2 budgets are separated and do not include financial operations of municipal companies (other than budget subsidies to these companies).

We explored the database with a special focus on decentralization of consolidated regional budgets. The major differences in our approach compared to the one in Lavrov (1996a) include: (a) We consolidated all types of local governments (i.e. governments below the regional level) and did not try to look at any differences between them. While budget mechanisms in different types of municipalities are quite different (especially between major cities and rural rayons and municipalities), these differences are less important from a decentralization perspective compared to a fundamental contrast between municipalities in general and regional administrations. At the same time, the size of the consolidated budget of all municipalities in each particular region is usually determined by the budgets of few largest cities that amount to 70-80% of the total. Thus, the share of all local budgets in the regional fiscal system could be considered as a proxy for the relative budget role of the largest urban municipalities. As it is shown below, the latter could be a potentially important variable related to the economic performance of regions.

(b) We excluded all interbudgetary transfers within the regions from further consideration. Netting out interbudgetary transfers is important, because the direct summation of total revenues/expenditures results in a substantial double counting and to overestimation of the real amount of fiscal resources being controlled by local governments. Because of a multi-level structure of local governments in Russia, intergovernment fiscal flows are quite intensive and could amount to 30% of gross (i.e. including transfers) total local budget revenues (see also Data Appendices).

(c) We excluded the cities of Moscow and St. Petersburg, which have a double status of "regionmunicipality" from the analysis. Given their weight in the total fiscal flows, such exclusion may change substantially statistical characteristics of the sample and influence conclusions of the analysis.

(d) Compared to the original work by Lavrov (1 996a), we tried to develop a more comprehensive statistical analysis of the data, including cross-regional variation of main parameters and factor analysis of decentralization.

(e) Finally, we have used the data to explore the links between decentralization and regional economic performance, which provides an opportunity to compare some conventional predictions of the decentralization theory with actual numbers.

Also, we've had an opportunity to incorporate the 1996 budget outcomes into the database. Given considerable stabilization efforts in Russia in 1995 such an extension may provide important additional information. Data on 1996 reflect some initial post-stabilization fiscal realities, which could be different from the trends observed during the inflationary phase of 1992-95.

All data on the federal budget is based on the reports from the Ministry of Finance with some adjustments done by the staff of the World Bank (Le Houerou, 1995; World Bank, 1998) to incorporate major types of off-budget operations of the central government. As usual in this kind of analysis, we do not consider here main extra-budgetary funds (such as the Pension fund) which operate outside of the traditional government budget.

An important caveat relates to the quality of the data, that was affected by various incentives of local governments to underreport their budget revenues and hide them using all kinds of extrabudgetary accounts (World Bank, 1998). Still, we believe that the data quality is sufficient for adequate evaluation of prevailing trends in the subnational budget system.