Working Paper: CEPR ID: DP3973
Authors: Konstantin Sonin
Abstract: In a federal state, political leaders of constituent units might protect their enterprises from the federal center (e.g., allowing them not to pay federal taxes). The effectiveness of such protection depends crucially on the ability of local authorities to extract rents from enterprises. They can easily do so, if there are a small number of enterprises with large employment, and local monopolies can be effectively sustained. They cannot do it so easily if regional industry is competitive, political opposition is strong, and the federal center has enough means to enforce payment of taxes. We build a simple model to argue that it is the industrial structure of constituent units that determines political relations between them and the federal centre. The theory is supported by the recent experience of Russia, China, and Argentina.
Keywords: Federalism; Political Economics; Russia; China
JEL Codes: H77; P20; P30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Industrial structure of constituent units (L16) | Political relations with the federal center (H77) |
| Local authorities' protection of large enterprises (L53) | Suppression of intraregional competition (F12) |
| Ability to extract rents from local enterprises (R38) | Lack of cooperation with the federal center (H77) |
| Lack of cooperation with the federal center (H77) | Adverse economic outcomes (F69) |
| Provincial protectionism (F13) | Economic performance in Russia (P27) |
| Presence of strong political opposition (D72) | Effectiveness of protectionism (F68) |
| Federal center's ability to enforce tax collection (H26) | Effectiveness of protectionism (F68) |