42 consequently all reported t-statistics are calculated with the White heteroskedasticity-consistent errors of OLS coefficients.

standard

# 8. Conclusions.

The analysis of the data on the structure of regional budgets for 1992-96 suggests that, while quite substantive, the relative share of local governments in the Russian consolidated budget did not expand since 1994 and they remain in control of about a quarter of total budget expenditures. However, at the subnational level, the relative size of the local budgets increased at the expense of some compression in regional budgets. 1996 was the first year, when local governments collected more budget revenues (6.4% of GDP) and spent more than regional administrations. At the same time, the relative role of local governments has been substantially increasing in all sorts of social financing including education, health, and social protection. With a growing share of federal budget spent on debt service, the role of the federal government in financing public goods and services increasingly becomes less important.

The cross-regional variation in degree of decentralization of subnational budgets is high and so far does not show any decline. Variation in revenue sharing is much more serious than variation on the expenditure side, where common and stable patterns in expenditure assignments are quite noticeable (e.g. in education and health). All major taxes remain to be shared between three government levels, and no progress has made towards a more transparent system of tax assignments.

Main factors that could explain this variation in the degree of decentralization are the level of poverty and an administrative status of the region. Regions, which have been historically less wealthy, have a more centralized budget system. This seems to represent a global phenomena: urbanization, growth in education, and decentralization are closely inter-related, and all positively related to growth.

There is a major difference in budget arrangements between ethnically Russian regions and national republics and okrugs. In both cases, the average level of expenditure decentralization is similar but the contrasts on a revenue side are striking. In the case of oblasts and krais, decentralization has been evolving through the provision of local authorities with a bigger share of subnational tax revenues, whereas in republics and autonomous okrugs (before 1996) the expansion of local outlays has been financed through larger interbudgetary transfers from regional governments. We describe two various patterns of fiscal evolution: the former could be called "true decentralization", the latter may be described as a "redistribution model".

There is also a significant correlation between decentralization and geographic location. Regions situated in close proximity tend to have similar budget arrangements. Interactions between neighbors in the area of budget settings seem to be quite intensive and probably are supported through activities of local regional associations. The size of region's territory does not influence the decentralization outcome.

The analysis provides quite robust and statistically significant estimates of the impact of decentralization on fiscal and economic performance. In particular, when we control for other social variables such as real per capita income, fiscal decentralization is positively related to the share of education spending in regional consolidated budgets. Regions with more decentralized finances tend to have a lower economic decline. These results seems to be fully consistent with conventional predictions of the decentralization theory that underline potential positive growth impact of decentralization.

At the same time, negative correlation between decentralization and regional budget balance suggests that overall budget control is weaker in more decentralized regions. Instability and non-