Rural local self-government challenges and development prospects

Adukov R.H., Doctor of Economic Sciences, Professor; Head of Division; All-Russia Research Institute of Agriculture Economy, Labor and Governance (VNIETUSH)

Adukova A.N., Candidate of Economic Sciences; Leading Researcher; VNIETUSH

This article was published in “Local Self-Government in the Russian Federation” journal, 2007, № 7

Experts fairly emphasize that local self-government system should be designed taking into account regional specifics. In the northern regions of this country the most important differentiations include sever natural and climatic conditions, vast unpopulated areas, lack of road networks and extremely low density of population. At the same time, it seems that there exist certain universal scientific and methodological provisions, which should serve as the basis of the local self-government system regardless regional specifics. Based on research findings an attempt has been made to formulate such provisions.

The study (including written and oral surveys of various population groups) evidences that the majority of respondents underestimate the importance of the local self-government in overcoming crisis and fostering socio-economic development in this country. Therefore, it is expedient to start from this particular problem in presenting the study findings.

1. Role of local self-governments in economic and regional development

The analysis shows that in order to encourage economic and regional development, including in rural areas (that dominate in the north) it is necessary to ensure certain basic conditions: in particular, democratization of government management, demonopolization of the national economy, as well as sustainable and efficient government authorities.

The democratization of government management is a key prerequisite for local self-government development. The demonopolization of ownership encourages multi-structure economy. The existence of sustainable and efficient government authorities is needed to create appropriate business conditions, covering a broad range of aspects: favorable rules of play, safeguarding of ownership rights, etc (table 1). Moreover, the sustainable economic development is possible only provided that the rules of play are adjusted to managers with average capabilities. In this context the economic and regional development in Russia is impeded by two factors: inadequate development of local self-governments and unfavorable business environment. Consequently, the efforts of government authorities and economic research community should be focused on these areas.

Table 1. Factors, which shape business environment in agricultural sector (provided the existence of multi-structure economy)

№	Factors *
1	Political and administrative support (creation of favorable environment)
2	Financial support (optimization of input-output balance, insurance)
3	Information, innovation, marketing and legal support
4	Access to inputs (financial, physical, information)
5	Training and professional development of agricultural workforce
6	Access to marketing outlets
7	Protection of domestic market, encouragement of internal competition
8	Supporting of equilibrium in the agricultural and food market (government procurement, food interventions)
9	Safeguarding of ownership rights, including rights of small owners
10	Promotion of agricultural research, seed production and livestock breeding
11	Construction and maintenance of expensive infrastructure facilities
12	Creation of acceptable rules of play, ensuring their stability

* These are functions of government management in agriculture.

The analysis shows that the most of the above listed conditions are not provided. This means that the government does not perform appropriately its own economic functions.

The following indicators may be used to control, whether the government complies with the above listed requirements: business conditions are adjusted to managers with average capabilities (over 85% of large-scale farms operate stably); doors to agricultural business are opened for every citizen in this country, having adequate professional background; the national food security is not threatened.

While business environment is important for economic development, the decisive factor in social development is the level of local self-government performance. Analyzing cause-effect relations in economic and regional development two interlinked development chains have been identified:

1. Democratization of government management → development of local self-government → strengthening of rural economy → intensification of rural citizens’ creative efforts → establishment of civil society → rural development.

2. Democratization of government management → encouragement of multi-structure rural economy → creation of acceptable business environment → economic development → rural development.

In this context the relevant question arises: why the role of local self-government is so important?

The practice shows that the relevance, efficiency and effectiveness of this power institution are determined by the fact, that the level of local self-government development is the core indicator of socio-economic democratization in the country. In its turn, in the modern world the democratization (i. e. decentralization of power and resources) is a key factor of the national socio-economic development. Therefore, it can be stated without exaggeration that the future of Russia depends on the local self-government development.

Today, figuratively speaking, the front line in struggling for democratic development in Russia and in struggling for Russia itself is the local self-government. This enables to state that the federal law N 131 “On Underlying Principles of Local Self-Government in the Russian Federation” is essential for this country. This necessitates especially responsible attitude to ensure high quality in drafting its provisions.

A review of topical publications and findings of our surveys demonstrate that many respondents associate the local self-government development only with local socio-economic issues. Meanwhile, it tackles a more important and profound process — an alteration of ideological basis of the society by building relationships based on fairer principles, which enable to generate high social and economic effects.

2. Assessment of current position of local self-government in Russia

Considering the existing situation in this country a question “Whether the local self-government exists in Russia?” may seem to be inappropriate at the first glance. However, this issue, as in the past, currently is extremely imperative for our country. The point is that such power institution actually does not exist in Russia. To prove this we can present several arguments.

1. Despite numerous definitions of local self-government the author refers to the system of regulation and development of socio-economic and other relationships in settlements addressing local challenges based on self-organization, predominantly, by relying on own resources. However, own resources are, first of all, own revenues. While, in the prevailing majority of rural administrations their share varies within 5-7%, i. e. this share is negligible.

At the same time the experience shows that to ensure institutional and financial self-dependence of local self-governments (that is stipulated in article 12 of the RF Constitution and in the European Charter of Local Self-Government ratified by Russia in 1996); the share of such revenues should constitute around 75%. In rural settlements in Russia such indicator is by 12-15 times lower the generally recognized standard. Therefore, in the current context it is impossible to address local challenges “by predominantly using own resources”.

The similar poor situation is at the district level that unjustifiably is ascribed to the local self-government system. For instance, in 2006 Kuznetsk District (Penza Oblast) anticipated not growth, but decline in revenues from 198 715 to 179 335 thousand Rubles (by 9.6%). The district expenses were expected to decrease markedly from 90 397 to 79 463 thousand Rubles (by 12.1 %). Taking into account inflation, the overall reduction of the district revenues and expenses is anticipated by more than 30%.

Consequently, the new federal law does not contribute to resolution of social problems, but rather creates prerequisites for social deterioration in Kuznetsk District. As the analysis shows, the similar situation is in many other districts in Russia. This means that district administrations (both as rural administrations) have to focus their efforts to implement programs and powers delegated from higher authorities. As a result, the scope for own initiative of district authorities themselves has been minimized. This implies that the federal law N 131 on local self-government does not create favorable environment for efficient performance of neither local nor district governments.

2. Monitoring exercise carried out by the RF Ministry of Finance in 2006 demonstrated that only 2% of municipalities achieved the self-dependence level that was consistent with the worldwide standard. The same conclusion has been drawn by experts of the RF Accounts Chamber.

3. To ensure self-dependence of local authorities the share of local budgets in the national consolidated budget is important. The practice shows that it should not be less than 20% (the similar indicator in the surveyed advanced economies is 22.6%). According to the official data, in Russia this indicator is lower by two times, even including district budgets, allocated to perform government management functions, but mechanically ascribed to the local self-government system. Actually, its value is even lower.

The above presented arguments persuasively evidence the actual non-existence of effectively performing local self-government in Russia. Consequently, the whole governance branch is not involved; rural depopulation is accelerating. In this respect the adverse impact of inadequate self-government development is stronger than the policy to liquidate unpromising villages.

As a consequence, cities (especially, Moscow) tend to experience huge pressure due to massive inflow of population from other regions; and the tremendous creative potential of the nation remains unutilized, though the scale of this potential (as foreign experience demonstrates) is not less than that concentrated in the national oil and gas sector. Taken into account that the local self-government development level is the key indicator of socio-economic democratization level, the conclusion is distressing: the system of socio-economic relationships built as a result of reforms has no similarities at all with the real democracy. Therefore, until these relationships are appropriately modified, rural areas in Russia will not develop, and the availability of budget funds in rural settlements will remain low.

In other words, if there is no efficient local self-government, there is no real democracy, i. e. there are no conditions to build the civil society, to encourage regional development, to address many other pressing needs of rural countryside and the society as a whole.

3. What impedes local self-government development in Russia

In the context of the above mentioned a question arises: “Whether the Russia’s leaders realize, to what extent the existence of self-dependent local self-government system is important for this country”? Undoubtedly, yes. This is evidenced by the fact that since the beginning of the reforms 3 laws on local self-government were adopted in Russia (in 1991, 1995 and in 2003). This is an unprecedented case. Moreover, all those laws were adopted on the eve of presidential elections and were presented as enormous steps in democratic development in the country.

But actually all those laws have not contributed to local self-government development and, correspondingly, to the democratic development in Russia.

In the course of the study the existing legal and regulatory framework relating to local self-government in Russia (including the federal law N 131) has been analyzed. The study results demonstrate that the shortcomings of the accepted local self-government model (caused not only by the federal law N 131, but intra-budget relationships as well) are not of tactical nature, but result from falseness of the underlying ideology. This is explained by the fact that the model envisages “sharing of budget cake”, rather than growth of well-being of rural areas and the country as a whole. In other words, this model does not contain development potential and, therefore, it can not be effective.

Formally, Russia’s leaders have undertaken numerous measures to promote rural development: the Regional Development Department has been set up at the RF Ministry of Economic Development and Trade; the RF Ministry of Regional Development and the RF Ministry of Healthcare and Social Development have been established; the RF Ministry of Agriculture has been assigned rural development functions; the federal program “Social Rural Development until 2010” is being implemented; the federal law on local self-government (N 131) has been enacted; the Sustainable Rural Development Concept has been drafted, etc.

However the key problem — the local self-government development — remains unresolved. Its complexity is caused by the need to reallocate powers and resources to the benefit of the lowest level in the governance system — to authorities in settlements. But leading government officials, first of all, at the federal level, seeking to preserve their monopoly on power and resources, hamper local-self-government development. As a result, in Russia the government authorities themselves have become the main impediment to the regional and national development.

In other words, the government is aware of mechanisms to overcome crisis and to foster rural development, but due to reasons of subjective nature they remain unutilized. As a result, in Russia the issue of local self-government development becomes more and more ethical, rather than the political and socio-economic one. Both in terms of the society development and human rights enforcement, preventing self-government development in the 21st century is not only economically and politically inexpedient and disadvantageous, but indecent as well.

It is remarkable that in the second half of 19th century, despite the recent elimination of serfdom, the Russian monarchy contributed substantially more to the local self-government development than existing authorities in Russia that declare themselves as democracy supporters.

We have attentively examined arguments of opponents of local self-government in Russia (the people is not ready; there are no human resources in rural areas; there are no funds for all; it took 200 years in foreign states to implement that; in Russia the national genetic potential has been lost; there will be massive misappropriations; the local self-government threatens the territorial integrity of Russia) and have arrived at the conclusion on their unsoundness. For instance, one of the most widely used arguments is “the lack of human resources in rural areas”. But this is not the cause, but the implication of the lack of effective local self-government system. This is evidenced by the fact that in Moscow there is a lot of professional staff, but according to the RF State Statistical Committee the capital is ranked the last among regions in terms of self-government development. That means that the problem is not associated with the human resources availability and any other good intentions.

In many cases decisions made by federal and regional authorities in relation to local self-government can not be explained reasonably. Sometimes actual forgery happens. For example, the RF Budget Code distorts a concept of “own revenues” by assigning nearly all monetary transfers to this category. Thereby local budgets are artificially augmented at the expense of the state budget; that creates an illusion of local self-government development in Russia.

In addition, budgets of district administrations that perform government functions are also classified as local budgets. The new edition of the RF Budget Code excludes a concept of “minimum social standards”. In Sverdlovsk Oblast rural settlements have disappeared entirely: in the region only 74 municipalities (for 5 million people) have been left, i. e. the whole oblast has been transferred into the system of urban districts. In Domodyedovo District (Moscow Oblast) several dozens of villages (in the past — rural settlements), have been incorporated into the urban district. In a number of other districts in Moscow Oblast as a result of enlargement the number of rural settlements has decreased by over 5 times as compared to the Soviet period. And there are dozens of similar cases in every region.

Despite illusory chaotic nature of the above mentioned and other defects as well as unsound decisions relating to local self-government, all of them have precise direction — to preserve and to further strengthen centralization of power and resources. Consequently, they impede the political and socio-economic democratization in the Russian society and, therefore, hamper rural development and the overall national development.

4. Local self-government development prospects in Russia

Researchers and practitioners propose various ways to develop local self-government in Russia. They all envisage to increase local budget revenues from various taxes. While not challenging the legitimacy of such approaches, in our opinion, in Russia it is advisable to support the different local self-government model that is based on rational principles of formation of management systems oriented to harmonize interests within “citizens — government — business” system, to increase budget revenues of all levels and to address other pressing issues in Russia. The recommended ways to encourage local self-government development are presented in Table 2.

Table 2. Recommended local self-government development measures in Russia

№	Arguments
1	Coincidence of vector of interests of all governance levels (establishment of local self-government on a territorial self-supporting basis)
2	Democratization of inter-budget relationships
3	Modernization (simplification) of tax system
4	Modernization of budget leveling mechanism
5	Selection of rational option to systematize local self-government functions
6	Improvement of local self-government structure
7	Concentration of local self-government support functions at one ministry (currently — at 4 ministries)
8	Establishment of the local self-government vertical
9	Return to single-level self-government
10	Optimization of election time of local self-government officials and duration of their period of office

Let us consider a summarized justification for each local self-government development directions specified in the table.

4.1. Coincidence of vector of interests of all governance levels

In Russia the existing power model disunites interests of various governance levels. This is because the taxes are divided into federal, regional and local ones. Moreover, the higher the governance level, the more reliable the tax revenue sources are. But settlements are entitled to rely on the least collectable taxes, having low collection potential. As a result the principle of democratization of inter-budget relationship is ignored, that makes impossible to decentralize governance.

Uniting of tax interests of all power levels (i. e. establishment of governance on territorial self-supporting basis) will contribute to increased efficiency of inter-budget relationships. Such matching of vector of interests will entail that higher authorities will be interested in successful performance of lower-level authorities, and vice versa. Ultimately, that will strengthen the governance system in this country, that is essential to promote democracy in Russia (if the power is weak, the democracy is basically impossible).

To implement the proposed approach the overall tax revenues generated on a rural settlement territory is recommended to allocate in accordance with the following principle: “all natural and legal persons, which earn their income on a settlement territory, should allocate taxes by governance tiers in the following proportion: for the settlement — 60%, for the district — 20% for the region — 10% and for the federation — 10% (while preserving the existing monetary transfers). Naturally, these and other figures are not spun out of thin air. The orientation on this proportion is necessary to narrow a gap between the share of own revenues of rural settlements and generally accepted standards.

It should be specially noted, that the total expenses required to implement this proposal amount only to 1.2% of the consolidated budget of the Russian Federation. Bearing in mind that this measure will facilitate to overcome crisis on 2/3 of the national territory, where 39 million people (or 27% of population) live, one should acknowledge that these expenses are minor. That is not much is needed to deal with social issues in rural areas, as it seems at first glance.

In our opinion, it may take 2-3 years to offset these expenses, but not longer than 5 years. Taking this into account and also considering anticipated social and economic effects of these allocations, one should regard them as beneficial investment in rural and national development.

4.2. Democratization of inter-budget relationships

In the majority of rural settlements 85-95% of their budgets are spent on salaries, utilities and housing services. This means, that local budgets are “eaten away” and are not oriented to foster local development.

As it was already mentioned, the advanced experience evidences that the share of local (settlement) budgets should comprise 20% in the consolidated budget of the Russian Federation. And 75% of local budget revenues should be generated from own sources.

4.3. Modernization of tax system

The tax system should be liberal, encouraging development, simple, clear, transparent and stable. As a result of considering possible options we recommend to replace the VAT, profit tax and gross income tax (including single agricultural tax) by a revenue tax on sales of products, services, property and property rights (preserving the existing tax revenues). The expediency of this proposal is dictated by the following considerations:

1. VAT is quite an uncomfortable tax for enterprises; moreover, it allows large abuses.

2. Profit is a key indicator of enterprise economic performance sustainability. But enterprises tend to conceal the profit tax; and the government is unable to objectively diagnose “the national economy health” and, consequently, to devise efficient development programs.

The implementation of the recommended measure will enable to improve transparency of the national economy, to upgrade quality of business planning at enterprises and to increase effectiveness of government economic development programs. At the same time the revenue tax for most of business entities in rural settlements will vary within 3-15%; that is quite acceptable.

There are grounds to suppose that such simplification of tax system will be an efficient measure to liberalize the economy.

4.4. Modernization of budget leveling mechanism

The existing mechanism of budget availability leveling envisages redirection of negative transfers from settlements to the region, leaving aside the district. Transfers to settlements with low budget availability are allocated from the regional center that complicates the leveling mechanism, strengthens centralization of power and resources at the regional level.

In this context it is proposed to implement leveling initially at the district level and then to redirect negative transfers from the district to the region, that will steamline the leveling mechanism.

4.5. Selection of rational option to systematize local self-government functions

The local self-government structure should be improved. The local self-government structure at district level is complicated that impedes efficient performance of employees.

As a result of content-based function systematization we have elaborated the district administration structure model that would enable to improve performance of employees. It is easy to justify by comparing the actual structure of Kuznetsk District Administration (Penza Oblast) (diagram 1) with the recommended structure (diagram 2).

4.6. Concentration of local self-government support functions at one ministry

In Russia there are 4 ministries responsible for rural development: the RF Ministry of Economic Development and Trade, the RF Ministry of Regional Development, the RF Ministry of Healthcare and Social Development and the RF Ministry of Agriculture. According to governance system building rules such dispersion of functions and erosion of responsibility is unjustifiable. In this context it is expedient to concentrate functions of local nature at one body — the RF Ministry of Local Self-Government Affairs that may be reorganized from the RF Ministry of Regional Development.

4.7. Establishment of the local self-government vertical

The experience of advanced countries shows the expediency of creation of local self-government vertical in Russia that covers all governance levels (the UK Ministry of Housing and Local Government; Japan Ministry of Local Autonomy Affairs, etc.).

It is recommended that the local self-government vertical should incorporate four identified groups of functions and to make them cross-butting (diagram 3).

4.8. Return to single-level self-government

The federal law N 131 introduced two-level local self-government (that never existed in Russia in the past). The practice shows, the farther the authorities are located from rural citizens, the poorer opportunities the latter have to influence it.

The district administration is poorly accessible for rural citizens; moreover, it performs government management functions and, therefore, it is recommended to return it back to the government management system.

It is also important to note that the government management system should “monitor everything from down to the top”. The abruption of this system at regional level, as it is stipulated in the federal law N 131, is inexpedient.

4.9. Optimization of election time of local self-government officials and duration of their period of office

Pursuant to the new law the local self-government bodies may be elected for the period of 2-5 years. In practice the prevailing majority of such bodies are elected for 5 years. The experience demonstrates that the election period should depend on the governance level. Based on investigations of this issue we recommend 2-year period of office for elected rural administrations. Such period of office at local self-government bodies was practiced in Russia in the second half of 19th century — the period of robust development of local governments. It ensures high performance and transparency of settlement authorities. It is also adequate to enable population to objectively assess performance of local self-government.

In addition the experience shows it is expedient to replace local heads more often (in this respect there is quite a fair expression: “authorities should perform at a run”). The recommended period of office of rural administration head is 10 years. This is because after that period of office the most of heads decrease their performance and become less sensitive to innovations.

5. Anticipated benefits from implementation of recommended local self-government model

Based on expert assessment we tried to define possible benefits from introduction of the recommended local self-government model. The results of this assessment are presented in Table 3.

Table 3. Anticipated outcomes from introduction of recommended local self-government model

№	Outcomes
1	Rational allocation of powers and responsibilities between governance levels
2	Uniting of interests of governance levels and strengthening of the power system in this country
3	Increased efficiency and effectiveness of authorities
4	Improved environment for business development
5	Intensification of efforts, increased employment and incomes of citizens
6	Realization of potential capabilities of local self-government bodies and population
7	Harmonization of relationships between citizens, government and business
8	Establishment of the civil society
9	Robust regional development
10	Mitigation of contradictions between rural and district administrations, and contradictions between heads of regions and mayors of regional centers
11	Increased transparency in the national economy and reduced corruption
12	Decrease of social tension
13	Growth of budget revenues at all governance levels
14	Reduction of workforce outflow from countryside, and reduction of rural citizens inflow to cities
15	Upgraded quality of business planning at enterprises
16	Improved efficiency and effectiveness of government economic development programs
17	Reduced authorities’ “headache” caused by rural problems
18	Creation of environment for reforms in the housing and utilities sector
19	Up-bringing of population to respect laws and other’ s property

Caution is justifiable in forecasts, especially in research. Moreover, one should take into account there are many opponents at government authorities and in the scientific community, who disagree with the above presented proposals. Despite this we suppose that the recommended local self-government model is one of few breaking-through socio-economic approaches, which Russia needs, as never. Therefore, we are convinced that the establishment of local government system based on the above listed principles will foster the rural and overall national development.