The Effect of Decentralized Governance on Timber Extraction in European Russia

Good governance is often promoted for economic growth, but its impact on natural resource use in developing and transitional economies is not well understood. For example, many scholars promote improved governance as a means to slow resource use, whereas others have found that better governance increases extractive resource activities. In this paper we use within-country variation in Russia to test the impact of governance on timber harvesting. Using a reduced form fixed-effects model and satellite-based estimates of forest cover we find a statistically significant and non-linear effect of governance on the area of timber harvested: for a marginal improvement in governance timber harvesting increases, but this effect decreases at high levels of governance. These results are robust to alternative specifications and when instrumenting for economic growth. Governance could impact timber harvesting in Russia through ownership risk (i.e., tenure security), through the costs of doing business (i.e., bribes), or both. Nonparametric regressions and qualitative evidence suggest that both factors are at play in Russia. This analysis provides additional evidence that improving governance may increase natural resource extraction. This has important implications for policy prescriptions that suggest good governance will slow resource use in developing and transitional economies.