Mexico's Decentralization at a Cross-Roads

This paper focuses on two inter-connected developments that account for the main challenges of Mexico’s decentralization today. First, we argue that the basic political incentives were misaligned with the decentralizing principles for at least the first two phases of the process of decentralization in the early eighties to the mid nineties. Second, we point out the impact Mexico’s long history of single-party rule has had on the development of federalism. We argue that democratic institutions and processes in Mexico have become important stumbling blocks, rather than promoters of an efficient and equitable decentralization process.

The paper illustrates these arguments with an analysis of four key moments of change in the history of federalism in Mexico: the 1980 Pacto Fiscal, the 1992 National Agreement to Modernize Basic Education, the establishment of a targeted poverty reduction program PROGRESA, and the current Fox administration’s efforts to increase local governments’ accountability for results. These key reforms created a confusing picture of responsibilities with no clear responsibilities at any level of government for key public services. In addition, the system of transfers that has evolved through these reforms is not providing the best incentives for efficient tax collection, expenditures, or service provisions.

Our main contribution to the large existing literature on federalism in Mexico is to highlight the importance of considering Mexico’s political system in assessing the prospects for reforming fiscal federalism in that country. While much of the past literature has been focused on the debate over whether more or less control over resources should be decentralized to the states, we argue that the primary focus should be on the design of transfer systems to improve the use of whatever level of resources are decentralized.