Making Decentralization Work: The Case of Russia, Ukraine, and Kazakhstan

Russia, Ukraine, and Kazakhstan have all carried-out comprehensive reforms of their inter-governmental fiscal systems in the decade since the inception of transition; and all three countries are in the process of considering or implementing far-reaching “second-generation” reforms in this area. In retrospect, the combination of efforts aimed at consolidating macroeconomic stabilization during the early years of the transition, together with the fundamental structural changes in the economy, in some cases strong centrifugal forces, and political and ethnic conflicts, created an extremely complex setting for fiscal decentralization. This goes a long way in explaining why the fiscal decentralization process in the three countries has been rapid, haphazard and largely non-transparent, with the emerging system of federalism having important implications for budgetary developments. The objectives of this paper are to discuss key aspects of the ongoing decentralization process in three important transition economies, Russia, Ukraine, and Kazakhstan; to identify areas where the present systems have clear adverse impacts on efficiency and—potentially—macroeconomic performance; and to offer a roadmap for future reform.