POLICY RESEARCH WORKING PAPER 3000

# Summary findings

To shed light on decentralization in Russia, Freinkman and Yossifov examine intergovernmental fiscal relations within regions. To analyze trends, they review channels - of fiscal allocation within regions tax sharing and local transfer schemes. To evaluate the potential impact of various fiscal decentralization patterns on regional economic performance (including growth and the budget deficit), they study data on the structure of 89 Russian consolidated regional budgets for 1992-96.

They find that local governments' relative share of Russia's consolidated budget, although substantive (roughly a quarter of the total budget), did not expand after 1994. The federal government's relative role in financing public goods and services declined as the relative role of local governments increased substantially. Local governments collected more revenues in 1996 (6.4 percent of GDP) and spent more than regional governments. They also substantially increased social financing (including health, education, and social protection).

Russia made no progress toward a more transparent system for tax assignments.

The average level of expenditure decentralization is similar for ethnically Russian regions and national republics and _okrugs_ but revenue arrangements differ greatly. "True" decentralization has taken place in _oblasts_ and _krais,_ where local authorities are provided with a bigger share of subnational tax revenues. A redistribution model applies in republics and autonomous _okrugs,_ where greater local outlays have been financed through larger transfers from regional governments.

Regions near each other tend to have similar budget arrangements - the result of intensive interactions between neighbors and probably supported by the activities of regional associations. The size of a region's territory does not influence decentralization outcomes.

Fiscal decentralization seems positively related to the share of education spending in regional budgets. And regions with more decentralized finances tend to experience less economic decline.

But budget control is weaker in more decentralized regions. Instability and lack of transparency in intergovernmental fiscal relations provide subnational governments little incentive for responsible fiscal policy. Further decentralization with-out greater transparency could bring greater debt and deficits.

This paper-a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region -is partof a larger effortin the unit to studyfiscal decentralization in transition economies. Copies of the paperare available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Zakia Nekaien-Nowrouz, room 04150, telephone 202-473-9057, fax 202-522-3607, Internet address znekaiennowrouzCaworldbank.org. Policy Research Working Papers are also posted on the Web at http://wwxv.worldbank.org/html/dec/Publications/Workpapers/home.html. Lev Freinkman may be contacted at lfreinkman@avworldbank.org. April 1999. (50 pages) _The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. 7'he papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent._ Produced by the Policy Research Dissemination Center