Fiscal federalism and intergovernmental fiscal revenue sharing in Mexico: The municipal perspective

This dissertation reviews the functioning of the intergovernmental fiscal revenue sharing system in Mexico. The gradual centralization of fiscal authority by the federal government since the 1980s has led to a revenue dependency of sub-national governments on the center that is extreme. State and municipal officials have little knowledge or influence on the revenue allocation process, a process widely perceived to function as a black box. The historic July 2000 exit of the PRI regime from the presidency by the opposition party PAN has brought the need for a comprehensive review of the fiscal coordination system to center stage, unleashing a nationwide debate on the subject. The research looks at the revenue and expenditure patterns of a sample of 257 municipalities during an 18-year period (1980-1997). The structure of the analysis is threefold: (i) it inquires about the factors that are believed to influence revenue allocation criteria and reviews the de facto allocations to sample municipalities recorded during the study period; (ii) it reviews revenue and expenditure preferences of municipalities, and looks for differences taking into account various factors; and (iii) it explores impacts of the intergovernmental fiscal revenue sharing system on local economic development. Equity-based variables (population), strategic location variables (geographical location whether border or coastal municipality) and growth variables (number of businesses and number of employees) were found to be statistically significant predictors of the variation in centrally assigned transfers. The results do not support a politically-biased allocation thesis. The high variation in the municipal indicators of revenue and expenditure preferences was present not only across states but also within them. Thus, the analyses performed produced limited results for generalization, and alternative analytical approaches should be for future research. The results obtained for the third line of inquiry indicate that municipal business and employment growth is responsive to population size, transfers received from the central government, and local expenditures in operation of local provision of public services. The potential virtuous cycle of central transfers-local expenditures-local growth deserves further analysis.