Intra-Regional Equalization & Growth in Russia

Until 2009, the Russian economy had been enjoying above 5% annual growth since it hit bottom along with the oil prices in 1998. However, the dynamics of the economic recovery have been very uneven across Russian regions. Thus, the determinants of regional economic growth are likely to have a strong sub-national level component. In this paper we examine the potential role played by the fiscal relations between regional governments and their constituent localities. Our empirical results strongly suggest that intra-regional fiscal inequality across local governments and inter-jurisdictional equalization policies pursued by the regional governments have a substantial impact on regional growth. Specifically, we find the following policy tradeoff: one standard deviation higher level of regional equalization translates into half a standard deviation lower rate of regional growth. One question for future research is whether decentralization designs into a hierarchical system result in more local government equalization in comparison to other inter-governmental design, such as a bifurcated system, where the central government is in charge of local equalization.