Consortium for Economic Policy Research and Advice WCER Canadian Association Working Institute Academy International of Universities Center for the Economy of National Development and Colleges for Economic in Transition Economy Agency of Canada Reform Federal Reform Outcome: Influence of Modified Institutions on the Investment Climate in the Regions Moscow 2007 UDC 332.15:330.322 BBC 65.263.221 F33 Federal Reform Outcome: Influence of Modified Institutions on the Investment Climate in the Regions / Consortium for Economic Policy Research and Advice ; [Yanovskiy K. et al.]. – Moscow : IET, 2007. – 210 p. : il. – ISBN 9785932552155. Agency CIP RSL Authors: Yanovskiy K., Zhavoronkov S., Litarchuk V., Reva E., Shakin D., Shulgin S., Cherny D., Kucherinenko V. This publication is aimed at studying the modification of institutions of regional state power in the Russian Federation and its influence on the investment climate in the regions, including regional peculiarities of the investment climate and predictability of the policy of regional authorities headed by appointed governors. Examples of political confrontation between regional and provincial authorities in Canada allow us to illustrate the influence of normal federative democracy on business environment. JEL Classification: D72, D74, H5 Translated from the Russian by Anna and Alexey Yurasovsky. Page setting: Yudichev V. The research and the publication were undertaken in the framework of CEPRA (Consortium for Economic Policy Re search and Advice) project funded by the Canadian Agency for International Development (CIDA). UDC 332.15:330.322 BBC 65.263.221 ISBN 9785932552155 5, Gazetny per., Moscow, 125993 Russia Tel. (495) 6296736, Fax (495) 2038816 [email protected], http://www.iet.ru Contents Introduction ................................................................................................5 1. The Problem State ...............................................................................7 2. Statistical Analysis of the Disappearing Distinctions ............................................................................ 13 2.1. A Comparison with the Methodology of the 2001–2002 Projects..................................................... 13 2.2. The Description of the Methodology................................. 14 2.3. The Tested Hypotheses................................................... 16 2.4. Data .............................................................................. 18 2.5. The Main Results of Statistical Analysis............................. 21 2.6. Informal comments to the statistical analysis outcomes ................................................................ 23 3. Federal State Institutions in the Russia and in the Canada: the Source of Instability or Flexibility?............ 27 3.1. Russia: the Final Wave of Gubernatorial Elections in the Regions......................................................... 27 3.2. The Problems of Guaranteeing the Quality of State Governance at the Regional Level............................... 30 3.3. The Negative and Positive Trends at the Regional Political Markets of Russia............................... 33 3.4. On the Way towards a Unitary State: Benefits and Losses .............................................................. 35 3.5. The regions of Russia consolidation processes as the problem of political economic competition........................................................... 43 3.6. Regional authorities and the challenges of terrorism .......................................................................... 45 3.7. Canadian National Energy Program (NEP) 1980........................................................................... 49 3.8. Parties' Conflicts on the Federal Provincial Level in Canadian PostWar History.......................... 89 Bibliography........................................................................................... 120 Annex 1 Comparative Table of RF Subjects’ Budget regulations main features............................................. 124 Annex 2 Canadian provincial and federal elections' outcome statistics 1945–2006 .................................. 138 Annex 3 Main outcomes of calculations ................................................. 151 Annex 4 Regional conflicts ................................................................... 163 Annex 5 Table of Variables (Data for Calculations) .......................................... 190 Introduction 2005 became the first year of performance for the new administra tive system in Russia. This system was the result of the federative rela tions reform (mainly, replacement of electing governors with their ap pointment1 and cancellation of elections in constituencies to the State Duma). This period allows us to analyze the first outcome of the new system performance and demonstrate the first reform results on the perform ance of both regional and federal officials. First observations over the development of legislation, legal practice and political life in the regions permit us to evaluate the influence of the new norms on the transpar ency of the government and business environment. This project will continue CEPRA research, which was started in 2001–2002 and related to the formal analysis and comparative descrip tion of the institutions in the Russian regions (courts, mass media, NGO, etc.) and research started in 2004, which was dedicated to the analysis of mechanisms and incentives for import of institutions by the regions. The subjects of the report analysis is: − the dynamics of institutional environment in the Russian regions, focusing on the states before and after the administrative reform; − experience of the most successful countries with transition econo mies and Canada of solving political and economic contradictions between different levels of government with the minimization of the negative effect for the investment climate. Available data demonstrates that over passed year peoples confi dence in the court system and law enforcement agencies did not in crease. The vast majority of the appointed governors represent already acting governors, who very often could not be elected for another term. This fact undermines arguments of the fathers of the reform who stated 1 See Federal law of 11 December 2004 No. 159FZ “On Introducing Changes in the Fed eral Law ‘On the General Principles of Organization of Legislative (Representative) and Executive Bodies of Government of the Subjects of the Russian Federation’ and in the Federal Law ‘On Main Guarantees of the Voting Right of the Citizens of the Russian Fed eration’, and Presidential Decree of 9 March 2004 No. 314 ‘On the system and Structure of the Federal Bodies of Executive Power’”. that elected governors were not qualified for the job and their moral qualities were very low. They insisted on the need to increase the effi ciency of the legal system with the help of “strengthening administrative vertical”. Passed year also provides possibilities to verify suspicions of those who opposed changing the legislation about undermining incentives of the regional authorities to provide quality public goods to the popula tion. Thus, although changes in the legislation did not have major effect, they as an experiment gave substance for comparative analysis and created demand (although postponed till the energy price fall) on policy advice on improving the situation (even the federal authorities are dis satisfied with the situation, although they proposed the system of nomi nating candidates for a governor proposed by a party, which won the elections in the regional legislative assembly). Research is aimed at demonstrating the influence proceeding from the change, which is taking place in the system of the regional govern ment bodies in the Russian Federation, as well as on the investment climate in the regions including regional differences (in case they re main) in the investment climate and predictability of regional authorities policy headed by appointed governors. 6 1. The Problem State The study “Political and Legal Sources of Investment Risks in the Russian Regions” (by V. Mau, S. Zhavoronkov, K. Yanovskiy et al., 2002) addresses different approaches to determining the sources of political and legal investment risks, as well as the associated factors of economic growth. The approach based only on distinguishing the eco nomic freedoms and property guarantees has been augmented by in cluding the indices that reflect the situation that exists in the sphere of basic human rights, which are associated primarily with the guarantees of the inviolability of the person, as well as the population’s demand for such institutes. The results obtained in course of this study, indicative of the signifi cant ways in which the guarantees of rights and liberties influence the entrepreneurial climate, have demonstrated the great importance of the individual assessments of risks in the decisionmaking concerning in vestments. In this connection, the significance and explanatory capacities of in dependent variables was increasing noticeably in certain combinations. The combination “judicial protection of the inviolability of the person – activity of human rights organizations” (outside which the judicial statis tical data were found to be statistically insignificant with the 95% inter val) could provide explanations for up to 16% of the variations of the employment dynamics index in the sphere of smallsize businesses. Even more efficient (with the explanatory capacity of up