REGIONAL PROTECTION IN
Interim report
Evgenia Kolomak
Statement
of purpose
Regional leaders were inclined to interference in the
regulation of regional economy and to protection of local producers almost
everywhere in
The project has an aim to study how significant the
barriers erected by the regional administrations for interregional flow of
goods are. The project also considers the consequences of the regional
protectionism for economic development of the territories.
Review
of literature
I. Theoretical issues
Literature on the economics of transition regards the price
liberalization as a key element of transition, because it is a necessary
condition for the introduction of the market mechanism and for the improvement
in the allocation of resources. These studies deal with important efficiency
dimension to price liberalization (Lipton and Sachs (1990), Boyko
(1992), McKinnon (1991)). However, there is also an important redistributive
dimension to price liberalization, and this consideration is a political
economics’ argument (Drazen (2000), Persson and Tabellini (2002)).
What legislators should put in place depends on the political acceptability of
the reforms. Roland (2000) writes that the political constraints affect the
speed and design of reforms.
One of the aspects of the redistribution that price reforms cause is
between regions. The between regions distributive dimension to price reform is
a topic of political economy of international trade policy (Krugman
and Obstfeld (1994), Caves, Frankel and Ronald
(1996)) where one of the discussions is focused on national welfare arguments
for and against protectionism. Applying the results to transitional economy Kruegel and Ciolko (1998)
demonstrate that the hypothesis of the endogeneity of
price liberalization variable can not be rejected. The worse the initial
conditions for transformation, the greater the probability of the deep
transformation recession is, and hence there are more likely delays in liberalization.
When initial conditions are favorable, rapid liberalization is feasible and
preferable. Castanheira and Popov
(1999) also suggest that the speed and extend of price liberalization may be endogenous, liberalization policy may depend on the initial
conditions and magnitude of the decline in output as a result of
liberalization.
The political constraints are reinforced when the fact that bureaucrats
and regulators may benefit from the persistence of price control is taken into
account. Shliefer and Vishny
(1992) applying a rent-seeking model, show that price control creates shortage
rents for state sector and represents opportunities for soliciting bribes.
Another explanation of low prices is given by Berkowitz (1996). The theory
developed in this paper assumes that local politicians are motivated to serve
constituents rather than to collect bribes. The model predicts that local
government would choose a market clearing price when, firstly, private sector
is monopolized, and, secondly, the share of nonresidential consumption within a
jurisdiction is high.
So the political constraints may make a gradual price reform preferable
despite its efficiency costs (Dewatripont and Roland
(1992 a, b) Roland (2000)). Milder reforms are the only way to speed up the
process and enhance political acceptability. Bertocchi
G. and M. Spagat (1997) give another explanation for
gradualism and reversion in the price reforms, applying learning model they
show that instability, which economies in transition are faced, dampens
learning effect and make policy more gradual.
The economic distortions resulting from partial price liberalization are
discussed in Murphy, Shleifer and Vishny
(1992). The partial price reforms encourage diversion of inputs away from the
regulated sector towards enterprises that are less constrained by arbitrarily
regulated prices. When only a few regions impose maximum prices, they hurt
themselves as well as the producers, and benefit enormously the regions that
have not restrained prices which simply free ride on them.
Summarizing literature on price liberalization Castanheira and Popov (1999) write that there is no theoretical evidence that a big bang approach is associated with less cost than the gradual one and there is no persuasive empirical evidence that fast liberalization performed better than slow one. Liberalization should and would lead to better performance in the longer run.
Features of local policy depend also on the attitudes towards the governments. Paper by Edwards and Keen (1996) synthesizes the two extremes: the view of government as a Leviathan and the view of government as a benevolent maximiser of their citizens’ welfare. The policy-makers have quasi-concave preferences defined over some item of public expenditures which, while financed from general revenues, benefits only the policy-maker, and the welfare of their representative citizen. Polishchuk (2000) shows that under certain assumptions a revenue-maximizing Leviathan-type government might offer better conditions for economic growth than a benevolent, which is concerned about economic well-being of its constituency at large.
The role of lobby groups in the shape of trade policy is incorporated into analysis in two ways. The first approach stresses political competition between opposing candidates. In the works of Magee et al. (1989), Hillman and Ursprung (1988), the lobby groups evaluate their prospects under the alternative trade policy proposals have been made by competing parties. In making their giving decisions, the lobbies weigh the benefit of an increasing the probability of their favorite party being elected against the direct cost for the donation. The parties use the resources to influence the election outcome. In the second approach presented in Stigler (1971), Hillman (1982), Grossman and Helpman (1994), the economic policy is considered as being set by an incumbent government seeking to maximize its political support. The political support function has as arguments the welfare that designated interest groups derive from the chosen policies and the deadweight loss that the policies impose on society at large. In this formulation, campaign contributions do not enter directly into the analysis, and the political competition of the next election is kept in the background. Both of the approaches consider the political optimization as underlying the endogenous determination of trade policy.
II. Stylized
facts and estimations for Russia
1. Tools of the regional regulation includes as direct (price ceiling,
making-up price, limitations on profitability, limitations on trade extra
charge, declaration about change in price) as indirect methods (tax exemptions,
credits, subsidies, budget compensations) and differ essentially among the
regions. (Appendixes 2, 3).
The TACIS report ranks regions by price control in October 1995. The survey is conducted in capital cites. The ranking differentiates between types of price controls: from subsidies and limitations on the profitability and price mark-ups to rationing and issuance of coupons. The ranking is based on seventy-three food goods surveyed by Goskomstat. Tallying up points for different categories of price controls, regions are rated from most liberal (1) to most regulated (1/47).
2. Growth of private wholesale trade and «porosity» of the interregional
borders have undermined attempts of some regional administrations to implement
an autarchy policy in food supplying. For instance, in 1995-1996 the famous “Ylyanovskaya” system of control over price and supply of
food failed and was discontinued (Õåíñîí (2001)). However the sub-federal documents erect barriers and
limitations on interregional flow of goods and services by introduction of
recurring certification, marking and “identification”, by direct prohibition of
export from and import in the region (Âåðõîâåíñòâî Êîíñòèòóöèè ÐÔ è …
(2000).
3. Documents adopted at sub-federal level in
4. Price differentiation among the regions is very high in
5. There are not only high thresholds for interregional trade, which are
surprising for neighbouring regions, because
transport costs do not explain them. There are also observed diverged time
series of price levels in the regions. (Ãëóùåíêî (2001))
6. A “culprit” of the weak market integrity of
7. Almost all regional policy-makers in
8. The main source of hidden subsidies to enterprises is as follows:
power subsidies in the form of overdue payments and of barter with artificially
high prices; non-payments in budget and non-budget funds, state purchase paid
by barter or by tax exemptions (Äîêëàä Âñåìèðíîãî
áàíêà (2000), Êîëîìàê
(2001), tables 1, 2, 5, Appendix 3).
9. An important feature of the debts and barter is that they provide the ground for the regional and local executive authorities to control the enterprises and level of their profitability. In exchange for the cooperation the policy-makers soften budget constrains of the enterprises and protect against external competition. More over barter became profitable business for mediators, including bureaucrats of the executive bodies. It resulted in a wide spread of scheme for extracting of benefits, of collusion and corruption. The extraction of political rent became a reason for the highest regional decision-makers to protect the enterprises (Äîêëàä Âñåìèðíîãî áàíêà (2000)).
10. However, the existence of tight local budgets does not explain why
many regions allocate scarce financial resources to subsidize basic consumption
goods (Berkowitz (1996)). Inter-budgetary relation is a factor provoking barter
and subsidies. The level of transfers from upper level budget to lower level
budget depends on actual expenditures of previous year. This makes regional
bureaucrats interested in exaggeration of expenses, in order to have a
possibility to obtain more transfers next year, or to provide a higher share of
taxes distributed between different budgetary levels. Barter
payments is an easy way of reaching this aim. At the federal level such
practice was stopped in 1999-year budget (Äîêëàä Âñåìèðíîãî áàíêà (2000)).
The empirical estimations have shown
positive and statistically significant correlation between subsidies granted to
industrial, agricultural and constructing enterprises and VAT transfers (table
7, Appendix 3), between tax exemptions to branches of industry and transfers
(table 8, Appendix 3) and between subsidies and level of price regulation
(table 6, Appendix 3).
11. A characteristic of the regional budgets is high level of overdue
for salary and transfers to population (more 40%), the
next item is overdue to infrastructure monopolies, supplying public utilities
(28%). Hence, the biggest part of burden, resulted from hidden subsidies to
enterprises is imposed on population, what contradicts to thesis that
subsidizing and help to enterprises are explained by social imperatives of the
regional authorities (Äîêëàä Âñåìèðíîãî áàíêà (2000)).
Methodology
I. A Model
Statement of the problem
We consider a regional market, so we may assume that the economy is
small and market regulation is the result of the political process. One of the
attitudes of Russian regional economies is a high level of specialization in
the production, the producers have incentives to form lobby groups and they
demonstrate ability to overcome the free-rider problem.
The regional lobby groups confront regional policy-makers with
requirements to provide protection for the sector against external producers in
exchange for political support. The regional government bears costs for
implementing an inefficient protection policy that is result of creating
deadweight loss and its accountability to the general electorate. The
government sets protection policy comparing benefits of the political
cooperation with local producers and costs of deterioration of its reelection
prospects. The implemented policy must be financially feasible.
The proposed theoretical framework for the analysis of the barriers of regional price regulation is very similar to the one developed by Grossman and Helpman (1994) in the study devoted to protection trade policy.
Overview of Grossman - Helpman’s results
Grossman and Helpman consider a small,
competitive economy. Free trade is efficient for such an economy, so any policy
interventions can be ascribed to the political process. They assume that there
is a high degree of concentration in the ownership of the specific inputs and
that the various owners of some these inputs have banded together to form lobby
groups. They assume also that some factor owners overcome the free-rider
problem to conduct joint lobbying activity, while other do
not.
The lobby groups may offer political contributions to the incumbent
politicians, who are in a position to set the current trade policy. While the
lobby groups ignore the effects of their contributions on the election
probabilities, the incumbent politicians may see a relationship between total
collections and their reelection prospects. Incumbent politicians’ objective is
to maximize a weighted sum of total political contributions and aggregate
social welfare.
The authors model the lobbing process as follows. Each interest group
confronts the government with a contribution schedule. The schedule maps every
policy vector that the government might choose (where policies are import and
export taxes and subsidies) into a campaign contribution level. The government
then sets a policy vector and collects the contribution associated with its
choice.
Let introduce some notations: p is the vector of domestic prices; Ci(p) - the contribution schedule tendered
by lobby i;
Wi(p)
- gross-of-contributions joint welfare of the members of lobby group i; G(p)
- government’s utility function.
The authors are interested in the political equilibrium of a two-stage
non-cooperative game in which the lobbies simultaneously choose their political
contribution schedules in the first stage and the government sets policy in the
second. An equilibrium is a set of contribution functions {Ci0(p)}, one for each organized lobby group,
such that each one maximizes the joint welfare of the group’s members given the
schedules set by the other groups and the anticipated political optimization by
the government; and a domestic price vector p0 that
maximizes the government’s objective taking the contribution schedules as
given. The Nash-equilibrium contribution schedules implement an equilibrium
policy choice.
Grossman - Helpman’s model has the structure
of a menu-auction problem. Bernheim and Whinston (1986) have characterized the equilibrium for a
class of such problems. Grossman and Helpman applied
these results to the problem of protection trade policy. The adaptation
resulted in following proposition.
Proposition
1. ({Ci0}iÎL, p0}) is
a subgame-perfect Nash equilibrium of the trade
policy game if and only if:
(i) Ci0
is feasible for all iÎL;
(ii) p0 maximizes G(p) on the set of domestic price vector;
(iii) p0 maximizes Wj(p) - Cj0(p)+ G(p) on the set of domestic price vector for every jÎL;
(iv) for every jÎL there exists a pj that maximizes G(p) on the set of domestic price vector such that Cj0(pj)=0.
Condition (i) states that lobby’s contributions must be nonnegative and no greater than the joint income available to the sector. Condition (ii) states that, given the political contributions offered by the lobbies, the government sets trade policy to maximize its own welfare. Condition (iii) stipulates that for every lobby, the equilibrium price vector must maximize the joint welfare of that lobby and the government, given the contributions offered by other lobbies. Condition (iv) requires that for every lobby j there must exist a policy that elicits a contribution of zero from lobby j, which the government finds equally attractive as the equilibrium policy p0. If there does not exist such a policy, then lobby j can lower their political contributions without changing the government’s choice, what of necessity leave sector j strictly better off.
Condition (iii) characterizes the equilibrium structure of protection. Condition (iv) characterizes the equilibrium structure of political contributions.
Our problem and one of Grossman - Helpman are very similar and we largely rely on the significant results obtained by the authors, however there are several differences. The differences come from three issues. The first one is the fact that Russian regional governments can not use export and import tariffs and subsidies opposed to the case of Grossman - Helpman consideration and are restricted to other tools of price regulation: price ceiling, price mark-ups, price subsidies, tax exemptions or credits. The second issue stems from the requirement of financial acceptability of the regional protection policy, regional budget constrain needs explicit introduction into the model. The third difference is explained by the statement of problem to distinguish between different tools of the protection policy. These differences modify Grossman - Helpman‘s model and obviously its analytical inferences as well.
Formal framework
We consider a regional market with tradable goods i=0,1,…,n. The local demand curve for a
particular good is di(pi).
Assume when there is no price dispersion all consumers prefer domestic goods.
If the regional government does not interferes into the market-clearing
mechanism the regional market faces exogenously given prices p0*, p1*,…, pi*,…, pn*.
Suppose that in the absence of trade the equilibrium price of goods i=1,…,n is
higher than in the situation of interregional and/or international trade.
The supply curves of local producers depend on input and output exogenous prices and/or implemented local protection policy. Assume the regional government can use input and output subsidies, input and output price limitations, and tax exemptions. We assume that production in each sector requires labor and a specific input, subsidized are and regulated are prices of the specific inputs. Consequently the supply function of a locally produced good i depends on price (which differs form the exogenous market price if local government imposes price limitations), input subsidy, output subsidy, input price restrictions, and tax exemption yi(pi, si,ri,ti) where pi is target price, si is subsidy per unit of good i, ri is subsidy per unit of specific input in sector i, and ti - tax exemptions granted to sector i. Let denote by p, s, r,, t the vectors of output prices, output and input subsidies, and tax exemptions respectively.
Let the regional economy is populated by individuals with identical preferences. Each individual maximizes utility given by
(1)
where x0 is
consumption of good 0 and xi
is consumption of good i, i=1,…,n. Good
0 is a competitive and does not need a protection, let its price equals to
1.With these quasi-linear preferences an individual spending an amount E consumes xi=di(pi)
of good i, i=1,…,n, where the demand function is
inverse of ui¢(xi), and
. The consumer surplus derived from the goods is equal to
(2)
Where p is the vector of the
prices targeted on the protection of local producers.
The protection must be
financially acceptable. The financial acceptability means satisfying the budget
constrain, local government expenditures should be less than receipts. The
receipts are in the form of taxation of the domestic aggregate income, the expenditure items are input and output subsidies
to local producers. The excess of receipt over protection expenditures, here
regarded as a source of public expenditures financing, is:
(3)
Where t is the tax rate, zi(pi,
si, ri, ti)
- demand for
specific input in sector i,
and b
reflects the
local government ability to ‘soften’ local budget, it can be done through
transferring expenses of local policy to another budgets or by obtaining
additional resources from higher level budgets.
The producers are interested in protection for their sectors and enter
the political activity. The lobby representing a sector i makes
its political contribution contingent on the protection policy implemented by
the government. Denote by ci(pi,si,ri,ti) the contribution tendered by lobby i.
The lobby determines the contributions to maximize total welfare of the
sector’s members: labor income plus profit of the sector plus consumer surplus
and benefits from the public expenditures less contributions. The scheme of the
distribution of the political donations among the sector’s members is out of
consideration here. We assume the existence of ways to allow all the members to
share the gains from the political coordination. The joint
gross-of-contribution welfare of the members of sector i is:
(4)
Where pl - the wage rate; pi* - exogenous price of the specific input in
sector i; ai - share of the voting population related to sector i.
The government’s utility function depends on attitudes towards
government. There are two extreme types of government presented in the
literature as stark alternatives: benevolent and Leviathan. When the government
is a benevolent, it is a maximizer of their citizens’ welfare. A Leviathan –
government maximizes items of expenditures benefit only the policy-makers. A
more general assumption is that policy-makers are neither wholly benevolent nor
wholly self-serving, an obvious encompassing is that
the policy-makers maximize a weighted sum of citizens’ welfare and their own
wellbeing. The latter assumption is adopted to our
problem.
The incumbent government maximizes a weighted sum of political
contributions and aggregate welfare of the population. The political
contributions provide direct benefits to the government. However the social
welfare can result in indirect benefits if voters are more likely to reelect a
government that provides a high standard of living. The government objective
function is:
(5)
Where 0£q£1.
We consider a two-stage non-cooperative game: in the first stage
sector’s lobbies make decision and propose political contributions contingent
on protection policy; in the second stage the regional government determine the
implemented policy. An equilibrium is a set of contribution functions {ci0(pi,si,ri,ti)}, one for each sector, such that each one maximizes the joint welfare
of the sector’s members given the schedules proposed by the other sectors and
the anticipated optimization by the regional government; and a regional
protection policy vector (pi0,si0,ri0,ti0) that maximizes the
government’s objective taking the contribution schedules as given. The
Nash-equilibrium realizes an equilibrium policy.
The proposed formal framework corresponds to the structure of Grossman-Helpman’s problem. However the modification of the
Grossman-Helpman’s model and more detailed
consideration of some issues modify Proposition 1. The proposition relevant to
our problem is as follows.
Proposition
2. ({ci0}iÎL, {p0,s0,r0,t0}) is a subgame-perfect Nash equilibrium of the
regional protection policy game if and only if:
(a) {ci0} is
feasible for all iÎL;
(b) {p0,s0,r0,t0} maximizes G(p,s,r,t) subject to budget constrain r(s,r)³0 for all iÎL;
(c) {p0,s0,r0,t0} maximizes Wj(p,s,r,t)+ G(p,s,r,t) subject to budget constrain r(s,r)³0 for every jÎL;
(d) for every jÎL there exists a bundle (pj,sj,rj,tj) that maximizes G(p,s,r,t) subject to budget constrain such that cj0(pj,sj,rj,tj)=0.
The equilibrium structure of protection policy
Grossman and Helpman have proved that if the contribution schedules are differentiable around the equilibrium, the shape of the political contributions reveal the lobbies’ true preferences in the neighborhood of the equilibrium. They have also demonstrated an interesting property of Nash equilibria, in equilibrium government behaves as if it attributed to lobbies higher weigh than other population. Below we show that these results hold to our model as well.
Let assume that the political
contribution functions and welfare functions are differentiable. To characterize
the structure of the equilibrium protection policy let consider conditions (b)
and (c) Proposition 2, they imply that the first order condition is satisfied
at {p0,s0,r0,t0}:
(6)
(7)
Where l is a Lagrange multiplier. Inserting (7)
into (6) gives 
. By definition (4) 
. Taken together the equations imply
(8)
Equation (8) establishes that around the equilibrium change in the political contributions reflects the effect of change of the government protection policy on the joint welfare of members of the lobby’s group.
By the definition (4) 
, where Wi(p0,s0,r0,t0) is
net-of-contribution welfare of group i members. If the political contributions correspond to true
preferences of the group, than Wi(p0,s0,r0,t0)³Wi((p,s,r,t) and
(9)
Condition
(b) of Proposition 2 states that if (p0,s0,r0,t0) and (p,s,r,t) are feasible than 
, or 
. From expression (9) 
.
Consequently the government in the equilibrium maximizes weighted sum of welfare of different groups of population. Welfare of groups of population presented by lobbies in the political process receives weight (1+q), welfare of other ones receives weigh q, where 0£q£1.
Further let present in a more detailed
record expression (7), it takes form 
. Inserting (8) into the expression gives
(10)
The equation shows how marginal change of protection policy influences the welfare of the groups of populations distinguishing between participating in lobbing and do not participating.
So the properties of the equilibrium structure of the regional protection policy are as follows. Firstly, around equilibrium the political contributions reveal preferences of the interest groups regarding protection policy. Secondly, equilibrium protection policy results in distribution of welfare in favor of the sectors, participating into political lobbing. Thirdly, in equilibrium marginal change of welfare of different groups influenced by the protection policy depends on the fact of participating in political lobbing.
At the current stage of the analysis we consider the cases when the regional government is restricted to one of the protection tools: output subsidies, input subsidies, target prices, or tax exemptions.
a)
Output subsidies
Let first consider output subsidies, we
analyze a solution of equation (10) when the region faces exogenously given
prices pi=pi*,
input subsidies equal zero ri=0, tax exemptions equal zero ti=0, and
output subsidies only are at the disposal of the regional government si³ 0.
From (4) we find 
, where sij - Kronecker’s
symbol. Substitution of the terms in expressions (10) allows to derive 
Let introduce an indicator variable ji that equals 1 if the sector uses
lobby pressure and 0 - otherwise. Denote 
by L. The equation
takes the form 
.
From (3) we find 
. Inserting let to derive 
, where ejs - subsidy elasticity of production good j.
Proposition 3. The government in the equilibrium chooses output subsidies that satisfy
for
all j=1,…,n
So output subsidies for a good
positively correlated with tax rate, subsidy elasticity of production, ability
of the regional administration to soften regional budget constrain, with weight
attributed to population’s welfare, exogenous input price and with lobbing
activity of the sector. And output subsidy for a particular good negatively
correlated with level of exogenous output price.
b) Input subsidies
This case supposes to analyze the equation (10) when pi=pi*, si=0, ti=0, and ri³ 0.
From equation (4) 
, equation (10) takes form:
Or 
.
From (3) we can find 
. Taken together let us derive 
, where ejr - input price subsidy elasticity of demand for input of production
good j.
Proposition 4. The government in the equilibrium chooses input subsidies that satisfy
for all j=1,…,n
So input subsidies for a good positively correlated with level of the exogenous input price, with tax rate, with input price subsidy elasticity of demand for input, ability of the regional administration to soften regional budget constrains and lobbing activity. However level of input subsidy for a particular good negatively correlated with output exogenous price.
c)
Tax exemptions
This case supposes analysis of equation (10) when pi=pi*, si=0, ri=0, and ti³0.
From (4) we find 
. Substitution of the terms in expressions (10) let us to
derive 
The equation takes the form 
.
From (3) we find 
. Inserting lets to derive 
, where ejt - tax exemption elasticity of production good j.
Proposition 5. The government in the equilibrium chooses tax exemptions that satisfy
for
all j=1,…,n
So tax exemptions for a sector
positively correlated with tax rate, tax exemption elasticity of the
production, with weight attributed to population’s welfare, with lobbing
activity of the sector and with input exogenous price. Tax exemption for a
sector negatively correlated with level of exogenous output price.
d)
Target price
This case supposes analysis of equation (10) when si=0, ri=0, ti=0, and pi is fixed at a target level.
From (4) we find 
. Substitution of the terms in expressions (10) let us to
derive
The equation takes the form 
.
From (3) we find 
. Taken into account that local demand is satisfied with
local production and import 
. So 
. From (2) we derive 
Inserting gives the result
, where ejp - price elasticity of production good j.
Proposition 6. The government in the equilibrium chooses prices that satisfy
for
all j=1,…,n
So target prices for a sector positively
correlated with level of import and negatively correlated with level of
exogenous input price, price elasticity of output, and marginal utility of
good.
The table below summarizes the characteristics of the equilibrium protection policy when one instrument of protection .is used.
Table 1. The correlation
characteristics of equilibrium
|
Variables |
Output subsidy |
Input subsidy |
Tax exemption |
Target price |
|
Tax rate |
+ |
+ |
+ |
|
|
Exogenous output price |
- |
- |
- |
|
|
Exogenous input price |
+ |
+ |
+ |
- |
|
Weight attributed to population’s welfare |
+ |
|
+ |
|
|
Overall lobbing pressure on a regional government |
+ |
+ |
|
|
|
Political activity of the sector’s lobby |
+ |
+ |
+ |
|
|
Output subsidy elasticity of production |
+ |
|
|
|
|
Input price subsidy elasticity of demand for input |
|
+ |
|
|
|
Tax exemption elasticity of production |
|
|
+ |
|
|
Price elasticity of output |
|
|
|
- |
|
Level of import |
|
|
|
+ |
|
Marginal utility of production |
|
|
|
- |
|
Ability of the regional administration to soften regional budget constrain |
+ |
+ |
|
|
II. Empirical estimations
A.
Hypotheses
Assuming the model is correct the empirical estimations will support the hypotheses as follows.
Hypothesis 1. Regional price regulation is a feature of regions
that have weak competitive positions and higher level of import.
For testing these hypotheses connection between price
regulation and characteristics of efficiency of regional economic development
will be estimated.
Hypothesis 2.
Subsidies, tax exemptions and price regulation depend on exogenous input and
output prices, so macroeconomic demand and supply shocks resulted in raise of
prices may also result in change of protection activity.
Data on regional subsidies and price regulation
confirms this hypothesis (Appendix 3, table 2). There were growth of price
regulation activity in 1995 and 1998 and increase of share of total subsidies
in 1998 These years are famous for sharp devaluation of ruble, growth of
consumer demand and prices of goods of both import and domestic production.
Hypothesis 3. Regional subsidizing and granting tax exemptions
provoke higher tax burden in the regions.
For testing these hypotheses connection between
subsidies, tax exemptions and level of the regional tax collection will be
estimated.
Hypothesis 4. Regions demonstrating active subsidizing of output
have larger share of transfers from federal center and higher level of
non-payments in their budgets.
To test the hypothesis the dependence of level of
transfers received by region and of budget non-payments on price regulation
will be estimated. The preliminary estimations have shown positive significant
correlation between subsidies and transfers from the federal budget (Appendix
3, table 7).
Hypothesis 5. Lobbying power depends on the concentration of the
producer’s interests, the higher is the concentration
the higher is the ability to influence the government and to persuade it of the
protection.
To test this hypothesis the correlation of the
regional subsidizing and tax exemptions and level of the regional
specialization will be estimated.
Hypothesis 6. Regional price regulation depends on import pressure
in the region.
To test this hypothesis the correlation of the
regional price regulation and level of the regional import will be estimated.
B.
Methods of estimation
The theoretical model structure implies to make an empirical analysis by
sectors and by regions. Because of radical changes during transition period in
The updating of the empirical information is still in the process, and
at the present stage of the research the preliminary empirical estimations have
been done for the aggregated by sectors data. The observations have the panel
structure and include characteristics of the regions (about 80) over time
period (1996 – 2000), let i=1,…,N is index for region, and t=1,…T is index for time. The system of the hypotheses shapes the
system of regression equations.
(A)
(B)
(C)
C. Information
Testing of the formulated hypotheses assumes data on
subsidies, tax exemptions, price regulation by regions and by sectors, and
information on structure of economies, efficiency of production, on budgets,
taxes, and import by regions.
Detailed structure of regional budget incomes and
expenditures for 1996 - 2000 are taken from Ministry of Finance of the
D.
Results of the estimations
For the empirical estimations were generated variables
as follows:
-
share
of subsidies for industry and agriculture in regional budget expenditures in
region i in
year t;
-
number
of decisions aimed at direct price regulation in region i in year t;
-
number
of decisions granted different tax exemptions in region i in year t;
-
dummy
variable for the macroeconomic shock, which takes the value “1” for year 1998;
-
dummy
variable for the specialization level, which takes value “1” when there is an
industry producing more than 1/3 of total regional industrial product in region
i in year t and value “0” other wise;
-
share
of transfers from federal budget in the regional budget income in region i in year t;
-
tax
income per capita in total regional budget income in region i in year t;
-
share of unprofitable firms in industry in region i in year t.
The results of the empirical estimations are presented
in the tables below.
Table 2. The results of
regression (A)
estimation
|
Variables |
Within estimation |
GLS estimation |
||
|
coefficient |
P-value |
Coefficient |
P-value |
|
|
Constant |
7.117 |
0.063 |
5.926 |
0.13 |
|
Dummy for macroeconomic shock |
-4.742 |
0.150 |
-5.381 |
0.023 |
|
Dummy for specialization level |
0.322 |
0.836 |
1.388 |
0.025 |
|
Share of transfers |
0.057 |
0.512 |
0.116 |
0.001 |
|
Tax income per capita |
0.001 |
0.488 |
0.001 |
0.004 |
|
Share of unprofitable firms |
-0.102 |
0.138 |
-0.110 |
0.020 |
|
R2 |
0.204 |
0.311 |
||
|
Breusch-Pagan test for random effects |
c2(1)=8.67, P-value=0.0032 |
|||
|
Hausman specification test |
c2(5)=2.07, P-value=0.8395 |
|||
Hausman test shows that we can rely on GLS estimations that
are more effective. So the correlation of the share of subsidies for industry
and agriculture in regional budget expenditures subsidies with the generated
variables is statistically significant.
The obtained estimations have confirmed that the high
level of taxation, lobbing activity, and transfers form higher level budget are
the factors allowing the regional governments to increase the subsidizing of
the local firms. The calculations confirmed the significance of the
macroeconomic shocks for the subsidizing and revealed negative correlation.
Table 3. The results of
regression (B) estimation
|
Variables |
Within estimation |
GLS estimation |
||
|
Coefficient |
P-value |
Coefficient |
P-value |
|
|
Constant |
0.559 |
0.472 |
1.382 |
0.00 |
|
Dummy for macroeconomic shock |
0.420 |
0.023 |
0.389 |
0.022 |
|
Dummy for specialization level |
0.272 |
0.636 |
0.054 |
0.077 |
|
Tax income per capita |
0.0002 |
0.649 |
-0.0001 |
0.524 |
|
R2 |
0.01 |
0.11 |
||
|
Breusch-Pagan test for random effects |
c2(1)=5.01, P-value=0.03 |
|||
|
Hausman specification test |
c2(3)=4.78, P-value=0.19 |
|||
Hausman test shows that we can use GLS estimations. It means
that the correlation of the intensity of tax exemptions granting with lobbing
pressure and exogenous price levels is statistically significant, however tax
level appears to be insignificant.
Table 4. The results of
regression (C) estimation
|
Variables |
Within estimation |
GLS estimation |
||
|
Coefficient |
P-value |
Coefficient |
P-value |
|
|
Constant |
11.039 |
1.731 |
8.608 |
0.00 |
|
Dummy for macroeconomic shock |
4.859 |
0.001 |
3.862 |
0.007 |
|
Share of unprofitable firms |
-0.017 |
0.702 |
-0.080 |
0.007 |
|
Unemployment rate |
-0.028 |
0.210 |
0.021 |
0.019 |
|
R2 |
0.02 |
0.08 |
||
|
Breusch-Pagan test for random effects |
c2(1)=1.99, P-value=0.158 |
|||
|
Hausman specification test |
c2(3)=12.08, P-value=0.007 |
|||
Data on the interregional trade is not available. Rate
of unemployment is used as a proxy for pressure of outside producers on the
regional production. Breusch-Pagan test and Hausman test show that we should use within estimations. So
the significant is correlation of the price regulation and macroeconomic shocks
only. The coefficients of unemployment rate and share of unprofitable firms are
statistically insignificant.
So the empirical estimations obtained on the base of
aggregated data mostly confirm the comparative static results of the
theoretical model. However the structure of the model needs the disaggregated
by sectors estimations, these estimations will be presented in the final
report.
Plan for further work
Development of the theoretical results
Development of the hypotheses of the empirical
analysis
Updating and disaggregation
of the empirical information for the empirical analysis
Regression estimations and analysis of the results
Final report, discussion
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Appendix 1
Goods and services subject to price regulation at
regional level in
Housing
Land
Monopolized
sectors: oil processing, metallurgy, engineering, chemical, petrochemical,
wood-processing industry, pulp and paper, textile, food, extracting, timber,
non-ferrous metallurgy, construction materials
Agriculture
products
Public transport
Construction
Electric power
Heating
Medical services
Service of
municipal firms and organizations
Educational
services
Architecture and
city designing
Social services
Culture service
Gas natural and
liquefied, solid fuel
Glass
Grain, alcohol,
sugar, salt, oil, flour, potatoes, children's meal, meat, sausage, eggs,
matches, bread, milk and dairy production, pasta, butter, fish, canned food,
dry milk, tea, vegetables, synthetic detergents, soap.
Water-supply and
sewage
Source:
Legislative data base «Consultant Plus. Regional Legislation»,
Appendix 2
Number of documents on price control adopted in
regions of
|
|
1992 |
1993 |
1994 |
1995 |
1996 |
1997 |
1998 |
|
Republic Adigeia |
|
|
1 |
0 |
1 |
1 |
4 |
|
Republic Altai |
|
|
|
|
|
|
14 |
|
Altaiskei krai |
|
|
4 |
19 |
48 |
9 |
32 |
|
Amurskya oblast |
|
|
25 |
2 |
1 |
6 |
16 |
|
Arkhangelskaya oblast |
|
|
|
|
3 |
2 |
22 |
|
Astrakhanskya oblast |
|
|
|
18 |
3 |
2 |
2 |
|
Republic Bashkortostan |
|
|
2 |
35 |
4 |
1 |
3 |
|
Belgorodskaya oblast |
4 |
15 |
23 |
35 |
9 |
6 |
24 |
|
Bryanskaya oblast |
|
|
|
|
1 |
|
1 |
|
Republic Buryatiya |
|
|
|
|
17 |
15 |
7 |
|
Vladimirskaya oblast |
11 |
1 |
1 |
18 |
|
1 |
21 |
|
Volgogradskaya oblast |
|
|
|
2 |
1 |
|
|
|
Vologodskaya oblast |
1 |
5 |
2 |
2 |
5 |
8 |
11 |
|
Voronezhskaya oblast |
|
34 |
15 |
20 |
8 |
8 |
17 |
|
Republic |
|
|
|
|
|
|
3 |
|
Ivanovskaya oblast |
6 |
2 |
2 |
2 |
19 |
2 |
17 |
|
Irkuskaya oblast |
|
|
|
16 |
2 |
1 |
6 |
|
Kabardino – |
|
|
1 |
|
|
|
15 |
|
Kaliningradskaya oblast |
|
1 |
2 |
4 |
1 |
1 |
26 |
|
Republic Kalmikiya |
|
|
|
|
|
|
12 |
|
Kaluzhskaya oblast |
|
|
2 |
22 |
3 |
1 |
1 |
|
Relublic Kareliya |
|
|
|
|
|
3 |
1 |
|
Kemerovskaya oblast |
|
2 |
|
3 |
4 |
2 |
17 |
|
Kirovskaya oblast |
16 |
|
|
16 |
1 |
11 |
19 |
|
Republic Komi |
10 |
1 |
2 |
4 |
9 |
10 |
23 |
|
Kostromskaya oblast |
|
|
|
1 |
2 |
2 |
1 |
|
Krasnodarskei krai |
|
5 |
7 |
22 |
5 |
6 |
28 |
|
Krasnoyarskei krai |
|
|
2 |
18 |
4 |
15 |
21 |
|
Kurganskaia oblast |
|
|
|
|
17 |
4 |
31 |
|
Kurskaya oblast |
|
|
1 |
1 |
4 |
15 |
19 |
|
Lipetskaya oblast |
|
|
|
5 |
6 |
14 |
27 |
|
Republic Marei –El |
|
|
|
40 |
6 |
1 |
1 |
|
|
7 |
24 |
7 |
37 |
|
5 |
23 |
|
Moskovskaya oblast |
25 |
|
1 |
25 |
|
|
|
|
Republic Mordiviya |
1 |
6 |
8 |
2 |
35 |
3 |
29 |
|
Murmanskaya oblast |
3 |
7 |
13 |
5 |
3 |
19 |
1 |
|
Nenetskei ÀÎ |
|
|
|
|
|
1 |
17 |
|
Nizhegorodskaya oblast |
26 |
26 |
24 |
27 |
3 |
4 |
2 |
|
Novgorodskaya oblast |
|
|
4 |
|
|
|
|
|
Novosibirskaya oblast |
|
2 |
9 |
22 |
8 |
16 |
26 |
|
Omskaya oblast |
|
|
3 |
2 |
18 |
2 |
19 |
|
Orenburgskaya oblast |
|
|
|
|
11 |
|
18 |
|
Orlovskaya oblast |
11 |
|
1 |
|
|
|
|
|
Penzenskaya oblast |
|
1 |
21 |
22 |
6 |
1 |
20 |
|
Permskaya oblast |
|
|
|
16 |
|
2 |
8 |
|
Primorskei krai |
|
1 |
4 |
8 |
11 |
21 |
30 |
|
Pskovskaya oblast |
|
|
|
2 |
7 |
|
6 |
|
Rostovskaya oblast |
24 |
22 |
1 |
16 |
4 |
16 |
26 |
|
Pyazanskaya oblast |
|
15 |
11 |
2 |
4 |
|
26 |
|
Samarskaya oblast |
8 |
|
1 |
1 |
3 |
5 |
|
|
Saratovskaya oblast |
|
|
|
|
|
1 |
11 |
|
Republik Sakha (Yakutiya) |
|
|
|
|
|
|
29 |
|
Sakhalinskaya oblast |
|
17 |
1 |
17 |
12 |
5 |
31 |
|
Sankt – |
33 |
1 |
3 |
5 |
2 |
3 |
13 |
|
Sverdlovskaya oblast |
33 |
24 |
12 |
7 |
35 |
3 |
19 |
|
Smolenskaya oblast |
|
6 |
8 |
1 |
2 |
3 |
25 |
|
Stavropolskei krai |
|
1 |
1 |
1 |
6 |
4 |
4 |
|
Tambovskaya oblast |
|
|
0 |
2 |
4 |
29 |
17 |
|
Republic Tatarstan |
1 |
2 |
12 |
26 |
7 |
5 |
10 |
|
Tverskaya oblast |
|
|
|
4 |
|
2 |
22 |
|
Tomskaya oblast |
|
2 |
7 |
12 |
2 |
4 |
14 |
|
Tulskaya oblast |
|
|
1 |
26 |
5 |
2 |
3 |
|
Tumenskaya oblast |
|
|
|
3 |
2 |
1 |
15 |
|
Republic Udmurtiya |
7 |
11 |
1 |
20 |
0 |
2 |
35 |
|
Ulianovskaya oblast |
1 |
|
6 |
29 |
1 |
|
39 |
|
Khabarovskei krai |
|
23 |
17 |
6 |
40 |
13 |
20 |
|
Republic Khakasiya |
|
|
|
15 |
|
2 |
8 |
|
Khanti-Manseiskei ÀÎ |
|
|
|
3 |
17 |
23 |
38 |
|
Chelyabinskaya oblast |
21 |
18 |
12 |
15 |
16 |
7 |
6 |
|
Chitinskaya oblast |
|
|
|
|
1 |
1 |
|
|
Republic Chuvashskaya |
4 |
2 |
1 |
|
1 |
4 |
11 |
|
Yaroslavskaya oblast |
6 |
1 |
5 |
8 |
7 |
8 |
7 |
Source: Legislative data base «Consultant Plus.
Regional Legislation»,
Appendix 3
Descriptive statistics and preliminary
estimations
Table
1
Subsidies
to enterprises from federal and regional budgets, percent of GNP
|
|
1992 |
1993 |
1994 |
1995 |
1996 |
1997 |
1998 |
|
Subsidies from federal budget |
5,8 |
2,5 |
3,1 |
2,2 |
1,6 |
1,8 |
1,9 |
|
Subsidies from the regional budgets |
5,3 |
6,8 |
7,3 |
5,2 |
6,3 |
6,9 |
7,2 |
Source:
Russian Statistical Yearbook, 1999
Table 2
Regional subsidies and documents
regulating price
|
|
1992 |
1993 |
1994 |
1995 |
1996 |
1997 |
1998 |
1999 |
|
Share of the
regional subsidies in the budget expenditures (average level for |
- |
- |
- |
- |
18,5 |
18,3 |
21,9 |
18,8 |
|
Number of
documents adopted at regional level in |
312 |
321 |
288 |
692 |
457 |
364 |
1070 |
- |
Source:
Legislative data base «Consultant Plus. Regional Legislation», data of Ministry
of Finance RF
Table 3.
Summary
statistics on the regional subsidies,(share of budget
expenditures, percentage
|
|
Total subsidies |
Subsidies to industry,
agriculture and construction |
||||||
|
|
1996 |
1997 |
1998 |
1999 |
1996 |
1997 |
1998 |
1999 |
|
Minimum |
0,0 |
0,0 |
0,0 |
0,0 |
0,0 |
0,0 |
0,0 |
0,0 |
|
Maximum |
50,0 |
48,5 |
44,3 |
47,5 |
11,6 |
14,2 |
13,7 |
8,7 |
|
Median |
18,9 |
19,0 |
22,8 |
19,1 |
3,9 |
3,6 |
3,9 |
2,8 |
|
Average |
18,5 |
18,3 |
21,9 |
18,8 |
4,2 |
4,1 |
4,0 |
3,0 |
|
Standard deviation |
10,8 |
9,7 |
9,3 |
7,9 |
3,1 |
3,2 |
2,6 |
2,0 |
Source: data of
Ministry of Finance RF
Table 4
Branch structure of the regional subsidies, percentage
|
|
1996 |
1997 |
1998 |
1999 |
|
Industry,
construction and power engineering |
8,4 |
2,9 |
4,8 |
3,4 |
|
Agriculture and
fishing |
10,9 |
12,8 |
9,9 |
10,0 |
|
Protection of
environment |
0,7 |
0,3 |
0,6 |
0,9 |
|
Transport, road construction, communication |
15,9 |
12,6 |
15,3 |
14,1 |
|
Market
infrastructure |
0,1 |
0,3 |
0,3 |
0,2 |
|
Housing |
63,2 |
68,9 |
69,1 |
66,4 |
|
Others |
0,7 |
2,2 |
0,0 |
4,9 |
Source: data of
Ministry of Finance RF
Table 5
Regions granting tax exemptions, percentage
|
|
1992 |
1993 |
1994 |
1995 |
1996 |
1997 |
1998 |
|
Tax relief for particular enterprises |
1 |
3 |
8 |
17 |
26 |
26 |
28 |
|
Tax relief for branches of industry |
1 |
6 |
14 |
25 |
38 |
40 |
47 |
|
Tax relief for small business |
0 |
1 |
3 |
4 |
11 |
14 |
19 |
|
Free economic zones |
1 |
1 |
3 |
6 |
7 |
10 |
11 |
|
Tax relief for investors |
1 |
3 |
4 |
11 |
22 |
51 |
79 |
Source:
Legislative data base «Consultant Plus. Regional Legislation»
Table 6
Estimations
of the regression of subsidies on price regulation
|
|
Fixed effect model |
Random effect model |
||
|
|
a |
P-value |
a |
P-value |
|
Number of documents adopted at regional level regulating
prices and tariffs |
0.12 |
0.028 |
0.11 |
0.022 |
Table 7
Estimations
of correlation between subsidies and transfers
|
|
Fixed effect model |
Random effect model |
||
|
Coefficient |
P-value |
Coefficient |
P-value |
|
|
VAT
transfers |
0.266 |
0.000 |
0.217 |
0.000 |
|
«Pure»
transfers |
-0.200 |
0.136 |
-0.223 |
0.090 |
Table 8
Estimations
of correlation between tax exemptions and transfers
|
|
Fixed effect model |
Random effect model |
||
|
Coefficient |
P-value |
Coefficient |
P-value |
|
|
Tax relief for particular enterprises |
||||
|
VAT
transfers |
0.007 |
0.451 |
0.013 |
0.065 |
|
«Pure»
transfers |
-0.004 |
0.450 |
0.007 |
0.057 |
|
Tax relief for branches of industry |
||||
|
VAT
transfers |
-0.018 |
0.047 |
-0.024 |
0.001 |
|
«Pure»
transfers |
0.013 |
0.011 |
0.008 |
0.040 |
Table 9
Variation of price indicators in
|
|
1992 |
1993 |
1994 |
1995 |
1996 |
1997 |
|
Index of consumer prices |
26,1 |
22,3 |
8,9 |
6,7 |
3,6 |
10,1 |
|
Index of electric-power prices |
43,5 |
33,5 |
24,8 |
19,9 |
19,0 |
17,8 |
|
Value of consumer good basket,
consisting of 25 food products |
- |
33,7 |
30,2 |
33,6 |
35,7 |
47,3 |
|
Share of value of the consumer good
basket into money income of population |
- |
31,8 |
27,7 |
44,2 |
44,1 |
49,6 |
Source: Prices in