This paper examines the efficiency of public expenditure on a regional level. The empirical estimates reveal a considerable variation in productivity of social outlays among Russian regions. Consequently, the rising of effectiveness in backward areas to the level of advanced parts of the country saves a substantial amount of public funds. The major finding is that the utilization of these savings for additional investment can boost gross output and simultaneously narrow the existing territorial income gaps. Therefore, under certain circumstances, an increase in effectiveness of social expenditure may possibly play a major role in a balanced regional development policy.
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