Russian Federalism: Economic Reform and Political Behavior

Abstract

This paper explores the implications from Russian federalism of the "new" interregional economic inequality produced by the structural distortions inherited from the central planning, and immaturity of the Russian markets. As a result, regional preferences over federal policies are widely diverse, which makes a nation-wide consensus hard to reach. It is argued in the paper that high correlation between political and regional divides in Russia renders the federation unstable and that the instability, in its turn, reproduces interregional disparities. These links are also illustrated by a simple equilibrium model presented in the Appendix. When the federal legislative bodies are "uprooted", captured by extra-territorial narrowly based interest groups, and lose their accountability to the voters, regional administrations emerge as representatives of their jurisdictions on the federal scene, and decision-making at the federal level assumes the form of federal-provincial bargaining. Such bargaining entails vast efficiency losses, since the federal administration is pressed to spend its resources for buying compliance of regional counterparts, instead of providing mandated public goods. It is stated in conclusion, that until markets integrate Russian regions and hence locally based political interests, the country will be failing to develop "market-preserving federalism" (Weingast, 1995), i.e. a federal system which stimulates economic growth and imposes self-enforcing restrictions on counterproductive discretion of public officials.

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