A Look at Regional Development in Russia in View of the World Development Report 2009

1. A Look at Regional Development in Russia in View of the World Development Report 2009 Zeljko Bogetic, Lead Economist for Russia Moscow, March 31, 2008 Joint workshop of the Ministry of Regional Development and the World Bank

2. PART 1. Russia: Economic and Geographic Specificities • Low economic density • Large distances • Barriers to market access

3. Russian Population Density 1996 Population per Square Kilometer Source: Fay, Felkner and Lall 2008

4. Economic Distance: Market Access Based on Euclidean Distance Source: Fay, Felkner and Lall 2008

5. Road Network Used for Travel-Time Estimations of Market Access by Municipal Rayons

6. Market Access Estimates Based on Road Network Quality Source: Fay, Felkner and Lall 2008

7. Comparison of Market Access Estimated by Two Methods: • Overall, road network density tracks closely Russian population density • Russian road network was largely built to service areas with a high population density (on a national scale) • Road network is not dramatically different from Euclidean distance measures, on a national scale • Detailed diagnostics/estimates for specific regions are needed Source: Fay, Felkner and Lall 2008

8. Barriers to Doing Business and Market Access in Russia Are Relatively High Ease of Doing Business, 2008

9. Significance of Specific Business Climate Issues in the Tver Oblast as Compared to Russia 1-Access to funding; 2-Cost of funds; 3-Telecommunications; 4-Power; 5-Transport; 6-Access to land; 7-Land title or leasing; 8-Tax rates; 9-Tax policy; 10-Customs and trade regulations; 11-Licenses and permits; 12-Labor legislation; 13-Education skills and level in the labor market; 14-Unstable policy; 15-Unstable macroeconomic environment (inflation,national currency exchange rate); 16-Functioning of the judicial system; 17-Corruption; 18-Street crime/thievery/disorders; 19-Organized crime/mafia; 20-Unfair competition policy by other market participants; 21-Breach of contract by consumers and suppliers.

10. 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 9 8 2 13 20 14 17 1 6 11 18 15 16 7 10 21 19 4 12 3 5 Россия 05 Рост 07 Significance of Specific Business Climate Issues in the Rostov Oblast as Compared to Russia 1-Access to funding; 2-Cost of funds; 3-Telecommunications; 4-Power; 5-Transport; 6-Access to land; 7-Land title or leasing; 8-Tax rates; 9-Tax policy; 10-Customs and trade regulations; 11-Licenses and permits; 12-Labor legislation; 13-Education skills and level in the labor market; 14-Unstable policy; 15-Unstable macroeconomic environment (inflation,national currency exchange rate); 16-Functioning of the judicial system; 17-Corruption; 18-Street crime/thievery/disorders; 19-Organized crime/mafia; 20-Unfair competition policy by other market participants; 21-Breach of contract by consumers and suppliers.Source: Rostov Oblast Survey, 2007;BEEPS-Russia, 2005.

11. 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

12. 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 is likely to increase further

13. PART 2.Major Conclusions for Russia: • Concentration of economic activityis unavoidable and desirable for Russia • Spatial inequality in living standards and access to basic social services is undesirable • Russia needs botheconomic prosperity through a higher concentration and a more equitable distribution of basic social services across its vast territory, subject to its budget constraint

14. 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 factors: 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

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

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

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

18. 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.

19. 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.

20. 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

21. A Framework for Spatial Integration Policy

22. Policy Instruments for Russia’s Lagging Regions

23. 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

24. SUMMARY Key Propositions: The findings of the World Development Report that are based on international experience are relevant for Russia but their application must take into account regional economic and geographic specificities. More detailed regional growth and development diagnostics are needed to formulate and implement effective regional development strategies. Russia has fairly good economic prospects for the medium term, which is a solid platform for addressing key regional development issues: these are difficult challenges, but not insurmountable. 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 strategies should be guided by twin objectives: support of existing growth centers and inter-regional connectivity and integration of social conditions across Russia, subject to the fiscal constraints.