The World Bank Regional Development in Russia: Challenges and Dilemmas REGIONAL AND TERRITORIAL DEVELOPMENT: THE WORLD BANK’S EXPERIENCE Zeljko Bogetic Europe and Central Asia Region The World Bank European Commission’s “Open Days” Brussels, October 8, 2008

The World Bank OUTLINE I. Geography matters II. A policy dilemma III. Policy message

The World Bank PART I. Russia: Geography matters Very low economic density Very large distances Barriers to market access

The World Bank Source: Fay, Felkner and Lall 2008 DISTANCE RULES--1D COUNTRY: Russian Population Density Population per Square Kilometer

The World Bank Source: Fay, Felkner and Lall 2008 Economic Distance: Market Access Based on Euclidean Distance

The World Bank Road Network Used for Travel-Time Estimations of Market Access by Municipal Rayons

The World Bank Barriers to Doing Business and Market Access in Russia Are Relatively High Ease of Doing Business, 2008

The World Bank Regional policy choices: high stakes game Russia’s specificities imply that the benefits of appropriate regional policy choices can be high. By contrast, wrong policy choices are likely to carry high economic costs

The World Bank Concentration Economic mass is spatially concentrated in Russia –A similar situation can be observed in 25% of countries. For instance, Botswana, Brazil, Norway, Russia, and Thailand produce half + GDP on 5% land BUT: Spatial concentration in Russia still has a way to go

The World Bank PART II. A policy dilemma How to Encourage Concentration in Growth Centers and Achieve an Equitable Distribution of Basic Social Services? – Market forces favor concentration – But policy may be concerned with “balanced growth” Way out: agglomeration, interconnectivity, social integration

The World Bank Concentration of economic activity is unavoidable and desirable for Russia Spatial inequality in living standards and access to basic social services is undesirable Russia needs both economic prosperity through a higher concentration and a more equitable distribution of basic social services across its vast territory, subject to its budget constraint

The World Bank An efficient regional policy should not force economic production in regions without sufficient demand (e.g., USSR, pre-reform China). A policy to establish production facilities in sparsely populated areas is very likely to involve high public costs and will likely fail to achieve the stated objective.

The World Bank PART III. WHAT ROLE FOR POLICY? How to Encourage Concentration in Growth Centers and Achieve an Equitable Distribution of Basic Social Services? Key to success: Integration both within Russia and with other countries Policy instruments for achieving greater integration: Supporting existing growth centers, providing for infrastructure, and develop interconnectivity between them and with neighboring regions. Enabling a free flow of factors of production: labor and capital across space. An efficient migration policy. Integration of poorer and isolated regions assumes the provision of a minimum package of basic social services.  Economic concentration with inter-regional connectivity and social integration, across space

The World Bank Source: Fay, Felkner and Lall 2008 Strengthening Transport/Logistics Links between Lagging Regions and Adjacent Growth Centers is a Possible Way to Provide for Efficient Spatial Integration of Russian Regions

The World Bank Russian Regions Differ Significantly According to the Level of Economic Development Per capita GRP, 2005 (rubles) average

The World Bank But They Also Differ Significantly In Terms of Access to Basic Social Services Infant mortality rate (per 1,000 of live births), 2005

The World Bank Large differences between Russian regions suggest that there is no single, best approach to regional economic policy and reforms. Regional and municipal policy must take into account regional and local conditions.

The World Bank Integrating Lagging and Leading Areas Can Help Integrate Russian Economic and Social Space Three sets of measures for integration –Institutions –Infrastructure –Incentives Three mechanisms for implementation –Taxes –Public spending –Regulation

The World Bank A Framework for Spatial Integration Policy InstrumentsIntegration Policies Institutional PoliciesInfrastructure PoliciesIncentive Policies TaxesClarification of tax assignments across levels of government; intergovernmental transfers Tax expenditures (fiscal incentives, subsidies) SpendingEducation and health sector expenditures Development of interregional highways, airports, and ICT Public and local roads, irrigation, power supply, and innovation RegulationLand and housing market reform, banking reform, macroeconomic and trade policies, and national price and wage equalization Infrastructure competition policies Industry location regulations, and investment climate

The World Bank Policy Instruments for Russia’s Lagging Regions Region CircumstanceNon-isolatedIsolated Sparsely populated lagging regions Institutions Land market reform Education sector development Public service provision in health, water supply, and sanitation Isolated: Republic of Tyva, and Altai Republic Non-isolated: Republic of Karelia Densely populated lagging regions Institutions Infrastructure (a combination of spatially blind and integrative policies) Road construction ICT Regions in European Russia, and regions in South Russia (Stavropol Krai) Institutions, infrastructure and incentives (a combination of spatially blind, integrative and focused policies and programs) Construction of local roads Irrigation Workforce training, and employment support (Chita Oblast, Buryat Republic, and Far East regions)

The World Bank The Role of Government in Regional Development Policy Regional development policy is a task for all levels of government. It requires coordination of federal, regional and local development programs. At the federal level Macroeconomic policy and the rule of law National projects of federal significance (construction of interregional railways and highways, airports, and ports) Overall investment climate Trade policy Tax policy Public expenditure policy aimed at revenue redistribution (pensions, intergovernmental transfers). At the regional and local levels: Regional and local investment climate Land markets Regional and local infrastructure Improving the quality of life: health, education and other social services

The World Bank SUMMARY Key Propositions: Geography matters but it’s not destiny (e.g., Canada, Sweden, Japan); Success requires avoiding major mistakes (e.g., forcing production in regions with a limited market access and a low economic density); Regional development strategies that run counter to market forces are unlikely to be successful; Effective regional development strategy in Russia should be guided by twin objectives: (i) support of existing growth centers and inter-regional connectivity and; (ii) integration of social conditions across Russia, subject to the fiscal constraints.

The World Bank THANK YOU