Russian Economic Reform

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Regional “decentralization” – realistic or not?

Published on October 30 2011
Posted by: jeff

A working group on “decentralization of power” led by vice-premier Dmitry Kosak is due to present a report to President Medvedev by 1 December. Medvedev has in the past pushed the idea of greater decentralization of power, and his economic adviser Arkady Dvorkovich has suggested the introduction of regional sales taxes to increase regional fiscal autonomy.

According to an article in “Vedomosti”, the Kosak working group has considered the possibility of abolishing the post of presidential plenipotentiary to Federal Districts – which, on the face of it, would be a move toward “decentralization”. Each of the 8 plenipotentiary Federal Districts encompasses a number of the 83 Russian regions (oblasts, krais, republics, federal cities).

The role of plenipotentiary was introduced by the Vladimir Putin in 2000 to help enforce presidential directions in regions, but with the abolition of elected governors in 2004 there became less need for the plenipotentiaries. Nevertheless, they continued to exist, and the positions to some degree became, according to some officials, little more than places of “honorable retirement” for formerly influential officials.

The one exception to this is the plenipotentiary to the more recently created North Caucasus Federal District, Alexander Khloponin, who also has the status of a vice-premier. Unlike most of the other plenipotentiaries, Khloponin was picked because of his business experience in an effort the boost the economy in this volatile part of Russia. He thus – according to officials – “co-ordinates financial flows from the center” as well as handling political issues.

So, it is not a surprise that, apart for abolition of the plenipotentiaries, the Kosak working group has also considered changing their role to an economic one as part of a new government department under the prime minister. An official of the Ministry of Economic Development suggested to “Vedomosti” that the department thought the idea had merit.   

Such a proposal would seem to run counter to a “decentralization” agenda. However, in my view, it makes a lot of sense for a number of reasons.

Firstly, 83 regions in their slightly varied legal forms and huge differences in population (about one third have a population of less than 1 million) is a ridiculously large number of entities to have a directly relationship with the central government in Moscow. It can only be unwieldy and highly inefficient.

Secondly, many are very poor and will never be viable entities with any significant degree of economic self-sufficiency. Standard & Poor, in a recent report said that ten of the 83 regions provide 50% of Russian GDP. It described the taxation system as “hyper-centralized” with the regions able to “regulate” only 7-8% of their own income – and is mainly not tax. The eventual introduction of a tax on “real-estate” (to replace the existing taxes on land and property) may lead to some changes, but the reality of huge “vertical fiscal imbalance” (to use an Australian term, which is used to describe Australia’s own problems in such an area) is not going to go away.  Moreover, Standard & Poor also notes that while Medvedev has promised “decentralization” of responsibilities, there has been little attempt to give the regions new sources of income – and that they have been loaded up with unfinanced social obligations (such as in some areas of education).

Thirdly, Vladimir Mau from the Russian Academy of National Economy, who is one of the coordinators of the Strategy2020 project, recently made a sensible observation that “internal migration” could assist national economic growth in the face of a declining population and labor force: “It is therefore necessary to review and possibly redirect the flow of labor within the country, with strong incentives for labor to move to places of economic growth.” Any incentive program along these lines would be totally chaotic without some mechanism to deal with most of the smaller regions in groups – and 8 economically empowered (and economically competent) plenipotentiaries could possible perform this role quite well.

I have previously wtitten on this issue – including on the work of Expert Group 12 (see right-hand side column).

As a final thought, it might be that economically empowered plenipotentiaries would make a return of elections for regional governors more acceptable to Moscow. Moreover, if a sales tax was to be introduced in order to decentralize taxation revenues it might best be done at the Federal District level.

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