RE-MAPPING OPPORTUNITY Public Disclosure Authorized Making Best Use of the Economic Potential of Russia’s Regions Public Disclosure Authorized Washington, DC — Moscow Public Disclosure Authorized Public Disclosure Authorized 2018 © 2018 International Bank for Reconstruction and Development/The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www. Worldbank.org This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail [email protected]. ACKNOWLEDGEMENTS This report was prepared by a joint team of the World Bank and the Analytical Center for the Government of Russian Federation (AC). For the World Bank, this project was led by Dmitry Sivaev. Core team members included Grace Cineas, Alexandra Milentey, Yuliya Gosnell, Tatiana Shadrunova, and Eleanor Dalgleish. The AC team was led by Mikhail Pryadilnikov. Other AC team members included Anton Steshenko and Alexandra Silchuk. The World Bank team expresses its sincere gratitude to the Analytical Center for assistance with data collection, organization of case study field trips, and expert consultations, which provided unique insights into the details of federal and regional policy and contributed to the overall development of the theme and narrative of this report. We also want to thank our team of economic advisors — Uwe Deichmann, Thomas Farole, and Mark Roberts — who generously contributed their time and knowledge throughout the process to help the team address multiple methodological challenges and develop the narrative of the final report. This report would also not be possible without the advice of World Bank colleagues David Sislen, Paula Restrepo Cadavid, Mikhail Matytsin, Daniel Alberto Benitez, and Somik Lall. We want to further express our gratitude to the following experts who shared their insights with the team: Natalia Zubarevish (Moscow State University), Alexey Krylovskiy (AV Group), Alexey Prazdnichnikh (Center for Strategic Research/Strategy Partners), Andrey Klepach (Vneshekonom Bank), Irina Ilyina (Higher School of Economics), Alexey Novikov (School of Urban Studies, Higher School of Economics). We specifically want to thank Mikhail Dmitriev (New Economic Growth Partnership) for allowing us to utilize the results of as yet unpublished work by his team. The data collection field trips for the regional case studies would not have been possible without the coordination of the Analytical Center and the AV Group, and the collaboration and support of the regional governments of the Republic of Bashkortostan, Krasnodar Krai, and Ulyanovsk Oblast. 1 RE-MAPPING OPPORTUNITY MAKING BEST USE OF THE ECONOMIC POTENTIAL OF RUSSIA’S REGION CONTENTS 1 Acknowledgements 49 Annex 1 Summaries of the Case Studies of the Regions 2 Contents 49 Ulyanovsk oblast — working hard 5 Executive summary to catch-up 8 Introduction 51 Krasnodar krai: learning how to leverage its The need for a focus on regional development assets 54 Bashkortostan republic — seeking growth 10 Chapter 1 beyond oil What shapes the economic development of Russia’s regions? 56 Annex 2 10 Is the legacy of a planned economy still Quantitative analysis methodology. a burden for regions? Full table of variables used in the EPI model 12 Natural resources: a blessing or a curse? 58 EPI: Selection of regions 68 Sensitivity Analysis Results: 37.5 percent 16 Chapter 2 threshold What is the economic potential of Russia’s regions — and what drives it? 69 Sensitivity Analysis: 27.5 percent threshold 16 Methodology, analytical challenges, and re- 70 Variable Selection sults 72 Model Specification 18 Focusing on critical structural characteristics 73 EPI Scores to drive regional development 74 Performance Rankings 18 Maximizing the benefits of urbanization 74 Explaining Potential 22 Enhancing connectivity 24 Nurturing high-tech sectors 76 Annex 3 A brief overview of spatially-targeted federal 26 Developing human capital programs for the development of lagging 27 Re-thinking monotowns macro-regions 27 Making more of agriculture’s potential in the regions 28 Where is the potential among the regions, and what does it tell us about them? 32 Chapter 3 What is the role of regional institutions, governance, and policy in a region achieving its economic potential? 32 The evolution of national policies for regional development 34 Do regional institutions and governance matter — and how much? 36 Regional governments have the tools to support economic development 40 Federal policy limits the role of regions in supporting economic development 43 Regions can still do more 44 Suggested policy priorities 44 Policy priorities for the federal government 46 Policy priorities for the regional governments FIGURES 11 Figure 1. 50 Figure 22. Two historical phases in the Convergence of income and wages among development of the Ulyanovsk region’s Russia’s regions economy 11 Figure 2. Change in distribution of pairwise 52 Figure 23. EPI estimates for Krasnodar Krai distances between registered enterprises 53 Figure 24. Two phases of development in Russia of the economy of Krasnodar region 13 Figure 3. Convergence and divergence trends 55 Figure 25. EPI estimates for Bashkortastan in real regional GRP per capita (in 2010 prices) 59 Figure 26. Correlation between market 13 Figure 4. Comparison of dynamics of regional access and productivity on a Russia-wide convergence in Russia, Canada, and Australia scale 14 Figure 5. Levels of inequality in regional GRP 60 Figure 27. Concentration of high economic per capita in Russia and other comparable potential in resource-rich and remote regions countries 62 Figure 28. Сontrolling for resource-rich 15 Figure 6. Natural resourse exports and regions — doesn’t result in significant manufacturing growth in selected countries changes in the EPI scores in 1970s 65 Figure 29. Analysis with 20 regions removed 15 Figure 7. The Product-Space Network from Far Eastern and Siberian Federal Okrugs 19 Figure 8. Rank-size distribution of cities 68 Figure 30. Scatter Market Access vs. in Russia and selected comparator countries Log GRP per capita 2014 19 Figure 9. Change in business productivity 69 Figure 31. Scatter Market Access vs. based on the size of the city of location, Log GRP per capita 2014 Russia 2014 70 Figure 32. Regions included and excluded 21 Figure 10. Population concentrates in larger in the final EPI estimation cities 73 Figure 33. Correlation between GRP per 21 Figure 11. Net migration by centrality of cities capita and EPI 23 Figure 12. Proximity to Moscow is not a source of prosperity for neighbors 24 Figure 13. Average wages and migration balance in the regions of the Central Federal Okrug 25 Figure 14. GRP growth in Tver Oblast vs. projections 25 Figure 15. GRP growth in Vladimir Oblast vs. projections 26 Figure 16. Change in Economic Complexity Index of Russia and China (1990-2010) 30 Figure 17. Economic Potential Index for the regions of western Russia 30 Figure 18. Regions of western Russia that meet their economic potential, exceed it, or are still to reach it 31 Figure 19. Economic performance of regional economies, 2010-2014 33 Figure 20. Evolution of federal regional development policy in Russia, 1990-2017 49 Figure 21. EPI estimates for Ulyanovsk Oblast 3 RE-MAPPING OPPORTUNITY MAKING BEST USE OF THE ECONOMIC POTENTIAL OF RUSSIA’S REGION BOXES 15 Box 1 37 Box 6 Why economic growth driven by oil exports is To tax or not to tax unsustainable 39 Box 7 21 Box 2 Development Corporations of Ulyanovsk Oblast Federal housing construction targets and their and Bashkortostan impact on planning decisions 40 Box 8 25 Box 3 Regulatory Environment Reforms in Ulyanovsk Did high-speed rail unlock growth opportunities in Tver region? 31 Box 4 Economic potential is not the only factor that determines the economic growth of regions in the short run 35 Box 5 Case study methodology TABLES 18 Table 1. Results of the economic potential 68 Table 7. Sensitivity Analysis Regression 37.5 modeling percent threshold 56 Table 2. Variables used for Russia EPI 69 Table 8. Sensitivity Analysis Regression 27.5 analysis percent threshold: only urbanization level and market access are statistically significant 59 Table 3. Correlation between GRP per capita and market access for all Russian regions 70 Table 9. Oil and gas dependent regions between 2010 and 2014 removed from the model 64 Table 4. EPI estimation for all regions 71 Table 10. Correlation matrix for all variables included in the analysis 66 Table 5. EPI results controlling for extractive industries 74 Table 11. Regional Ratings by individual components of EPI 67 Table 6. Share of natural resource extraction in the structure of GRP by region 2004-2014 4 EXECUTIVE SUMMARY Russia can unlock new sources of economic growth if the economic potential of its regions is enhanced and better exploited.