THE EFFECTS OF SOFT BUDGET CONSTRAINTS ON MARKET DEVELOPMENT: THE CASE OF RUSSIAN REGIONS 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 CEU eTD Collection Central European University Budapest, Hungary June 2010 STATEMENT 1 This is to confirm that the thesis contains no materials accepted for any other degrees in any other institutions. STATEMENT 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 CEU eTD Collection 2 To Anna, Nicholas and John CEU eTD Collection 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 CEU eTD Collection 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 elections 137 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 CEU eTD Collection 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 the regression analysis ..........................................................................................144 6.4