The mechanisms of influence of the state on regional economic activity

Analyze foreign economic activity of the Russia. The international economics cooperation of Russian Far East with South Korea. Key factors affecting foreign economic activity. A model of economic cooperation of a domestic region with a foreign country.

Рубрика Экономика и экономическая теория
Вид курсовая работа
Язык английский
Дата добавления 21.06.2016
Размер файла 424,2 K

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If we want to estimate `subnational foreign economic activity' we can try to find similar phenomena in international regionalism. Within this field we can measure a regional “degree of foreignness” or “the degree to which economic activities of the region take away from home”. It can be assessed measuring the region's level of internationalization. There is no generally accepted notion or formula of internationalization, so that internationalization “indices are or are not appropriate according to the tasks we assign to them”.

Therefore combining this approach with a Peter A.Petri's concept of necessity to measure both foreign trade turnover and inward FDI flows, we can construct an indicator to assess general level of regional economy involvement into foreign economic activity, i.e. to measure domestic region's internationalization. It will be seen as a share of the region's international trade turnover in foreign trade turnover in that of the domestic country and a share of the region's FDI inflows in that of the domestic country. These indicators can show the region's `opennnes' to carry out international economic activity. But these indicators should be compared with those of other domestic regions in order to have relevant results. Besides, in order to make it more clear, trade statistics can be assessed by analyzing exports and imports separately.

Similarly, we also can measure the level of 'economic cooperation of a domestic region with its foreign partner' by calling it as mutual internationalization. Therefore it is calculated as a share of international trade turnover between a domestic region and its foreign partner in that of the region. As for investments, it is seen as a share of regional FDI inflows from its partner in a quantum of FDI inflows to the region. And again trade turnover can be separated into imports and exports, and the indicators should be compared to indicators for other foreign partners or regions.

In spite of the fact that it seems that `subnational foreign economic activity' and `economic cooperation of a domestic region with its foreign partner' are estimated successfully, there is still a problem with separating foreign economic activity, implemented by a domestic region and a central government. It is necessary to do, because in some cases a central government may take partial or total control over paradiplomatic economic activity, thereby complementing or substituting regional functions. Consequently, it is not correct to equate `subnational foreign economic activity' to a domestic region's internationalization, likewise to equal `economic cooperation of a domestic region with its foreign partner' to mutual internationalization. The indicators don't show purely regional impact to international activity, but mutual impact of both a domestic region and a central government.

Thus the indicators show foreign economic activity and motivations of a region and a central government as they overlap each over. In other words, only by eliminating such factor as foreign economic activity carried out by a central government from indicators of internationalization, we can assess correctly `subnational foreign economic activity' and `economic cooperation of a domestic region with its foreign partner'.

Within the frames of this work such separation is impossible, because it is necessary to implement huge statistical researches in order to estimate shares of a central government and a domestic region in economic paradiplomacy. After that only one indicator will be necessary: an analysis of `economic cooperation of a domestic region with its foreign partner', because exactly this indicator satisfies the model. However in this work both indicators are necessary, because low level of mutual internationalization with low level of a domestic region's internationalization will more or less a clear evidence of the fact that a central government interferes in paradiplomatic economic activity. It can be indirectly traced due to the fact that subnational foreign economic activity promotes international trade and lured FDI.

Also in this work a central government influence on internationalization described above is not be considered, because of the impossibility to calculate it. Therefore there is a third assumption that there is only a domestic region which interacts with a foreign partner, while a central government role is to increase/decrease subnational political autonomy.

Therefore, a theoretical framework of the master's thesis can be presented as follows:

A dependent variable (DV) is a level of subnational foreign economic cooperation with a foreign country, expressed in the region's level of internationalization and mutual internationalization. Regional and its foreign partner's motivations to develop mutual economic activity is the first independent variable (IV1). The second independent variable (IV2) is an institutional framework or a level of regional political autonomy, designed by a central domestic government. The central government has at least two levers to influence regional political autonomy: legal (IV2,1) and political (IV2,2).

In this model IV1 takes on a value of zero or one, indicating whether the motivations exist. If the motivations exist, then the parties should develop their economic relations, if the motivations don't exist the parties don't cooperate. If motivations exist and the parties cultivate their economic relations then a central government by means of its influential levers can decide on to what extent this activity can be lessened or intensified. A formula of the model can be seen as follows:

DV= f(IV1 (0/1))*f(IV2)

Key factors affecting subnational foreign economic activity: Russian literature analysis

After analyzing the Western literature and creating a paradiplomatic model of subnational economic activity, the next issue to focus on is to see whether the model is applicable to Russia, and if it is, then to understand whether the Russian context makes adjustments to the model. These adjustments should be described.

First of all, it should be noted that theoretical issues of subnational foreign activity in Russia are studied insufficiently. However the works of M.Alexseev and S.Ivanov, as well as those who are the authors of the research project on “Regionalization of Russian Foreign and Security Policy: Interaction between Regional Processes and the Interest of the Central State” can elucidate the features of paradiplomacy in Russia.

In his studies M.Alexseev explores the time period from the 1990s till the early 2000s, trying to find out the fundamental factors which stimulated in the late 1990s and early 2000s the federal authorities to change a strategy from decentralization to centralization. He states that in the 1990s regional authorities had been engaged in “attempts to developing multiple channels of dialog with foreign powers”, fostering thereby subnational international ties. These tendencies were perceived by the central elites as a trend towards the “formation of unitary government at the level of the subjects of the Russian Federation”. In addition, the subnational intentions to develop their foreign economic activity were “seen as destructive to Russia's common market, since it had been linked to rising possibilities of regional elites to control currency emissions, industrial assets, and the flow of goods and services within the country”.

M. Alexseev also illustrates one more issue that was perceived by the center as “undermining its hold on coercive power” and overall economic capabilities, namely the redistribution of revenue flows among the regions. The problem is that “in the 1990s the regions' bargaining with Moscow over taxation, subsidies, loans, and jurisdiction over production assets and natural resources has generally weakened” overall economic capabilities of the center.

Besides the researcher shows that the central authorities were also concerned about vulnerable demographic situation because of illegal and uncontrollable migration, and about increased separatist claims of different ethnic groups.

Accordingly, M. Alexseev comes to a conclusion that the perceived threat from the Russia's common market breakup plus apprehensions regarding economic contraction, demographic vulnerability, and separatist claims in the 1990s brought about to concerns about regional disintegration. As a result “the Kremlin took measures to reduce the regions' capacity both to influence the decision-making process of the center in foreign policy and to develop their own foreign policies and conduct independent “paradiplomacy”. Moreover, the researcher outlines the specific legal mechanisms that Russian central authorities applied to gain more control over the Russian subnational foreign activity.

A. Chirikova and N. Lapina add that due to a severe “overall administrative crisis” in Russia that was in the 1990s, the subnational authorities formed “vertical hierarchies in the regions that is in obvious contradiction with national vertical pyramid of power”. These regional hierarchies were based on a strong executive authority, controlling of practically all public spheres, and preventing any political opposition. Therefore in case of the crisis of the state control, the heads of many Russian regions managed to build up a successful vertical hierarchy of power, providing stability and manageability within the federation as a whole.

However as these regional vertical hierarchies were strong and in many cases self-sufficient systems, they were not controlled by the center both politically and economically. Thus beginning from the early 2000s a new Russian president Vladimir Putin and his team started active administrative reforms at the state level and at the level of relations between the center and the regions, known as “new federalism” According to A. Chirikova and N. Lapina these reforms consists of political and economic elements.

The first set of reforms embraces political sphere, where the changes were carried out in two dimensions. First, changes in the structure of the Federation Council, where status reduction of regional heads and the upper chamber as a whole took place. Second, there was a strengthening of the vertical of power. These changes meant a “depolitization of regional elites” and the fact that “regional elites became more vulnerable from the legal point of view”, and more dependent on the federal center.

The second part of the reforms was aimed to gain more state control over the economy. The reforms affected tax rates and a system of the income distribution between the center and the regions, leading to strengthening of the center financial levers and sharp reduction of those of the regions. In addition, the reforms implied the increase of the state property.

S.Ivanov, assessing the interrelations between the Russian national and subnational actors regarding border issues, states that internal factors of transregional system of cooperation are less important than external ones. The external factors cover boundary regime, national government policy towards its border regions, and ect. Due to this S.Ivanov comes to two conclusions. First, center-periphery relations in Russia are characterized by high level of centralization of material, administrative and legal powers in the sphere of international relations. Second, the federated center doesn't provide provinces with any preferences concerning border relations, thereby collecting custom fees itself. S.Ivanov also argues that the Russian authorities don't perceive development of subnational foreign activity as a driver for growth of provincial economies. All these factors undermine and decrease paradiplomacy in Russia.

Besides, S.Ivanov concludes that the regions, controlling information flows directed to the center, are interested in presenting information about border relations in a way which satisfies expectations of the center. They do it in order to increase their value in the eyes of national government and thereby have the rights to acquire specific benefits and preferences. Thus if “the center pursues a policy toward restriction of border relations, for instance, because of security matters, the regions would generate ideas about threats to security despite the real situation”.

Moreover the regions would probably eager to fulfill the center's ideas because it is conductive to career progress of subnational leaders and elites. Accordingly, “subnational governments' activity in the sphere of international relations depends also on political preferences of regional leaders and elites”.

To sum up, a brief analysis of the Russian experience of paradiplomacy indicates the following. international economic cooperation russia

First, the Russian post-Soviet history of paradiplomacy can be divided into two periods: the first one had been lasting until the late 1990s-early 2000s and is characterized by tendencies to decentralization. The second period started by reforms of a new Russian president Vladimir Putin and his team aiming to centralization.

Second, in the 1990s because of decentralization and overall administrative crisis the vertical regional hierarchies were formed, that provided regional elites with considerable political and economic autonomy from the center. That system was in obvious contradiction to a national vertical pyramid of power.

Third, concerns of regional disintegration, lack of economic and political power triggered the federal authorities to start administrative reforms aimed at higher centralization. As a result, regions have become more dependent on the federal center politically and economically, and thereby have lost their capacities to conduct independent paradiplomacy.

Fourth, in order to raise the influence over the regions the federal government applied three types of levers: legal, political and economic mechanisms.

Model modification according to the Russian context

An exploration of the Russian context regarding the issues of paradiplomacy shows that in case of Russia a central government applies legal and political levers to influence subnational international activity as well. It also shows that there is one more lever used by the central government, which determines an extent of regional autonomy: economic mechanisms. Therefore according to the Russian literature analysis, two elements of political autonomy are added by economic one. Thus now we have three influential factors of a central government to enable/restrain subnational international economic activity. These factors are legal, political, and economic.

Since the factors which determine the institutional framework and thereby regional political autonomy are increased to include legal, political and economic levels, and we investigate subnational foreign activity, but not its internal direction, it is better to use a notion regional foreign autonomy instead of political autonomy of a region.

Thus according to the Russian context, logic and fundamentals of the model of `economic cooperation of a domestic region with its foreign partner' remain unchanged, so that we still have motivations of a domestic region and its foreign partner to cultivate mutual economic relations, enabling/restraining institutional framework, and subnational foreign economic activity itself, estimated by two internationalization indicators. But from now on we consider regional foreign autonomy, instead of regional political autonomy, whose components were added by economic influential mechanisms.

Therefore the influential factors of the institutional framework are as follows:

Legal factors don't change conceptually, because they still cover constitutional regime and regional competencies which go beyond the formal constitution. In the Russian context it is specified to include treaties, decrees, and laws which determine a character of redistribution of power regarding a system of international competencies of the federal and regional authorities. M. Alexseev has shown that the exploration of these aspects by no means is less important than an analysis of the constitution regulations.

As for a political level there is a slight modification, because in the Russian context it was shown that central political power and regional political power influence each other, figuratively depicting a `balance system'. Components of the both political levels were elaborated by A. Chirikova and N. Lapina. The regional influence can be named as a `region', meaning an extent to which a region can influence the federal center. It covers region's economic situation or its effectiveness, which leads to a decrease/increase in absolute values of its contribution to the federal budget, its population, political influence of its leader, the status of an upper chamber in the political system, and the level of a leader's loyalty towards the center. In addition it seems appropriate to extend the list of the components by a strategic importance of the region to the whole country.

The second part is a `central government'. It determines a level of the center's influence on a region. It consists of three components. First, mechanisms through which the local leaders come to power. Second, a performance reward system of the regional authorities. Third, a system of exerting control over regional authority's activity.

Components of an economic level are described by A. Chirikova, N. Lapina, and S.Ivanov. They explain that a federal government may activate tax, budget, and property rights schemes along with a system of custom and administrative fees in order to increase or decrease its control over the subnational foreign activity.

An idea that economic factors influence foreign regional autonomy is also presented in the work of J. Blatter et al. They suggest that «the size of the regional budget come closer to measuring the amount of policy autonomy/influence a regional government possesses».But the researches applied an entire regional budget instead of “the portion of the budget over which the regional government has autonomous decision-making power”. Therefore in case of J. Blatter et al.'s analysis a central government doesn't have direct mechanisms to influence foreign regional autonomy.

Therefore, a theoretical framework according to the Russian literature analysis can be presented as follows:

A dependent variable (DV) is a level of subnational foreign economic cooperation with a foreign country, expressed in the region's level of internationalization and mutual internationalization. Regional and its foreign partner's motivations to develop mutual economic activity is the first independent variable (IV1), and again it takes on a value of zero or one, indicating whether they exist. The second independent variable (IV2) is an institutional framework or a level of regional foreign autonomy, designed by a central domestic government. The central government has three levers to influence regional political autonomy: legal (IV2,1), political (IV2,2), and economic (IV2,3). In its turn political component falls into two parts, which influence each other: region (IV2,2,1) and central government (IV2,2,2).

A formula of the model is unchanged and can be seen as follows:

DV= f(IV1 (0/1))*f(IV2)

Conclusions

Accelerated development of the RFE has become one of the most pressing issues for the Russian central authorities recently. There are many initiatives concerning stimulating its economic growth, including those about promoting its economic cooperation with countries of the Pacific. However if we instantiate it by economic relations between the RFE and RK, we detect that in spite of these initiatives and strong mutual interest to develop economic cooperation, the figures of mutual economic statistics are absolutely and relatively low. Therefore what factors determine the low level of economic cooperation? How his low level can be explained?

In order to answer these questions there is made an attempt to construct a model of `economic cooperation of a domestic region with a foreign country'. This model provides and explanation what can restrain realization of regional motivations and those of its foreign partner to start, maintain or expand mutual economic activity. The model bounds regional and its foreign partner's motivations to develop mutual economic activity with influential factors, which enable/restrain this activity. The result of the fulfilled motivations is mutual economic activity.

Having analyzed Western literature, it was revealed that a central government, influencing a level of regional political autonomy, creates favorable/unfavorable conditions for the region to develop economic cooperation with its foreign partner. A central government has two channels through which it can influence regional political autonomy and construct an institutional enabling/restraining framework for paradiplomacy: legal and political. A central government reaction whether implements or doesn't implement these controlling mechanisms depends on its response to `a many voices phenomenon'.

Also it was found out that there is no suitable explanation of what is understood by `subnational foreign economic activity' and how to estimate it and a level of `economic cooperation of a domestic region with its foreign partner'. That is why it was suggested to apply an interdisciplinary approach in order to create indicators to assess these parameters. The former is estimated by domestic region's internationalization, the latter is by mutual internationalization. In this work both indicators are necessary to assess due to impossibility to separate central government influence and that of a domestic region on paradiplomatic economic activity. If it is done, then the only estimation of the level of `economic cooperation of a domestic region with its foreign partner' is necessary.

The Russian literature review doesn't make considerable modifications to the model, as its logic and fundamentals remain unchanged. The correction was made to include one more influential mechanism into enabling/restraining institutional framework. Therefore there are three central government levers: legal, political, and economic. A political lever was divided into a `region' and a `central government' spheres which influence each other. Also it was suggested to use a term regional foreign autonomy instead of regional political autonomy.

Besides, since J.Blatter et al. considered the size of regional budget as a indicator of regional political autonomy, it is supposed that economic component of regional foreign autonomy is relevant not only within the Russian context, but also within a broader context, comprising other countries. But it is a question for further research.

There are also other options for the further research. First, it can be carried out a detailed analysis of the model's components, especially of the influential factors, according to a specific case, for example, the RFE and RK economic cooperation.

Second, a central government as an actor which substitutes and/or complements a domestic region in economic paradiplomacy should be taken into consideration. After estimating shares of a central government and a domestic region in economic paradiplomacy, it will be possible to calculate a level of `economic cooperation of a domestic region with its foreign partner'.

Third, when the second option will be realized, it will be possible to try to find a balance between regional and central government economic paradiplomatic activity within a specific case in order to make a foreign economic policy optimal. Thus it should be found to what amount a central government should control legal, political and economic influential factors in order make a foreign economic policy satisfy to strategic interests of a country. Therefore, the further research should determine optimal spheres of economic paradiplomatic competencies of a subnational unit and a central government.

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29. АМАзїµ ? ЖДє§ №МіЄЕ°ёЈ ? АМГ¶їш ? ИІБцїµ. “ЗС?·Ї ±ШµїБцїЄ °жБ¦Зщ·В 20ів: »х·Оїо єсАь°ъ ЅЗЗц№жѕИ”. KIEP Korea Institute International Economic Policy East Asia InfoNet, 2010. (Jae-Young Lee, Pavel Minakir, Cheol-Won Lee, and Jeeyoung Hwang “The 20 Years of Korea-Russia Far Eastern Economic Cooperation: new vision and its realization”)

Appendix #1

Shares of the Central Federal District and the Far East Federal District in total Russian international trade

Source: Rosstat, Statistical yearbooks from 2000 up to 2013

Appendix#2

FDI inflows to the CFE and the FEFD

Source: Rosstat, Statistical yearbook 2011, 2013; UNCTAD Handbook of Statistics 2012

Appendix #3

Distribution of FDI inflows to the RFE referring economic sectors in 2009

Source: Levintal' A. “State of Foreign Investment Cooperation and the Ways of Creating Favorable Investment Climate in the Russian Far East”, 2010 // Official website of the authoritative representative of the president of the Russian Federation in the Far East District // p 12 http://www.dfo.gov.ru/dl/files/f4b99410c466277e2a234066050c3a06.pdf

Appendix #4

RFE-SK trade (exports and imports)

Source: The Far East department of the Russian Federal custom services. The RFE total results of the foreign trade from 2008 till 2013

Appendix #5

SK FDI to Russia and the RFE

Sources:

1. Korea Exim Bank, Foreign Investment Statistics 2005-2013;

2. Jae-Young Lee, Pavel Minakir, Cheol-Won Lee, and Jeeyoung Hwang “The 20 Years of Korea-Russia Far Eastern Economic Cooperation: new vision and its realization” //АМАзїµ ? ЖДє§ №МіЄЕ°ёЈ ? АМГ¶їш ? ИІБцїµ. “ЗС?·Ї ±ШµїБцїЄ °жБ¦Зщ·В 20ів: »х·Оїо єсАь°ъ ЅЗЗц№жѕИ”. KIEP Korea Institute International Economic Policy East Asia InfoNet, 2010, p 241-244;

3. Rosstat, Statistical yearbook 2011, 2013.

Appendix #6

Theoretical model of `economic cooperation of a domestic region with its foreign partner' according to the Western literature analysis

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Размещено на http://www.allbest.ru/

Appendix #7

Theoretical model of `economic cooperation of a domestic region with its foreign partner' according to the Russian context

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Размещено на http://www.allbest.ru/

Размещено на Allbest.ru

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