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It should be noted that the very fact of approval of the Methods of distribution of fi nancial resources of the Fund of Financial Support of Regions by the Resolution of the Government and the changes made in these methods in comparison with the principles applied throughout the preceding years may be evaluated in a positive way. No doubt, in the case the Russian Federation continued to maintain the system permitting to link pref erences shown by regional voters and the decisions taken by the regional authorities in the tax and budgetary sphere, the respective changes would result in the creation of favorable fiscal incentives for subnational authorities. The effects of the application of the new meth ods in the present situation will be revealed by the results of 2005 and 2006.

2.3.4. Social policy: changes in the division of respective powers among the federal, regional, and local authorities. Monetization of social benefits The approval of the legislation aimed at the liquidation of unfunded mandates (the so called monetization of social benefits) in 2004 was closely related to the development of interbudgetary relations and had a wide public response. Earlier, there had been made amendments to 155 laws currently in force, which contained provisions about social bene fits. Besides, there was abolished law No. 41, which declared social benefits never fi nanced in practice.

Since January 1, 2005, cash payments should have substituted the right of free use of urban and suburban transport services, free medicines, and free medical treatment at RUSSIAN ECONOMY in trends and outlooks health resorts. Initially, the RF Finance Ministry has proposed to substitute more than social benefits with cash payments.

All recipients of social benefits were>

23 billion.

In theory, subjects of the Russian Federation had enough time to evaluated the changes and determine if they maintain social benefits and in what forms.

However, in spite of the measures taking for these purposes, there may be predicted certain difficulties related to the monetization of social benefits exactly at the regional level.

First, the very fact of>

Second, the>

Third, due to the fact that there are sufficient grounds for the emergence of the prob lem of soft budgetary constraints discussed above (i.e. regional authorities have good rea sons to believe that the federal authorities will distribute additional financial resources throughout the year), regional authorities would have incentives to understate the level of financing of the abolished social benefits in order to receive the respective resources from the federal budget.

Fourth, the process of approval of the respective legislative acts at the level of RF subjects as concerns the problems being in the jurisdiction of regions was the prerogative of the regional authorities and should not be subject to control at the federal level; there fore many regions had no time, could not, or did not want to approve respective laws by the beginning of the new financial year. Meanwhile, the population links the flaws of the new system of social protection with the legislation approved by the federal authorities.

Section 2.

Monetary and budgetary spheres 2.3.5. Switching to the new procedures governing the election of the heads of executive authorities of RF subjects On December 15, 2004, there were published the amendments to the federal law УOn the general principles of organization of legislative (representative) and executive au thorities of RF subjects.Ф The amended law contained the decision about the actual abol ishment of the electivity of the heads of executive authorities of RF subjects. According to the new scheme, the direct election of the heads of regional executive authorities is abol ished and substituted by the appointment of the candidate by the legislative authorities of RF subjects. The candidate for the office of the head of the regional executive authorities should be nominated by the RF President. The new procedures governing the election of the heads of RF subjects will no doubt have an impact on the state of interbudgetary rela tions and subnational finances.

On the one hand, the motives of the federal authorities facilitating the transition to the new procedures envisaging the appointment of the heads of executive authorities of RF subjects are clear. Alongside with the purely political reasons, including the toughening of administrative control over the economic policies pursued by regional authorities, en hancement of controllability of the country, transfer of a number of functions performed at present by territorial agencies of the federal authorities under control of appointed offi cials. It may be surmised that these decisions resulted from the experiment of appointment of plenipotentiary representatives of the President in federal okrugs, although the positive results of this experiment turned out to be more modest than initially expected. The results of the activities of the Presidential representatives have demonstrated that the only impor tant outcome of their work was the harmonization of regional legislations with the federal legislation. However, it should be noted that this result could be well achieved by the use of available institutions of federal authorities (primarily, procuratorsТ offices). In the regions of the Northern Caucasus, the office of Presidential representative could be well justified by objective circumstances; however, first, it does not provide the grounds for the establish ment of such offices for other regions (federal okrugs), and, second, as the practice re vealed, the efficiency of the measures taken by the plenipotentiary representative of the President primarily depends on the personality of the official taking this post.

On the other hand, the authors believe that the negative long term consequences of these decisions are as clear as the national benefits of the abolishment of elections of gov ernors are illusory. Thus, alongside with the purely political reasons the major factors be hind the switching to the actual appointment of the heads of regional executive authorities were the creation of possibilities for optimization of the structure of regional executive au thorities, liquidation of overlapping functions as concerns the territorial agencies of the federal executive authorities, the executive authorities of RF subjects, and Presidential representatives. It should be noted that the solution of all problems discussed above could be achieved by the improvement of the federal legislation as concerns the division of pow ers and enhancement of efficiency of the structures of federal executive authorities per se.

Besides, there may be listed the following flaws of the decision about the appoint ment of the heads of regional executive authorities in a long term outlook.

First, one of the main reasons of the efficiency of the federative state structure is de centralization of responsibility for the decisions taken by the authorities including the deci sions in the sphere of tax and budgetary policies. A decentralized system of power implies the accountability of the elected authorities to their voters; it should be noted that the higher is the level of decentralization, the shorter is the distance dividing the authorities and the voters. In the situation of an efficient division of powers, decentralized systems re RUSSIAN ECONOMY in trends and outlooks sult in more efficient functioning of the public sector than centralized structures14. At the same time, in the situation, where governors are appointed and legislative assemblies may be dissolved, regional authorities will reorient towards the federal authorities as concerns the decision making process, what will result in the removal of many advantages of central ized systems. It may be argued that the responsibility of regional authorities to their voters was not a determining factor in the process of decision making at the regional level; how ever, in this case the efforts of federal legislators and the resources of the federal authori ties at large should be directed to putting in place the mechanisms aimed at the ensuring such responsibility. Thus, one of the possible mechanisms of responsibility of governors could become the procedure of recall of the top local executive officials initiated either by the federal authorities (as represented by the RF President), or the population (by referen dum), or the local Legislative Assembly (vote of no confidence) on the condition that such a decision is clearly defined in the legislative terms and there is a closed list of the grounds, on which the head of a region can be dismissed from the office. For instance, the Institute of the Economy in Transition has many times proposed to introduce such an efficient mechanism of control of conscientiousness of the financial policies pursued by regional authorities as the institution of the external financial management, which has been partially stipulated in the new budgetary legislation (see below).

Second, the creation of a new system of interbudgetary relations, division of powers between the levels of state authority, approval of other decisions in the sphere of the re form of the budgetary system have been based on the prerequisite that regional authori ties should be independent within the limits of their jurisdictions. Changes in the system of incentives and responsibilities of regional authorities will result not only in the fact that the tools and institutions introduced over the last few years in the practices of interbudgetary relations at a great cost may turn out partially inefficient, but to the search for new mecha nisms of interbudgetary regulation based on coercion and hierarchical control. The latter can only enhance the trends towards centralization and manifestations of negative effects of the new system.

Third, centralization of responsibility may result in a slowdown of already slow pace of the reform of the economy and the budgetary sphere. It may be surmised that being lim ited by responsibility to the President, the appointed governors will less actively assume the risks related to the implementation of too often unpopular reforms. At the same time, the voters will believe that the President, who appointed the governor, should bear respon sibility for the decisions taken at the regional level; therefore the President will also shun the active support of risky decisions taken by the appointed official. The first outcomes of the monetization of social benefits at the regional level have demonstrated that already at present voters are inclined to blame not regional, but federal authorities for the failures and negative effects of the reform.

As a result, there may be drawn the conclusion that the last political initiatives ad vanced by the federal center in the sphere of regional policies may have an ambiguous im pact on the state of the economy and budgetary sphere at the regional and local levels of authorities in the medium and long term outlook. The new system of state authorities may prove to be less efficient than the one, which has existed over the last few years. In any case, it may be surmised that political and economic costs of improvement of this system could be significantly below the possible costs related to the functioning of the new sys tem.

See, for instance, Buchanan J. M., "Federalism and Fiscal Equity" // American Economic Review. - Vol. 40 (4), Septem ber, 1950, pp. 583 599, Oates W. E., Fiscal Federalism. - New York: Harcourt Brace Jovanovich, 1972.

Section 2.

Monetary and budgetary spheres 2.3.6. Amendments to the budgetary and tax legislation affecting the state of interbudgetary relations The changes occurring in the sphere of the federal legislation in 2004 and aimed at the regulation of interbudgetary relations and subnational finances turned out to be so sig nificant that it is necessary to dwell on the analysis of these legislative acts, which have set new basic principles of interbudgetary relations in Russia for a medium term outlook.

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