.11 30.10 30.10 30.10 30.10 30.10 01.08 04.07 04.07 04.07 04.07 1997 04.07 29.11 13.06 13.06 Date 101 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Code Region Moskow city Marii-El oblast Kostroma oblast Ivanovo oblast Voronesh oblast Amur oblast Krasnoyarsk oblast Astrakhan oblast Ulyanovsk oblast Yaroslavl oblast Murmansk oblast Kirov oblast Samara oblast Magadan oblast Chelyabinsk oblast Bryansk oblast Saratov oblast Vologda oblast Altai krai Tver oblast Tver Leningrad oblast CEU eTD Collection oes Basic ModelsOLS Controls: status rative Administ Yeltsin Vote for ent Employm Samples With with without and Ingushetia(models for year 1996). Dependent What variable –SBC Explains the Level of SBC: Comparative statistics for Table a 6.2 samples population federal.property state.pr. repub for.Yelt Employment (Intercept) Table 6.2 Regression estimates forthemulti-level model OLSregressionbasic (sixregressors) Fig.6.1 Profile for the transformation parameter log-Likelihood

-96.5 -96.0 -95.5 -95.0 95% regressors with six (1.6) 0.57 (3.3) 0.04 (4.3) 66.8 hetia Ingus -2.4 (2.1) 0.02 (4.2) 47.5 hetia Ingus out With -2.2 Estimate -0.0004898 -0.0004898 -3.936 0.0001244 0.1643514 0.1181784 1.391 0.5301037 0.1477676 3.587 0.5229640 0.3672352 1.424 0.0449802 0.0130068 3.458 64.2520229 15.4766035 4.152 -3.0886489 -4.105 0.7523272 regressors with six Polynomial (1.3) 04 0.00 (3.0) 1.1 hetia Ingus With -2.0 O (0.9) 04 0.00 (2.6) 0.9 hetia Ingus out With -1.8 Std. Error Std. regressors two with Polynomial - (3.1) 1.2 hetia Ingus With - -1.6 - (2.5) 0.9 hetia Ingus out With - 218 t value regressors six with WLS (3.2) 0.03 (3.7) 43.9 hetia Ingus With (1.9) 0.5 Ȝ intheBox-Cox modelapplied tothe (2.8) 0.02 (3.3) 30.8 hetia Ingus out With (1.7) 0.35 regressors (four) three with Basic OLS - (4.4) 1 80.1 hetia Ingus With - (2.1) 0.02 (4.3) 51.7 hetia Ingus out With regressors two with Basic OLS - (4.1) 74.8 hetia Ingus With - (3.6) 45.1 hetia Ingus out With CEU eTD Collection R n Populatio Property Federal 2 adj population 1 21.5210 1.708e-05 *** 1.708e-05 1 21.5210 population * 0.03420 1 4.6766 federal.proper 1 2.2803 0.13580 state.pr. 1 2.1775 0.14480 repub for.Yelt 1 7.0532 0.00991 ** Employment Response: sbc OLS modelwith six regressors (without Ingushetia) Table 6.4 Heteroscedasticity consistent andcommon ANOVAestimates forthebasic *** population 1 federal.propert state.pr. repub for.Yelt 1 Employment F Pr(>F) Df Response:sbc estimates forthe basic OLSmodelwith six regressors. Table 6.3 Heteroscedasticity consistent andcommon ANOVA(typeIItests) Note: t-values in parentheses in t-values 0.069517 . 0.069517 0.54 0.55 0.69 0.68 0.66 0.66 0.50 0.52 0.34 0.32 0.48 0.34 0.52 0.50 0.66 0.66 0.68 0.69 0.54 0.55 (-3.9) 48 .000 - (1.7) 0.19 1 4.1604 0.04538 * 0.04538 1 4.1604 Pr(>F) Df F 1 1 1 (-5.8) 05 0.00 - (1.7) 5 0.00 26.091 2.908e-06 26.091 0.045193 * 4.1657 1 0.100691 2.7704 0.087967 . 2.9981 0.004784 ** 8.5178 10.6) (- 0031 0.00 - (1.7) 05 0.00 3.4026 10.8) 003(- 0.00 - (1.7) 5 0.00 11.1) (- 0032 0.00 - - ouain 539 1 34.4391 population 25.379 1 5.7737 federal.proper 4.255 5.850 1 7.9378 state.pr. 1 1.876 2.5459 repub 3.368 1 4.5697 vote for 13.223 Yelt 1 17.9429 Employment value Df F Sq Sum *** population 1 federal.propert 4.274 state.pr. repub for.Yelt 27.278 1 Employment sbc Response: Response: sbc 11.5 (- 0032 0.00 - - 219 0.0004671 *** 0.0004671 (4.9) 05 0.00 - (1.9) 0.15 Sum Sq Df F Pr(>F) F Sq Df Sum 23.309 1 23.309 1 3.928 15.760 1 15.760 (-6.3) 05 0.00 - (2.0) 0.12 20.121 1 20.121 (-4.2) 058 0.00 - (1.4) 0.19 15.686 0.0001837 15.686 0.0945317 . 2.8764 0.1086717 2.6435 10.60 0.0017702 0.0017702 ** 10.60 5.99e-05 *** 18.357 (-6.6) 058 0.00 - (2.5) 0.21 1.562e-07 *** 1.562e-07 * 0.01909 ** 0.00638 0.11536 * 0.03625 *** 7.212e-05 Pr(>F) 13.540 (-4.1) 057 0.00 - - (-6.0) 056 0.00 - - 0.42 CEU eTD Collection model Fig. 6.2Regression diagnostic plotsforthe sample without Ingushetia, basic OLS Residuals Standardized residuals

lm(sbc ~ employment + for.Yelt + federal.prop + republ + state.pr.4 + popul ... + popul + state.pr.4 republ + for.Yelt + ~ employment + federal.prop lm(sbc -2 -1 0 1 2 3 ... + popul + state.pr.4 republ + for.Yelt + ~ employment + federal.prop lm(sbc -2 -1 0 1 2 3 0.00 -2 Cook's distanceCook's 0.05 -1 0.10 Residuals vs Leverage Residuals vs Fitted Fitted valuesFitted Leverage 0 0.15 87 86 1 0.20 64 64 62 0.25 2 62 0.30 3 0.5 0.5 1 220

Standardized residuals Standardized residuals lm(sbc ~ employment + for.Yelt + federal.prop + republ + state.pr.4 + popul ... popul + state.pr.4 + republ + federal.prop + for.Yelt + ~ employment lm(sbc lm(sbc ~ employment + for.Yelt + federal.prop + republ + state.pr.4 + popul ... + popul + state.pr.4 + republ +federal.prop + for.Yelt ~ employment lm(sbc 0.0 0.5 1.0 1.5 -2 -1 0 1 2 3 -2 -2 -1 -1 Theoretical Quantiles Scale-Location Normal Q-Q Fitted values 0 0 86 1 1 64 2 86 2 62 64 62 3 CEU eTD Collection six regressors with regression (WLS) squares least Weighted OLSmodel adequate Minimal sample without Ingushetia Fig. 6.3Standardized residuals vs.fitted values plots for themodels run ona Standardized residuals Standardized residuals

0.0 0.5 1.0 1.5 2.0 0.0 0.5 1.0 1.5 lm(sbc ~ lm(sbc employment + for.Yelt + repub state.pr.4 + federal.property + ...+ po lm(sbc ~ employment + for.Yelt + repub + state.pr.4 + federal.property + po ... po + + federal.property state.pr.4 + repub + for.Yelt + ~ employment lm(sbc -2 -2 -1 -1 Scale-Location Fitted values 0 Scale-Location Fitted values 0 86 1 64 86 1 2 64 62 3 2 62 Model with fourresponsevariables Model with tworegressors OLS with Polynomial 221 Standardized residuals Standardized residuals

0.0 0.5 1.0 1.5 2.0 0.0 0.5 1.0 1.5 10 -0.25 lm(sbc ~ employment + for.Yelt + federal.property + population) -2 lm(((sbc + 3)^-1.8)/-1.8 + ~ employmentlm(((sbc 3)^-1.8)/-1.8 + population) -0.20 -1 Scale-Location Fitted values Scale-Location Fitted values -0.15 31 0 64 -0.10 64 1 86 -0.05 62 2 CEU eTD Collection Panel A (panel B)Ingushetia Fig.464 Employment vs.SBC scatter plotfor a samplewith(panel A) andwithout

sbc

0 2 4 6 8 10 -0.01 yva Ty 0.00 employment 0.01 0.02 Ingu 0.03 Altr 222

sbc

-2 0 2 4 6 8 10 -0.01 Panel B 0.00 employment 0.01 0.02 0.03