Understanding Russian regions' economic performance during periods of decline and growth-An extreme bound analysis approach

This article uses “extreme-bound”-type analysis to revisit the determinants behind the widely differing economic growth in Russian regions prior to the recent global financial crisis. Using data of regional growth in 1995-2006 for 77 Russian regions, it examines the growth drivers for the phase of economic decline up to 1998 and for the period of strong growth afterwards separately. Looking at forty variables considered to be potentially related to growth, it determines, for each of the two periods, the ones robustly associated with Russian economic performance. Among the variables considered are proxies of politico-institutional features, indicators of economic reform, and measurements of both economic and non-economic initial conditions. The main findings are as follows: during the period of economic decline up to 1998, differences in Russian regional growth were almost entirely driven by initial conditions, with resource and human capital endowments, industrial structure, and geographical location playing the dominant roles. However, after the 1998 crisis, the importance of initial conditions declined and was basically reduced to fuel production, advantageous geographical location, and population structure. There is also some evidence that more reform-oriented policies and better regional leadership made a difference. These results could be seen as pointing to determinants of economic performance in periods of actual economic decline being different from those in normal times of economic growth.

► Up to 1998, in a period of economic decline, differences in Russian regional growth were driven by initial conditions. ► Post-1998, with the return of economic growth, the importance of initial conditions for growth declined. ► In a growing economy, reform-oriented policies and better regional leadership appear to have made a difference. ► These results point to determinants of economic decline being different from those of economic growth.