Incentive Effects of Fiscal Equalization

The effects of intergovernmental fiscal arrangements on variation in regional economic growth are analyzed for Russia, a country with large cross-regional differences and considerable fiscal redistribution. Moreover, fiscal reforms implemented in the first half of the 2000s, which to some extent followed scientific advice, make analysis of this case particularly interesting. We observe that postreform fiscal redistribution became more rational, and this resulted in fewer incentive distortions. We found no negative association between federal transfers and regional growth. Furthermore, there are no major differences among donor and recipient regions in the way intergovernmental fiscal arrangements influence regional growth. Overall, fiscal policy variables have become less important growth determinants than was the case in the 1990s. Still, further reforms in federalism arrangements would be desirable.