1

# 1. Introduction

Fiscal decentralization in Russia has been an important dimension of reforms since 1992. The issue has received a lot of attention recently in academic literature (Lavrov, 1995; Le Houerou, 1995; McLure at al, 1995; Treisman, 1998a; Wallich, 1994). As a rule these studies have been focused at three aspects of evolving Russian federalism: delegation of specific revenue and expenditure assignments to regional governments, relationship between federal and regional budgets through various types of explicit and implicit transfers, and cross-regional budget equalization.

The main purpose of this paper is to look at one more aspect of the decentralization process, which relates to inter-government fiscal relations within the regions. The paper focuses on two elements of such process. The first reflects overall trends in allocation of fiscal resources within regional fiscal systems, primarily between regional and municipal levels of the government. We review both channels of fiscal allocation within regions -- tax sharing and local transfer schemes. The second element relates to potential impact of various decentralization patterns on regional economic performance, such as economic growth and budget deficit. We use the data on the structure of 89 Russian consolidated regional budgets in 1992-96 to determine basic statistical characteristics of the decentralization process over the period and to provide correlation and regression analysis of links between decentralization, regional indicators of social and industrial structure, and economic performance.

Section 2 provides a brief description of the data. Section 3 presents an analytical framework used for developing a statistical model. Section 4 reviews trends in the distribution of revenue and expenditure assignments between the federal, regional and municipal governments. Section _5_ presents a more detailed analysis of fiscal decentralization in Russian regions through the examination of trends in local governments' shares in main types of consolidated regional budget revenues and expenditures. In Section 6, we suggest simple indicators of fiscal decentralization and subordination at the regional level and conduct their statistical analysis. Finally, in Section 7 we run a panel-data regression analysis of potential determinants of the fiscal decentralization process. We also explore relationships between these indicators and regional economic performance. Section 8 brings main conclusions.

# 2. Data

This paper was inspired by the work of Lavrov (1 996a), for which a special database on the structure of the Russian regional budgets for 1992-95 was collected'. Dr. Alexei Lavrov also shared with us the database, which derives from the standard reporting forms filed by regions with the federal Ministry of Finance. He also provided additional budget data for 1996. The database contains data on consolidated budgets for each level of subnational governments (regions, cities of regional status, rayons, cities of rayon status, rural municipalities) for all 89 regions. In a sense we had access to quite a unique data set. Systematic analysis of local budgets in Russia and their relationships with higher level budgets is usually limited by lack of representative data. As a result, the research is based on small samples or case studies (Freinkman and Titov, 1994; Mitcheneck, 1997a; World Bank, 1998; Zhuravskaya, 1997).

The data reflect actual outcomes of annual budget execution (i.e. it is not just agreed budget allocation). According to Russian budget accounting standards, the data include both cash and non-cash components of the actual budget flows, i.e. include budget revenues and expenditures occurred e.g. through barter or cancellation of mutual debts. Also, as is usual for Russian budget statistics, subnational ' Some results of this report were also presented in the paper by Kuznetsova, Lavrov and David (1997).