Biggest Firms Are Favored In the Regions

Our governors are primarily interested in big businesses because it is far easier to collect taxes from them than from small and medium-size firms. The problem is that this has become the deciding factor for governors when they determine which enterprises to support in their region's development.

This is not just theory. In his soon-to-be-published book, "Representation through Taxation," Scott Gehlbach, a political science professor at the University of Wisconsin-Madison, gives a detailed analysis of this phenomenon in the Pskov region during the late 1990s. Rather than channeling resources into sectors in which the region enjoys a relative advantage, such as tourism and transportation, the Pskov governor focused on alcohol production. Gehlbach writes that this was not simply because of the steady demand for alcohol, but because it is easier to collect taxes from this sector.

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Gehlbach argues that this problem is not peculiar to Pskov. As a rule, politicians in formerly socialist countries tend to support those business sectors from which they can most easily gather taxes and not those that could prove more beneficial to the region in a larger economic sense. In the planned economy of the Soviet Union, taxation was never an issue, but after it collapsed, a system of taxation had to be built from scratch. In the former Soviet republics, regions depended much more on corporate taxes than on personal income taxes. This created a dilemma: How can the authorities support small and medium-size businesses if most tax revenue is derived from the large local monopolies?

The answer is that smaller enterprises are neglected, and this is exactly what happened in the Pskov region. Mikhail Kuznetsov, who became Pskov governor in 2004, replaced the incumbent, Yevgeny Mikhailov, founder of the region's vodka industry. Kuznetsov tried to break that monopoly but gave up after just six months. After all, who wants to kill the goose that lays the golden eggs?

Gehlbach's book challenges the entrenched belief in Russia that politicians should primarily support big businesses. In the same vein, Robert Bates wrote a book that examines the political development of African countries. He describes how the ruling elite prevent new businesses from developing because the politicians are already so successful in collecting taxes from existing enterprises.

Does that mean the Pskov region is similar to Africa? This is impossible; after all, Pskov has pine trees, bears and vodka. Oh, those political scientists -- they come up with the craziest ideas!

Konstantin Sonin, a professor at the New Economic School/CEFIR, is a columnist for Vedomosti.