2165. The Russian City in Transition: The First Six Years in 10 Volga Capitals

Martha de Melo and Gur Ofer
(August 1999)

After studying the nature and variety of transition in 10 regional capitals of Russia, de Melo and Ofer observe that:

• All cities have experienced radical changes in their institutions and economies - changes associated on the one hand with the abolition of central planning and the introduction of freer markets, and on the other hand with political decentralization and the introduction of local elections.
• These changes have led to a wide diversity in economic and social outcomes, reflecting differences in the central government's (inequitable) economic relations with regions as well as differing local and regional policies. Most northern cities adopted policies more consistent with the central government's support of free market reforms; most southern (Red Belt) cities pursued more cautious, protective policies.
• City governments are using more proactive economic policies, including interventions to save local industries. Such efforts highlight the dual nature of the Russian transition, characterized by a shift in power from central to local government as well as from public to private enterprises.
• A major difficulty facing Russian cities is the cost of subsidies to housing and utilities. Real estate in general constitutes a major expenditure category for local government rather than, as in most western cities, a major source of revenue. A transition in this area alone could revolutionize the finances and independence of Russian cities.
• The jury is still out on what the right social and industrial policies were during the first years of reform. Ulyanovsk clearly lagged on market reforms, and Saratov represents a model of liberalization without institutional support. Both extremes have failed, but so far the social consequences of the Saratov model appear to be worse than those of the Ulyanovsk model.
• With the credibility of Russia's federal government at an all-time low, foreign investors have no choice but to rely on the competence and reliability of local leaders, especially mayors and governors. They will be looking for evidence of accountability in the form of the rule of law, and transparency in the form of reliable public information. Information at the city level - often unavailable and not easily accessible - would be very useful in attracting local researchers to monitor progress (as a basis for accountability) and diagnose problems (as a basis for public policy debate and political decisions).

This paper - a product of Public Economics, Development Research Group - is part of a larger effort in the group to study the causes and effects of fiscal decentralization. The project was carried out in cooperation with the New Economic School (NES) in Moscow. This is the first of two papers on the Volga cities. Copies are available free from the World Bank, 1818 H Street, NW, Washington, DC 20433. Please contact Hedy Sladovich, room MC2-609, telephone 202-473-7698, fax 202-522-1154, Internet address hsladovich@worldbank.org. The authors may be contacted at rhanrott@erols.com or gur.ofer@yale.edu. (58 pages)

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