Reform Strategies and Economic Performance: The Russian Far East as Compared to Other Regions

Abstract

As compared to other Russian regions, the Far East regions do not perform differently in terms of output and investment change. Initial conditions (resource advantages) and the strength of the institutions (the ability of the authorities to contain investment risk and shadow economy and to promote business climate favorable for the emergence of small businesses) have considerable impact on output and investment. But there is no evidence that economic reforms in the regions (deregulation of prices, small privatization) pay off in a sense that they lead to better output and investment dynamics. In contrast, for interpreting regional differences in per capita income change, reform progress is an important explanatory variable. It turns out that the major impact of reforms was not to boost output and investment, but to redirect incomes into the pro-reform regions (also the regions with larger shadow economy, lower investment risk and better business climate for small enterprises, liberal-minded electorate and lower increases in crime rates). However, changes in personal income in the Far East lag behind those in other regions with similar output performance. This Far East “income under-performance” phenomenon is explained by (1) by the reduction of subsidies in the 1990s that were used before transition to finance greater costs of housing and social infrastructure in the Far East, (2) by the income adjustment (rather than employment and output adjustment) of the Far East regions facing the challenge of restructuring. In contrast to Central Europe, this former type of adjustment was more typical for Russian enterprises facing competitive pressure.