36

# **VII. Conclusions**

This analysis has demonstrated the high degree of significance of pre-transfer regional revenues and federal transfers to regions in explaining national economy expenditures funded by Russian regions. To a lesser degree, these two variables also influence investment and, to a lesser degree yet, loans to enterprises. But federal transfers are particularly weak in explaining the variation in loans provided by regions.

The implications of the significance of these two supply-side factors is clear: fiscally wealthier regions and those regions that receive more in federal transfers have, on average in the years under examination, spent more on various types of budget subsidies. While it might seem that these two independent variables are associated with two fundamentally different types of regions in Russia (the former being the wealthier, the latter being the needier regions) and that, therefore, a degree of equalization is implicit in the regression results, it should be noted that the determination of federal transfers to the regions is not a completely transparent process and that other studies indicate the flawed nature of the formula used to determine 'heedy" and "very needy" regions.<sup>3 0</sup> Indeed, as Table 6 demonstrates, the comparison of the coefficients of variation for pre-transfer revenue and for total (i.e., post-transfer) revenue indicates no significant movement towards equalization in the regions of Russia as a result of federal transfers.

Although the important question of exactly how and in what amounts federal transfers to the regions are determined is outside the scope of this analysis, it will be recalled that, at least as far as the total amount of transfers to the regions is concerned, it is not a foregone conclusion that the neediest regions receive the most in transfers.

The analysis also suggests that the demand factors, i.e. indicators of regional need for government interventions, are not critical in determining the level of regional budget subsidization. Even when controlling for regional budget wealth, depressed regions (i.e., those which are more affected by industrial decline, unemployment, etc.) tend to spend less on subsidies than regions in a more favorable economic situation. The share of rural population is the demand factor identified in our analysis which has the most substantial impact on subsidy financing.

Of the various components of national economy expenditures, housing receives the lion's share of the contributions of both pre-transfer revenue and transfers, absorbing almost all of transfers' contributions to national economy expenditures by 1995, which means that transfers had next to no effect on subsidies to agriculture, transportation and industry.

Our results represent, in a sense, average effects across all regions and, therefore, are indicators of trends across the country. But they conceal variation within each variable (such as are captured by the residuals in the regressions), an important analytical concern best measured by the coefficient of variation. Most indicators of subsidies show growing inter-regional variation accompanied by reduction in real per capita spending. However, these trends in variation are quite uneven. Thus, the variation in housing subsidies is much wider than that in agriculture,

**30** See, for example, World Bank (1995), Treisman (1996).