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O. Kuznetsova

1. A Classification of Federal Economic Policy Instruments by Their Influence on Regional Development

 

Influence of the federal economic policy on social and political development of regions is exerted via various mechanisms, which are of different nature, and which had been studied to varying degree, etc. At the preliminary stage of the study it seems practical to classify these mechanisms.

 

In terms of the impact of the federal economic policy on regional development all its instruments shall be divided into two components (See Fig. 1). First is the regional (economic) policy (or the governmental regulation of territorial development) per se. There is no generally accepted definition of this term; however the sense of the majority of existing definitions may be formulated as follows. Regional economic policy is a component of the federal economic policy, the single, or the major goal of which is to influence social and economic development of regions. All other goals, even if they exist, are of auxiliary nature.

 

Mechanisms via which the federal economic policy influences regional development, but which are not a component of a regional economic policy are so called "regional consequences of non-regional decisions." In this case it refers to the measures of the federal economic policy, which originally were not intended for influencing these or other regions, but in fact had an impact on regional development.

 

Of course, there are certain decisions, which hardly, or at least arguably, could be considered as components of regional economic policy, or as "regional consequences of non-regional decisions." For instance, coal mining industry in some regions may be supported as such, or just in order to prevent extra social tension in regions. Accordingly, in the first case it is a structural policy, in the second case it is a regional policy, but it becomes possible to give an unambiguous appraisal only when the decision's motivation is known.

 

Instruments of both regional economic policy, and of "regional consequences of non-regional decisions" are divided into administrative and budgetary ones. Administrative measures are considerably less important as compared to budgetary measures, which widely vary.

 

Budgetary measures of regional economic policy may be divided into three components. Fist is the revenue redistribution among budgets at different hierarchical levels, which has been traditionally studied within the framework of inter-budgetary relations, or the fiscal federalism. First of all, it concerns financial aid to regional budgets from the federal budget.

 

The second component is financial aid to enterprises, organizations, and regional population from the federal budget bypassing the regional budget. This aid may exist in very different forms: as subsidies, tax exemptions, loans, credits, guarantees. For the federal budget this aid means both extra expenditures, and less revenues due to revenue preferences.

 

The third component is the redistribution of means via governmental extra-budgetary funds. It may seem arguable to include the funds in the instruments of the federal economic policy concerning regions, since these funds are outside of the federal budget per se. However, in its essence this redistribution is a budgetary measure of regional economic policy as extra-budgetary funds are financed from revenues of fiscal nature, while the legislation governing extra-budgetary funds is determined by federal authorities. Redistribution mechanisms within the framework of extra-budgetary funds are similar to redistribution mechanisms in the framework of the consolidated state budget: insurance premiums or taxes collected on the territories of regions are divided between central offices and territorial branches of the funds; means received by central offices are partly spent to finance centralized measures, and partly as financial aid to those territorial offices of funds, which lack internal resources to perform their functions.

 

The budgetary mechanisms of "regional consequences of non-regional decisions" are understood first of all as direct expenditures from the federal budget in the territories of regions, which are outside of regional economic policy. Among other budgetary measures are those listed as financial aid to enterprises and populace within the framework of regional economic policy excluding subsidies, which are direct expenditures of the federal budget (tax exemptions, loans and credits, guarantees).

 

In terms of the information available of these or those flows of budgetary resources, and of their organizational structure, all instruments of the federal economic policy influencing regional development may be divided into following groups:

 

redistribution of means among budgets at different levels;

redistribution of means within the framework of state extra-budgetary funds;

all direct expenditures of the federal budget in regions;

budgetary measures of indirect nature (tax exemptions, guarantees);

administrative measures.

Instruments of the federal economic policy in this list are placed according to diminishing possibility to analyze them. Redistribution of means between budgets at different levels is registered in statistics on the performance of regional budgets provided by the Finance Ministry of RF, therefore it is possible to evaluate the scope of the financial aid from the federal budget to regional budgets unambiguously. Redistribution of means within the framework of the state extra-budgetary funds are also comprehensively reflected in statistical data (both in reporting forms of extra-budgetary funds, and of the Russian Statistic Agency (Rossiyskoye Statisticheskoye Agentstvo); however due to a persistent tradition they are much less available. A source of information on direct expenditures from the federal budget in regions is the Federal Treasury, the persistent statistical problems arising during analysis of direct expenditures are related to the ongoing process of establishing the system of budget execution through the Treasury. Indirect budgetary measures are only partially reflected by statistics; therefore their importance can not be evaluated unambiguously. Naturally, administrative measures are not accounted for in statistics, the appraisal of their influence on social and economic development of regions is the most difficult problem.

 

The scheme in this study is useful for research (in particular, there is no necessity to divide direct expenditures from the federal budget into belonging and not belonging to regional policies); however, it to a lesser degree reflects the essence of instruments of the federal economic policy.

 

Another classification of measures in the framework of the federal economic policy, which affect the economic development of regions is often used; under this scheme the measures are divided into mechanisms of running and investment support. They combine in all aspects of both regional economic policy, and of "regional consequences of non-regional decisions" (i.e. each group in Fig. 1 could be divided in two parts - running and investment support). This classification is most useful for the evaluation of how the federal economic policy affects regional development.

 

2. Regional Economic Policy

 

While employing similar approaches to understanding regional economic policy as a system of measures aimed at influencing social and political development of regions, Russia and western countries disagree on an important aspect of the instruments of regional economic policy. Western practices do not include inter-budgetary relations dealing only with financial aid to regional enterprises, organizations, and the population.

 

In Russia, on the contrary, inter-budgetary relations (in other words fiscal federalism) is a major component of regional economic policy. Regional economic policy at large (not its individual components) draws relatively less attention. A good illustration of this is the legal base currently in force. Only Presidential Decree No. 806 of June 3, 1996, "On Basic Guidelines for Regional Policy in the Russian Federation" directly concerns regional policy while being rather of declarative than of practical character. Sections on regional economic policy exist in Medium-Term Programs of the Russian Government; however they also consider mainly inter-budgetary relations.

 

The reasons why inter-budgetary relations dominate are rather obvious. Due to limited financial resources the regulation of territorial development is reduced exceptionally to financial aid to regional budgets aimed at covering their running expenditures. Expenditure for implementation of other measures of regional economic policy are minimized.

 

A similar situation exists in the academic sphere. Works on all aspects of territorial regulation are rather scarce. Among few others monograph Gosudarstvo i regiony. Teoriya i praktika gosudarstvennogo regulirovaniya territorial'nogo razvitiya (The State and Regions. Theory and Practice of State Regulation of Territorial Development) by V. N. Leksin (in collaboration with A. N. Shvetsov) and a number of his other individual and co-authored works may be mentioned (books and a series of articles in Rossiyskiy Ekonomicheskiy Zhurnal (Russian Economic Journal) and in other publications). The apparent merit of these works is a reasonable combination of theoretical and practical aspects, often lacking in works of other authors, who underestimate the fact that the scarcity of budgetary resources and the limited scope of state interference in the economic development hinders the implementation of regional policy.

 

No doubt that in the sphere of regional economic policy there remain many unsettled problems both of practical, and of theoretical character. It appears that the major problems are the following.

 

First, in spite of repeated formulation of the regional policy goals both in official documents, and in academic publications there is yet no clear understanding of what problems regional economic policy should be address today. What is permissible degree of inequality among regions in terms of their social and economic situation, in particular, in terms of their budgetary security? In what regions economic development shall be stimulated in the first place? Is it necessary to attempt to achieve accelerated economic development in the most underdeveloped, or in leading regions?

 

Second, the lack of a complex approach to the study of the instruments of regional economic policy. At present individual components of the federal policy towards regions are not studied in their integration, there is no analysis of complementarity (or contradiction) of different instruments and their total effectiveness.

 

2.1. Administrative Measures

 

Singling out administrative measures of the regional economic policy is basing rather on foreign than on Russian practices. The elaboration of a system of permits and bans forming the administrative measures of territorial development is not actual in today's Russia. For instance, programs aimed at restraining growth of large cities, including their industrial development, implemented in developed countries simply do not make sense in the present Russian situation of the downswing in production. Although, certainly, sooner or later the problem of restraining the growth of Moscow will not seem so absolutely unrealistic.

 

2.2. Inter-Budgetary Relations

 

Inter-budgetary relations are the best studied component of the regional economic policy today. They are the subject of numerous studies, publications, and discussions.

 

A separate report was prepared on the problems of fiscal federalism. Therefore, only one circumstance shall be noted. Studies up to date have concerned mainly practical issues. The overwhelming majority of them discuss the possibilities of reforming inter-budgetary relations on the basis of existent theoretical works on the principles of the fiscal federalism (including the necessity to ensure transparency of the budgetary system, independence of budgets at all levels, balance between revenue sources and expenditure authority, etc.). There are no (or they are practically non-existent) studies on further elaboration of theoretical principles of organization of inter-budgetary relations. It appears that this problem is quite actual for Russia. Determination of an optimal level of inter-regional disparities, and therefore the scope of the redistribution of budgetary revenues is of quite practical importance.

 

2.3. Financial Aid to Regional Enterprises, Organizations, and the Populace

 

In order to render financial aid to enterprises, organizations, and the populace a numerous assortment of instruments is employed. They include federal purpose-oriented programs of regional social and economic development, federal investment in individual regional projects, individual decisions on support of social and economic development in certain regions, support to Northern territories, setting of special organizational and legal regimes.

 

In accordance with Presidential Decree "On Basic Guidelines for Regional Policy in the Russian Federation" federal purpose-oriented programs for social and economic development of regions shall be a major instrument of the regional economic policy. The only document regulating this issue is Federal Law No. 115-FZ of July 20, 1995, "On State Prognosis and Programs for Social and Economic Development of the Russian Federation." As it is clear from the title this document concerns not only regional programs, and, as in case of the above mentioned Presidential Decree, is of declarative nature.

 

It appears that the major problem for federal purpose-oriented programs is the lack of clear selection criteria. The necessity to elaborate such criteria is demanded by effectiveness requirements in expenditures of budgetary resources. While looking at the list of adopted programs, it becomes clear that they concern quite different regions in terms of their social and economic situation. There is an impression that adoption of rejection of programs depend exclusively on the scope of initiative regional authorities posses. In practice the lack of selection criteria is easy to overcome: federal purpose-oriented programs are severely underfinanced and with time problems seem to loose their acuteness. Nevertheless, the problem of selection requirements shall be settled as in the situation of scarce budgetary resources any savings are expedient. Moreover, it is well known that in order to achieve principal shifts in social and political development of any region it is necessary to allocate a previously agreed amount of funds while underfinanced projects do not yield expected results.

 

The elaboration of selection criteria for federal purpose-oriented programs shall not be the subject of a special study. It is a part of the general problem of setting the goals of regional economic policy and the choice of regions, economic development of which shall be urgently stimulated.

 

The lack of criteria for selecting priority regions is the major problem for other instruments of the federal support of territories. It is hardly possible to explain the choice of projects for federal investment, choice of regions with special or free economic zones, etc. from the logical point of view.

 

In contradistinction to federal purpose-oriented programs of regional development much more attention the study pays to the support of Northern territories. This problem similarly to the problem of fiscal federalism is the subject of special study. An analysis of different mechanisms of support of Northern territories (housing subsidies to citizens leaving areas in the Extreme North and territories with equal status, the gratis support of the Northern supply, etc.) gives an opportunity to evaluate the diversity of possible methods of financial aid to enterprises, organizations, and the populace.

 

2.4. Financial Flows Between Central and Territorial Offices of State Extra-budgetary Funds

 

Resources accumulated in state extra-budgetary funds equal to about half of the total federal budget. Therefore it is obvious that redistribution of revenues in the framework of extra-budgetary funds is of no less importance than the inter-budgetary redistribution. Nonetheless this problem is paid practically no attention in discussions and studies. The reason seems to be the fact that information on extra-budgetary funds is not transparent. Due to the lack of information suffers study "Komu platit federal'nyi tsentr? Opyt sostavleniya balansa finansovykh potokov" (Whom the Federal Center Pays? An Experiment on Drawing Up A Balance of Financial Flows) (Institut Vostok - Zapad (East - West Institute), which has made the first attempt to evaluate the scope of financial resources redistribution among regions.

 

Financial relations between central and territorial offices of extra-budgetary funds suffer the same shortcomings and problems as relations between the federal and regional budgets: their objectivity is not quite apparent, lack of reasonableness in inter-regional disparities as concerns per capita expenditures, etc. Obviously, all these issues require a study.

 

3. Regional Consequences of Non-Regional Decisions

 

A majority of measures of the federal economic policy influences individual regions unevenly. To follow the impact of each decision the federal authorities take on different regions is very difficult if not impossible at all (many of them cannot be evaluated in quantitative terms). But it is not necessary, it is obvious that the federal economic policy cannot be reduced to solely regional one, and when taking a decision an opportunity to evaluate its impact on different regions does not always present itself.

 

Nevertheless, foreign experience reveals that the problem of coordination of different lines within the federal economic policy (for instance, of regional and structural policies) persists, although varying in acuteness. Even highly developed countries (Germany, UK) experience lack of resources necessary to achieve the required effectiveness of policy, in these cases different lines pursued by federal authorities shall be mutually adjusted.

 

Limited financial resources coupled with the necessity to increase the effectiveness of budgetary expenditures is apparent in Russia. However, the study of regional consequences of non-regional decisions in the Russian conditions is necessary due to a number of other reasons. First, they are of political importance. Understanding of the real role played by the federal budget in individual regions shall shift the emphasis laid in public discussions from issues not relevant to the reality (for instance, the issue of a dozen donor regions) to really important problems of the state regulation of territorial development. Second, a discussion of the role the federal budget and the budgetary sphere at large play in regions will provide extra opportunities for an analysis of the effectiveness of the state economic policy due to increasing number of observations.

 

3.1. Administrative Measures

 

In contradistinction to the measures of regional economic policy, administrative measures exist in the framework of "regional consequences of non-regional decisions." Their impact on regional development is not studied and since they can not be evaluated in quantitative terms such analysis is extremely difficult. The role administrative measures play is much less important than that of budgetary measures; therefore their study is not of primary importance.

 

3.2. Direct Federal Expenditure in Regions

 

Until recently the distribution of direct expenditures from the federal budget has not been a subject of research; only in the beginning of this year there appeared publications on this topic. The weakness of previous studies may be explained by a quite objective reason. The Federal Treasury is the source of statistical data on amounts of direct expenditures of the federal budget in regions. Until the federal budgetary operations were transferred to the Treasury, the financing of federal expenditures had been performed via budgetary accounts of ministries and agencies, from which through a multi-stage system financial resources were transferred to final recipients. Under such a system an analysis of the final distribution of means among regions was a very difficult task.

 

The role played by the Federal Treasury in executing the federal budget enhanced continuously; by 1998 the servicing of more than 98 per cent of budgetary recipients (excluding budgetary recipients of the Defense Ministry, the Chechen Republic and the Republic of Tatarstan, where territorial offices of the Treasury did not operate, i.e. non-Treasury execution of the federal budget partly lasted out) was transferred to the Treasury. The figures of 1998 may be evaluated as close to the reality.

 

Up to now the major work concerning the problems of the distribution of direct expenditures of the federal budget has been "Komu platit federal'nyi tsentr? Opyt sostavleniya balansa finansovykh potokov" (Whom the Federal Center Pays? An Experiment on Drawing Up A Balance of Financial Flows). In the framework of this study an analysis of the distribution of direct expenditures from the federal budget among regions was accompanied by a calculation of the balance of financial flows between the federal and regional budgets, and consolidated regional budgets were considered (revenues and expenditures of the federal, regional, and local budgets in the region's territory).

 

However, the above mentioned study is only the first step towards elaboration of this topic. The distribution of direct expenditures of the federal budget deserves much more attention. The major question still to be clarified is the objectivity of direct expenditures distribution across regions, and the possibility to optimize it. The problem of elaboration and approval of the federal budget in territorial aspects is also of interest.

 

3.3. Other Budgetary Measures

 

Mechanisms of the federal economic policy included in this section are numerous and widely diverse. They include various tax exemptions, credits, loans, and guarantees. No doubt, their influence varies considerably across regions, especially regarding measures applied to individual sectors. Many of these measures can not be evaluated in quantitative terms at this time; therefore an analysis of the influence they exert on regional development, similarly to administrative measures, presents great difficulties.

 

4. General Problems

 

Among other problems there is an important issue, which practically has not been studied up to now, i.e. the interrelation of different instruments of the federal economic policy and their impact on regional development. To analyze the influence the whole complex of measures of the federal policy on regions is impossible, at least at this time. However, the actual task of evaluating the complementarity or inconsistency of those lines of the federal policy towards regions, which can be analyzed, shall be coped with. The results of such a study may be used for achieving more effective distribution of the federal financial aid among regions.

 

A comparison of data on the regional economic policy pursued by the federal authorities with the economic policies pursued by regional authorities shall present an opportunity to evaluate the role the state (the budgetary sphere) plays in each individual region and the effectiveness of different models of the state regulation of social and economic development.

 

Annex. Research Topics

 

1. Direct Expenditure from the Federal Budget in Federation's Subjects

 

Research objectives: an analysis of the distribution of direct expenditures of the federal budget among regions (a more detailed analysis as compared with those already carried out), evaluation of its objectivity and of its impact on the social and economic development of regions; elaboration of recommendations on optimizing the distribution of direct expenditures and on a cross-territorial analysis of the federal budget.

 

2. Federal Economic Policy Mechanisms of Influencing Regional Social and Economic Development

 

Research objectives: to inventory the existing federal economic policy mechanisms influencing regional social and economic development (financial aid to regional budgets, direct expenditures from the federal budget, federal purpose-oriented programs of regional development, probably, regional consequences of non-regional decisions), an analysis of their interrelation (same or different directions of running and investment support, etc.); elaboration of recommendations on coordination of different lines of the federal economic policy concerning regions.

 

3. Interregional Redistribution of Revenues in the Framework of State Extra-Budgetary Funds

 

Research objectives: collection of necessary information; an analysis of revenue redistribution between central and territorial offices of the Pension Fund, the Fund of Social Insurance, the Fund of Mandatory Medical Insurance, the State Fund for Population's Employment, the Road Fund, the evaluation of its objectivity and effectiveness; elaboration of recommendations for optimization of revenue redistribution within the framework of state extra-budgetary funds.