Decentralization: Panacea or Pandora’s Box? Fiscal Perversity in Mexico

Roberto Guerrero Compeán


Advocacy for decentralization has grown in Mexico at a rapid pace during the last decade. The gains of decentralization, however, are rather unclear and many times the assumptions and the outcomes of the process depart from the standard theory of fiscal federalism. There are serious drawbacks that should be considered before fully endorsing any decentralization program. As decentralization has progressed in Mexico, for instance, it has become evident that most of Mexican states have incurred in large fiscal deficits, majorly due to excessive overspending. This paper explains the reasons why such a trend has been observed in recent years based on a simultaneous equation model of state revenues and expenditures. The results suggest that increases in fiscal deficits are significantly associated with more intense political competition at the subnational sphere, the stage of the political business cycle, and fiscal perversity caused by political decentralization. This implies that regions expect to be bailed out by the federal government in case of financial trouble and thus do not have an incentive to observe fiscal discipline. Keywords: decentralization, fiscal perversity, Mexico.

Clasificación JEL: H72, H77, R51.


descentralización; perversidad fiscal; México.

Full Text:

PDF (Español)


Belsey, D.A., 1988, “Two- or Three-Stage Least Squares”, Computational Economics, 1, 1: 21-30.

Dabla-Norris, E., 2006, “The Challenge of Fiscal Decentralization in Transition Countries”, Comparative Economic Studies, 48: 100-131.

Calsamiglia, X. et al., 2004, Why Do Differences in the Degree of Fiscal Decentralization Endure?, Unpublished paper.

Cornelius, W., 1996, Mexican Politics in Transition, University of California San Diego: San Diego, CA.

Germán-Soto, V., 2005, “Generación del producto interno bruto mexicano por entidad federativa, 1940-1992”, El Trimestre Económico, 72, 3: 617-653.

Giugale, M., F. Hernández Trillo, J.C. Oliveira, 2000, “Subnational Borrowing and Debt Management”, in Giugale, M. and S. Webb (eds.), Achievements and Challenges of Fiscal Decentralization in Mexico, The World Bank Group: Washington, D.C, pp. 237-270.

Grindle, M.S., 2007, Going Local: Decentralization, Democratization, and the Promise of Good Governance, Princeton University Press: Princeton, NJ.

Guerrero Compeán, R., 2005, Determinantes del potencial de crecimiento regional y mecanismos de convergencia económica de las entidades federativas en México, B.A. thesis, Universidad Autónoma de Nuevo León, San Nicolás de los Garza.

Hernández Trillo, F., A. Díaz Cayeros, R. Gamboa González, 2002a, “Determinants and Consequences of Bailing Out States in Mexico”, Eastern Economic Journal, 28, 3: 365-380.

Hernández Trillo, F., A. Díaz Cayeros, R. Gamboa González, 2002b, “Fiscal Decentralization in Mexico: The Bailout Problem”, Research Network Working Paper R-447, Latin American Research Network, Inter-American Development Bank, Washington.

Hu, T. and B.H. Booms, 1971, “A Simultaneous Equation Model of Public Expenditure Decisions in Large Cities”, Annals of Regional Science, 5, 2: 73-86.

McLure, C.E., 1995, “Comment on ‘The Dangers of Decentralization’ by Prud’homme”, World Bank Research Observer, 10, 2: 221-226.

Molinar, J., 1991, “Counting the Number of Parties: An Alternative Index”, American Political Science Review, 85, 4: 1383-1391.

Netzer, D. (ed.), 2003, The Property Tax, Land Use and Land Use Regulation, Edward Elgar in association with the Lincoln Institute of Land Policy.

Prud’homme, R., 1995, “The Dangers of Decentralization”, World Bank Research Observer, 10, 2: 201-220.

Rodden, J. et al. (eds.), 2003, Fiscal Decentralization and the Challenge of Hard Budget Constraints, MIT Press, Cambridge.

Tanzi, V., 1995, “Fiscal Federalism and Decentralization: A Review of Some Efficiency and Macroeconomic Aspects”, Proceedings of the World Bank Annual Conference on Development Economics, 295-316.

Tiebout, C.M., 1956, “A Pure Theory of Local Expenditures”, Journal of Political Economy, 64, 5: 416-424.

Velázquez, C., 2002, Three Essays on Political Economy, The University of Chicago, AAT 3060275.

World Bank, 2000, Achievements and Challenges of Fiscal Decentralization. Lessons from Mexico, Giugale, M.M. and S.B. Webb (eds.), The World Bank Group, Washington.

Contador de visualizaciones:

  • Abstract : 545 vistas.
  • PDF (Español) : 131 vistas.
  • Refbacks

    • There are currently no refbacks.

    Copyright (c) 2008 Roberto Guerrero Compeán

    Creative Commons License
    This work is licensed under a Creative Commons Attribution 4.0 International License.