THE EFFECTS OF SOFT BUDGET COSTRAITS O MARKET DEVELOPMET : THE CASE OF RUSSIA REGIOS By Aitalina Azarova A Doctoral Dissertation Submitted to the Central European University Department of Political Science In partial fulfilment of the requirements for the degree of Doctor of Philosophy Supervisor: Gabor Toka, Central European University Central European University Budapest, Hungary June 2010 STATEMET 1 This is to confirm that the thesis contains no materials accepted for any other degrees in any other institutions. STATEMET 2 This is to confirm that the thesis contains no materials previously written and/or published by another person, except where appropriate acknowledgment is made in the form of bibliographical references. Aitalina Azarova Budapest June 2010 2 To Anna, icholas and John 3 Table of Contents List of abbreviations............................................................................................................................7 List of tables ........................................................................................................................................8 List of figures ......................................................................................................................................9 Acknowledgements................................................................................................................................11 Chapter 1: Introduction..........................................................................................................................12 1.1 Motivation for the present research.............................................................................................13 1.2 Structure of the thesis..................................................................................................................16 Chapter 2: Review of the relevant literature on creating functioning markets ......................................18 2.1. Introduction ................................................................................................................................18 2.2. The market-making state ............................................................................................................18 2.3 Federalism and Market................................................................................................................22 2.4 Political foundations of federalism Russian style........................................................................25 2.5 Fiscal decentralization Russian style...........................................................................................27 2.6 Soft budget constraints ................................................................................................................32 2.7 Market-preserving federalism .....................................................................................................34 Chapter 3: The Structure of Research....................................................................................................37 3.1 Concept and analytical framework..............................................................................................37 3.2 Case selection and sources of data ..............................................................................................40 3.3 Scope of the study (selected period)............................................................................................41 Chapter 4: Determinants of Economic Growth: Evidence from Russian Regions...............................44 4.1 Introduction .................................................................................................................................44 4.2 Different ways of measuring market reform ...............................................................................45 4.3 Analysis of the validity of measurements of market reform .......................................................47 4.4 Indicator of the development of market institutions....................................................................53 4.5 The effect of DMI in cross-regional models ...............................................................................55 4.5.1. Description of dependent variables .........................................................................................55 4.5.2. Results of bi-variate regressions..............................................................................................59 4.6 Evaluation of DMI in multivariate models..................................................................................64 4.7 Time series – cross section analysis ...........................................................................................65 4.8 Bayesian model averaging...........................................................................................................68 4.9 Conclusions .................................................................................................................................77 4 Chapter 5: Market Preserving Federalism and SBC..............................................................................79 5.1 Introduction .................................................................................................................................79 5.2 Theoretical framework: choice of independent variables............................................................81 5.3 The bargaining game theory approach ........................................................................................85 5.5 De facto regional economic autonomy........................................................................................87 5.6 Data and results ...........................................................................................................................90 5.6.1 Description of independent variables...................................................................................90 5.6.2 Preconditions for SBC .........................................................................................................92 5.6.2.1 Theoretical preconditions .............................................................................................92 5.6.2.2 Russian regions in 1996: Were these preconditions in place?......................................96 5.6.3 Measurement of SBC.........................................................................................................102 5.6.4 Measurement of political variables in the sub-period 1998-2001......................................107 5.6.5 Models specification and estimation results ......................................................................110 5.6.5.1 Bi-variate and multivariate models.............................................................................112 5.6.5.2 Linear regression model with interactions..................................................................115 5.6.5.3 Fitting multilevel structure .........................................................................................118 5.6.5.4. Time-series analysis of the development of market institutions................................121 5.6.6 Model diagnosis.............................................................................................................124 5.6.6.1 Remedies to the misspecified model: deletion of influential points..........................125 5.6.7 Conclusion .........................................................................................................................129 Chapter 6: Determinants of Soft Budget Constraints ..........................................................................133 6.1 SBC Predictors ..........................................................................................................................134 6.1.1 Lobbying capacity of regional governments: early signing of bi-lateral treaties...............134 6.1.2 Lobbying capacity of regional governments: vote against Yeltsin in presidential elections ....................................................................................................................................................136 6.1.3 Lobbying capacity of regional government: vote for left-wing parties in Duma elections137 6.1.4 Lobbying capacity of regional governments: inflated public employment........................138 6.1.5 Administrative status..........................................................................................................139 6.2 Control variables .......................................................................................................................139 6.2.1 Access to decision-making.................................................................................................139 6.2.2 Population size...................................................................................................................140 6.2.3 Economic need: structural backwardness ..........................................................................140 6.2.4 Economic need: share of state in regional economy..........................................................141 6.2.5 Economic need: share of federal property .........................................................................141 6.2.6 Economic need: low net profit...........................................................................................142 6.2.7 Economic need: development of social infrastructure.......................................................143 5 6.3 Results of