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Regional Disparities and Fiscal Federalism in Russia
This paper examines how regional disparities have evolved in Russia and how Russia’s system of intergovernmental fiscal relations is managing these disparities. Regional disparities have fallen over the past two decades but remain relatively high. Socioeconomic outcomes remain worse in lagging regions despite faster growth and convergence in income levels. The twin shocks of COVID-19 and lower oil prices appear to have impacted richer regions disproportionately. Compared to other large countries with federal systems of government, Russia stands out with its high reliance on direct taxes as a revenue source for its regions. Transfers from the federal budget to the regions provide some redistribution by reducing the dispersion in real per capita fiscal spending, but also tend to be associated with lower growth. The Russian fiscal system offers degrees of redistribution and risk sharing of around 26 and 18 percent, respectively—with in-kind social transfers contributing the most. Finally, federal transfers in the aggregate tend to be procyclical and are also fairly unresponsive to shocks to regions’ own revenues.
The Russian State’s Size and its Footprint: Have They Increased?
The short answer: The size of the Russian State has not increased much in the last few years, but its economic footprint remains significant. Concretely, the state's size increased from about 32 percent of GDP in 2012 to 33 percent in 2016, not far from the EBRD's estimate of 35 percent for 2005-10. This is different from the mainstream narrative, which contends that the state's size doubled in the last decade. However, a deep state footprint is reflected in a relatively high state share in formal sector activity (close to 40 percent) and formal sector employment (about 50 percent). The deep footprint is also reflected in market competition and efficiency. Although sectors in which the state is present are more concentrated, concentration is large even in sectors where the state's share is low. This suggests the need to protect and promote competition, in particular in state procurement. Finally, state-owned enterprises' performance appears weaker than that of privately-owned firms, which may be subtracting from growth.
Fiscal Federalism and Regional Performance
Sound regional policies are essential for balanced and sustained economic growth. The interaction of federal and regional policies with cross-regional structural differences affect human and physical capital formation, the business climate, private investment, market depth, and competition. This paper summarizes the main elements of Russia's fiscal federalism, describes the channels through which it operates, and assesses the effectiveness of regional transfers in reducing regional disparities. The results suggest that federal transfers to regions contributed to reducing disparities arising from heterogeneous regional tax bases and fiscal revenues. This allowed regions with initially lower per capita income to increase human and physical capital at higher rates. There is little evidence for transfers contributing to increased cross-regional growth synchronization. The results also suggest that federal transfers did not significantly improve regional fiscal sustainability, a conclusion that is supported by the lack of convergence in per capita real income across Russian regions in the last 15 years.
The Utilization-Adjusted Output Gap
This paper estimates the output gap in Russia using a utilization-adjusted production function approach, which we argue is preferable to traditional output gap methods. The approach amounts to (1) using available surveys to estimate the "natural rates" of capacity and labor utilization above which inflation begins to accelerate; (2) estimating a production function with utilization-adjusted capital and labor inputs; and (3) defining potential output as the level of output obtained when both capital and labor are at their estimated natural rates. The results suggest that the output gap in Russia was negative between 1999 and 2003, but may have recently become positive, thus contributing to inflationary pressures.
Less Inflation, Less Poverty
This paper undermines the conventional view in the West that stabilization policy aggravates poverty, demonstrating in fact that the effect is precisely the reverse. This investigation of the impact of the inflation tax on the monetary assets of Russian households reveals the general effect is clearly regressive, with the wealth of the lowest income groups most severely eroded by high inflation. On the basis of recent historical experience, a modest reduction in the monthly inflation rate from 6% to 5% can be expected to result in roughly 700,000 Russians being lifted above the official poverty line.
Russian Federation
This Selected Issues paper focuses on the Russian state’s footprint in the economy. Available cross-country employment data suggests that the Russian state's is relatively large, like that of Scandinavian countries. In sectors where the state's share is high, economic concentration is larger, but concentration is large even in sectors where the state's share is low. Existing policies to protect and promote competition, including in state procurement, need to be strengthened. The IMF Staff estimates suggest that the state represented about one third of Russia’s value added (VA) in 2016, smaller than in the mainstream narrative but nonetheless large. The Russian state represents close to 40 percent of formal sector activity and 50 percent of formal sector employment. State-owned-enterprises (SOE) are present in most sectors of activity. The state’s share in VA was approximated by its share in sales for market activities, and by employment for nonmarket activities. SOEs appear to underperform relative to non-state firms in a variety of economic activities.
Reforming the State
The essays in this volume, first published in 2001, examine fiscal policy-making and providing for social welfare in post-socialist countries.
Unleashing Prosperity
Over the past few years, the countries of Eastern Europe and the Former Soviet Union have seen rapid productivity growth that has driven up living standards and reduced poverty. Unleashing Prosperity examines the microfoundations of the recent growth. The report shows that these countries have enjoyed substantial productivity gains from the reallocation of labor and capital to more productive sectors and firms, from the entry of new firms and the exit of obsolete firms, and from the more efficient use of resources. Unleashing Prosperity also illustrates that policy reforms that promote governance and macroeconomic stability, market competition, infrastructure quality, financial deepening, la...
Economic Success: Fate Or Destiny?: Values And Policies Across 12 Countries To Better Understand The World We Live In
The traditional rules-based system of the West, which has yielded peace dividends for many decades, now faces challenges from an emerging new world order. Building upon the themes introduced in Grandjean and Tan's Financial Times Readers' Best 2021 Summer Books, Values at the Core: How Human Values Contribute to the Rise of Nations, this book adopts a fresh perspective, examining historical precedents while charting a course for the future. Through accessible economic and social analyses of 12 nations, it offers insights into potential pathways forward.
