Fiscal Federalism and Regional Performance

Sound regional policies are essential for balanced and sustained economic growth. The interaction of federal and regional policies with cross-regional structural differences affect human and physical capital formation, the business climate, private investment, market depth, and competition. This paper summarizes the main elements of Russia's fiscal federalism, describes the channels through which it operates, and assesses the effectiveness of regional transfers in reducing regional disparities. The results suggest that federal transfers to regions contributed to reducing disparities arising from heterogeneous regional tax bases and fi scal revenues. This allowed regions with initially lower per capita income to increase human and physical capital at higher rates. There is little evidence for transfers contributing to increased cross-regional growth synchronization. The results also suggest that federal transfers did not signifi cantly improve regional fi scal sustainability, a conclusion that is supported by the lack of convergence in per capita real income across Russian regions in the last 15 years.

Sound regional policies are essential for balanced and sustained economic growth. The interaction of federal and regional policies with cross-regional structural differences affects human and physical capital formation, the business climate, private investment, market depth, and competition. This paper summarizes the main elements of Russia’s fiscal federalism, describes the channels through which it operates, and assesses the effectiveness of regional transfers in reducing regional disparities. The results suggest that federal transfers to regions contributed to reducing disparities arising from heterogeneous regional tax bases and fiscal revenues. This allowed regions with initially lower per capita income to increase human and physical capital at higher rates. There is little evidence for transfers contributing to increased cross-regional growth synchronization. The results also suggest that federal transfers did not significantly improve regional fiscal sustainability, a conclusion that is supported by the lack of convergence in per capita real income across Russian regions in the last 15 years.

Introduction

During the late 1970s and early 1980s, many African countries experienced a profound slowdown in economic growth. The growth rate of real per capita GDP fell from 0.4% per year during the 1973-80 period to 1.2% per year during the 1980-89 period.' The causes-internal and external-of Africa's economic decline and the strategies for restoring economic growth are much debated. Nevertheless, broad consensus has emerged on the importance of (i) increasing total investment and (ii) promoting private-sector development and increasing its share of total investment for long-term growth.2 It is widely recognized that gross domestic investment fell substantially in Africa during the 1980s and remains severely depressed across the region. The proportion of total domestic investment in GDP fell from 20.8% per year during 1973-80 to 16.1% per year during 1980-89. In some countries, investment has fallen to less than 10% of GDP-a level that is insufficient even to replace depreciated capital. In Africa, the minimum investment needed to replace depreciated capital is estimated at 13% of GDP.3 In recent years, there has also been a growing recognition among many African leaders, faced with new realism and pragmatism, that the private sector could play a significant role in economic development. The focus in the longer term of structural adjustment programs and sectoral reforms adopted by these countries is on creating more appropriate incentives and a framework for private-sector development as the basis for achieving sustainable economic growth. In addition, multilateral and bilateral institutions have developed new initiatives with priorities for private-sector development. In 1989, the International Finance Corporation, an affiliate of the World Bank, es-

Subsidies funded by Russia's regional governments represented about 5.2 percent of GDP in 1995, almost triple the 2 percent of GDP in subsidies funded by the federal government. Regional policies vary greatly, influenced more by local factors than by the federal government. To find out what affects the regional governments' propensity to subsidize, the authors examined available data for 1992-95, asking: How great is the variation across regions in the incidence of subsidies, and what are recent trends in such variation? What are the relative influences of supply and demand factors in shaping the current levels of subsidy? How do federal budget transfers affect regionally funded subsidies to local enterprises? To what extent are federal transfers distortionary, encouraging subsidies and postphoning the liberalization of local markets? Their findings: 1) Regional wealth and federal budget transfers to regional governments are two of the most important determinants of regional propensity to subsidize. 2) Even when regional budgetary wealth is controlled for, depressed regions (those affected most by industrial decline and unemployment) tend to spend less on subsidies than regions with more favorable economies. 3) Federal budget transfers are quite distortionary, that is, they encourage regional governments to continue subsidy policies and postpone structural reforms. In fact, federal transfers tend to be concerned in regions with the most distortionary policies. 4) Housing receives the lion's share of total regional subsidies, and there are greater disparities in housing subsidies than in agricultural subsidies. 5) Housing and transportation subsidies are strongly counter-equalizing: Households in wealthier regions receive more in housing subsidies and rural populations have less access to those subsidies, so up to 30 percent of regional subsidies are questionable in terms of equity. 6) Federal transfers have less effect on regional subsidies in agriculture, which are influenced more by the region's own tax base and its share of rural population or by such factors as the political influence of local interest groups. 7) To accelerate structural reforms, the federal government might consider reducing the number of recipients of federal budget transfers and changing the rules of allocation of the transfers, in particular by introducing conditional transfers linked to increases in cost recovery.

Canada’s equalization program is supposed to ensure that provinces that lack the same ability to raise revenue as other provinces, due to economic differences, are still able to provide their residents with roughly similar levels of public service. The equalization program itself is ostensibly based on a formulaic approach, with automatic equalization payments kicking in where and when they are needed, while federal social transfers to the provinces are, at least by name, purportedly intended to support the social spending needs of those provinces. This is how things are supposed to work, anyway. But both equalization payments and social transfers are, inevitably, arranged by federal politicians, and politicians have a natural tendency to behave politically. An analysis shows that, in many cases, the amount of money a province receives in federal transfers is correlated with the way that province voted during federal elections. In other words, when a province exhibited dominant support for the national party that controls the federal purse strings, that province often received a greater share of federal transfers. Where provinces were largely unsupportive in a federal election for the victorious party, they were more likely to see their share of federal transfers shrink. This dynamic ultimately defeats the real purpose of federal transfers, which are intended to assist based on need, not based on political support. When transfer programs are modified for reasons other than need, one might rightly worry about suboptimal use of scarce public resources, while publicly undermining the legitimacy of what may be, in principle, worthy federal programs. Protecting against the influence of politics in such programs is vital to maximizing their efficiency and retaining their credibility. These programs can be redesigned in ways that safeguard against political interference. Appointing an independent body to manage fiscal transfer programs could be an important first step, as would putting constraints on the ability of the federal government to impose sudden floors and ceilings on transfers, or to cut special side deals with individual provinces or regions. Politicians will always behave politically; it is important to find ways to keep them from letting politics distort the principles of federal-provincial transfers.

The paper discusses the mechanisms that integrate environmental issues into regional policies in Germany. While spatial planning incorporates environmental targets and lays down restrictions on land‐use, it does not set financial incentives. Therefore, environmental protection aims are often overriden by economic development interests. In contrast, regional economic policy attempts to reduce economic disparities between regions by stimulating regional growth and mobilizing the development potential in structurally weak regions. The Joint Task ‘Improvement of regional economic structures’ (GRW) mainly supports industrial investment by private companies and investment in economic infrastructure. GRW funding may improve environmental quality by modernizing old facilities, supporting specific environmental investments by private firms or improving environmental infrastructure. However, regional economic policy as practised by the GRW has also negative impacts for the environment, because accelerated regional growth is often in conflict with environmental protection and conservation goals. The GRW contains some ‘negative restrictions’ to solve this conflict: GRW assistance is only granted if the investor complies with all federal, Länder and local environmental regulations as well as the restrictions on land use laid down by town and country planning.While regional economic policy takes account of the interdependencies between regional and environmental policy, it generally does not attempt to exploit potentials for simultaneous improvement of environmental conditions and economic development (‘environmental gain’), but mainly reduces negative repercussions of economic growth. However, there is scope for a more positive integration of environmental factors that would not require drastic changes of the current GRW framework. Important steps of such a reform include a greater emphasis on integration making environment an essential aspect of GRW assistance and establishing linkages between environmental targets, environmental criteria, environmental indicators and monitoring systems. Within this context, we discuss why the realization of environmental goals can improve regional economic development, how regional policy can promote measures that will encourage the detection and realization of such opportunities and how to change the institutional design of the GRW in order to secure environmental gain.The environmental impacts of regional policy are an important theme for European and national policymakers. Regional policies can influence the environment via different channels. On the one hand, they may directly improve the environment by supporting environmental projects. However, on the other hand there are also – often unintended and indirect – negative effects that must be taken into consideration. This paper discusses some of the mechanisms that attempt to integrate environmental issues into regional policies in Germany. In this context, it is useful to distinguish between spatial planning (town and country planning) and regional economic policy. Copyright © 2001 John Wiley & Sons, Ltd and ERP Environment

Military spending and sustainable economic development have been widely discussed in recent decades. Especially in Romania, the defense budget is valued at $4.8 billion, registering a compound annual growth rate (CAGR) of 23.57%. It is also expected to reach $7.6 billion in 2023, according to a report by Strategic Defense Intelligence. There is no consensus in current research and less attention is paid to Eastern European countries. Considering the significant increase in military spending in Romania in recent years, as well as the occurrence of political events, this paper focuses on the dynamic causal relationship between military spending and sustainable economic growth in Romania. The bootstrap rolling window causality test takes into account the structural changes, and therefore, provides more convincing results. The results indicate negative effects of military expenditure on sustainable economic growth between 1996–1999 and 2002–2004. It can be attributed to the crowding-out effect of public expenditure on private investment. The positive effect between the two variables analyzed is noticed with the accession of Romania to the North Atlantic Treaty Organization. Conversely, it is found that economic growth does not have a significant effect on military spending in Romania. Policymakers should guard against the crowding out of private consumption and investment due to excessive military spending and ensure to increase military expenditure on the premise of sustainable economic development.

As the global financial and economic crisis hit the European Union, no country was left unharmed. To this day, the Member States share the burden of excessive foreign debt, inflation, budget deficit, high unemployment levels, shaken stability of the currency, and many more. Multiple responses were introduced to these damaging effects, including adopting changes to the use of the Globalisation Adjustment Fund, enabling a Financial Stability Mechanism for the Euro zone and introducing a number of micro-financing instruments, particularly to support SMEs. Nevertheless, these have all been short-term actions, which will not suffice to ensure a long-term, sustainable economic growth of the European economies and maintain the EU's position among global political and economic leaders. European leaders have adopted the Europe 2020 strategy for economic growth, which addresses all key-areas of economic growth - from innovations to employment and environment. Yet, the greatest challenge to this goal remains regional cohesion - namely, full economic and social convergence of the regions and Member States of the European Union. After thirty six years of a common Regional policy and over twelve years since the creation of the Cohesion policy, the remaining economic and social disparities within the Union are striking. What is more, the distribution of cohesion financing, similarly to the Common Agricultural policy direct payments, continues to portray a significant weakness in the common objectives of fair competition and solidarity among Member States. Within the next multiannual financial framework of 2014-2020, Regional and Cohesion policy of the EU will have a fundamental importance in eliminating existing disparities among regions, providing for a sustainable economic growth, increasing the EU's competitiveness and implementing the ambitious Europe 2020 goals. It can therefore be considered as a key element in Europe's economic recovery. This paper provides an analytical examination of the goals, strategies and current trends in the Regional and Cohesion policy as a tool of economic growth of the European Union. It provides a brief insight into the history, objectives and functioning of the policy in order to continue with analysis of its results and provide recommendations for improvement of the policy and increase its positive impact on the EU's economic development. Materials, statistics, working documents and analysis provided by EU and national institutions, as well as independent analysts have been used in the production of this paper. Results and conclusion are presented in a descriptive, logically constructive manner of synthesis. More specifically, the paper concludes by stating that in order to achieve full convergence and be able to ensure sustainable economic recovery and growth throughout the EU, greater flexibility and sovereignty need to be employed in political decision-making and regulations on allocation of funds. To raise the positive effects on Member States' economies, equality must be ensured to attain the Union's strategic goals without harming the weakest Member States' economies and competitiveness. It is therefore essential that the convergence objective be formulated as the leading goal of the Regional and Cohesion policy. Policies under the upcoming multiannual financial framework must be results-oriented. The EU's economic recovery, hence, also its Regional and Cohesion policy and allocation of funds, have to reflect the practice of fair competition, solidarity and equality. Only then will the European Union be able to fulfil its political and economic ambitions. DOI: http://dx.doi.org/10.5755/j01.eis.0.5.1092

This article uses the Solow growth model and the panel data method to examine the effect of trade liberalization and the federal equalization transfers on income convergence among Canadian provinces between 1981 and 2006. Estimation problems of weak instruments and endogenous regressors are addressed by the use of a system Generalized Method of Moment (GMM) estimator. The results from the empirical analysis indicate that the current rate of convergence of Personal Income (PI) in Canada is 4.41% per year. This rate is considerably higher than the range of 1.80 and 2.41% per year that previous studies using least-square estimators have reported. The findings from the policy analysis show that the launching and expansion of the North America regional integration have de-accelerated the convergence speed for Canadian provinces by 3.99 and 3.15% per year, respectively. However, consistent with the results from previous studies, the fiscal transfers, which are part of the federal equalization programme, have accelerated the convergence speed for Canadian provinces.

We evaluate the economic consequences of immigration in a two-country, two-skill, overlapping-generations framework, where immigration, population, human and physical capital formation, and economic growth are endogenous variables. We go beyond extant literature by integrating physical capital in our model. This enables the derivation of new insights about the induced-immigration effects of exogenous triggers, including pull and push factors and policy variables, on the dynamic evolution of the “immigration surplus” in the short run versus the long run, in destination vs. source countries and in the global economy. The policy shifts we analyze include the easing of constraints on potential migrants’ labor and physical capital mobility, and the role of physical capital endowments. We also discuss the policy implications of asymmetries in the net benefits from immigration across destination and source countries. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

This paper analyzes the case for fiscal federal transfers in a Monetary Union. Looking at the labor market structure, it emphasizes the incentive effect of any federal transfer scheme insuring workers against bad draws. When the wage negociation process occurs at the national level and the federal government has incomplete information on the bargaining process, workers have an incentive to ask ex-ante for higher wages. This may negatively affect the macroeconomic performance in the federation. The First Best solution consists in shifting the wage bargaining process from the national to the federal level. Decentralization of fiscal policy would solve the incentive problem. However, looking at the fiscal federalism issue, we show that it is always optimal to keep federal transfers. Moreover, decentralized policies are only effective when access to financial markets is imperfect. Thus the paper makes a strong case in favor of centralization.

THIS ARTICLE IS A REVIEW OF THE ECONOMIC SITUATION AND PROSPECTS of an 'emerging' Russian province, Samara. The account of a single region will serve as a basis for formulating testable hypotheses about the factors influencing the differences in economic adaptation amongst Russian regions. Samara has begun to appear in short-lists of economically promising Russian provinces. In Bank Austria's mid-1996 assessments of the 89 Russian administrative regions, for example, it appears, along with Moscow City and its neighbouring region of Saratov, as one of only three Russian regions where the environment for foreign investment is reckoned to be unequivocally favourable.1 Such ratings both reflect and stimulate foreign business investment. In the first half of 1996, according to the oblast' statistics, the region received $29.4 million in foreign direct investment.2 The development of market institutions in the province has been striking. In 1994 Samara already housed one of only eight Russian foreign currency exchanges. In July 1996 it became part of the Russian Trading System (RTS), linking it with Moscow and six other major centres in on-line securities transactions. It also became a federally-approved trading centre for government securities.3 From previous work on Russian regional data, it appears that there are two types of Russian regions that have survived better than most the post-1989 collapse of Russian output: those with major deposits of exportable raw materials, and a small number of regions that contain emerging commercial and financial centres. Samara comes into the latter category, along with Moscow (city and oblast' together), St Petersburg, Sverdlovsk and Novosibirsk. Such survivor regions, whether raw-material or emerging-commercial, have in common a relatively high inflow of foreign currency (postuplenie valyuty) per head of population. This characteristic is positively and significantly related to per capita real incomes.4 Appendix 1 assembles some numerical indicators of Samara's economic status within Russia. Appendix 2 contains some data on the composition of the region's economic activity by type of ownership. Unfortunately, these data for Samara cannot be compared with equivalent data across all Russian regions because such data have so far been published for only a few regions. My purpose in this article is to identify and describe more fully the characteristics

Rural development is understood as a socio-economic process that consists of desired and positive qualitative and quantitative changes, leading to increased efficiency and productivity of rural businesses and the usefulness of rural households. This is in many ways determined by and at the same time embedded in the socio-economic development beyond local and regional level, and, consequently, also in general economic development. However, financial variables, including fiscal ones, quite rarely determine rural development. Therefore, the main objective of the article is to reduce this cognitive gap, which is of great importance also for regional and agri-food policy. The analysis is centered around the theory and practical achievements of fiscal federalism, which is a sub-discipline of public finances. According to this, the Author starts with presenting general assumptions of fiscal and environmental federalism. Then, focus is shifted to controversies related to fiscal decentralization in order to move on inter-jurisdictional competition and cooperation. In the background of this part of the analysis there is the Tiebout model, which is one of the most interesting conceptualizations of local and regional development mechanism. In the final part of the article the Author presents the key elements of Buchanan’s theory of club goods as a tool for optimizing the size of the local units.

Fiscal policy has recently been encouraged to increase competition, monitor Africa’s debt to GDP and improve its economic growth. Importantly, the present fiscal situation in most African countries will seem to have significant consequences for both public and private investments. This paper examines whether fiscal policy and investment matters for GDP growth in a panel of forty-eight (48) African countries for the period 1970-2017. The empirical evidence explored is based on the Fixed Effect (FE) and System Generalised Method of Moment (GMM) estimators. The results suggest that public and private investment among selected African countries has a positive impact on GDP growth. The findings further indicate that fiscal policies must play a more prominent role in sustaining potential private and public investments, especially as debt servicing among the African’ countries examined may have serious shortcomings on sustainable economic growth