Fiscal decentralization and economic transition in the Russian Federation: The determinants of regional public and private investment

The dissertation comprises two essays examining the determinants of public and private investment at the regional (oblast) level during the first decade of Russia's transition to market democracy, focusing on the effects of federal institutions, regional government policies, factor mobility and regional economic structure.;The first essay addresses the debate within the fiscal federalism literature as to whether fiscal redistribution among subnational governments creates a disincentive for them to promote local economic growth through public investment. A model of local government expenditure allocation with asymmetrical regional endowments shows that revenue redistribution from rich to poor regions diverts public spending from investment to consumption, because raising private income through infrastructure investment results in higher taxes and/or reduced subsidies. Random effects estimation of a 74-region panel covering 1994–1997 shows that, controlling for regional income, the budget share and per capita level of regional public investment depends negatively on federal subsidization. This effect is particularly strong for wealthier oblasts and non-republics, whose income from subsidies is more volatile than that of poorer regions and republics.;The second essay explores the determinants of regional private investment, comparing domestic and foreign investment, with emphasis on the effects of regional government policies and local economic structure. A general equilibrium model of a regional economy with non-traded goods, industrial specialization and public inputs is constructed to predict the impact of economic liberalization on regional capital returns. Random effects estimation of a 73-region panel covering 1995–1999 shows that, whereas foreign direct investment in the Russian regions follows the pattern predicted by the model, flowing into regions with better endowments and public policies, domestic investment is tightly linked with local income and largely unresponsive to the regional policy environment. However, some increase in domestic capital's elasticity to regional government market-orientation is detectable in the last two years of the test period. Analysis of the effect of the 1998 ruble devaluation, which constituted a large relative price shock in favor of import-competing goods, shows that it shifted investment from regions rich in natural resources to those with more dynamic industrial sectors.