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Mexican northern border municipalities, financial dependence and institutions

Abstract

Mexican northern border municipalities have experienced economic and populational growth rates that are much higher than other Mexican regions resulting in higher demand for public services and infrastructure. The different institutional framework, both fiscal and legal, faced by municipalities in every Mexican State might impact the fiscal behavior of local governments. This article examines whether border municipalities are more financially dependent on central authorities due to the high demand for public services in their jurisdictions and their inability to obtain sufficient funding. Several econometric models are estimated for 300 Mexican municipalities in the year 2000. A strong and negative relationship between income and financial dependence is found, as expected. We also learned that institutional and regional factors should not be omitted in the model specifications. Statistical theory based on the estimations shows that the border municipalities of Ciudad Juárez and Puerto Peñasco have systematically lower financial dependence than others. However, there is no general rule regarding border municipalities and financial dependence.

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Notes

  1. Demographic and migration data sources: INEGI, XI Censo de Población y Vivienda, 1990; INEGI, Conteo de Población y Vivienda, 1995; and INEGI, XII Censo General de Población y Vivienda, 2000.

  2. Arellano Cadena (1996) presents a historic overview of the allocating nonconditional federal transfers’ schemes. See Ortiz Ruiz (1996) for details on calculating the coefficients and Courchene and Díaz Cayeros (2000) for a description of the Mexican system of transfers.

  3. The general fund (“fondo general de participaciones,” FGP), the most quantitatively important, is constituted with 20% of the federal tax revenue (“recaudación federal participable,” RFP). The other funds are composed of federal excise taxes, 1% of RFP by federal user charges coordination, the 80% of the real value of subrogated agricultural and cattle taxes, the federal tax on vehicles, the federal tax on new autos, and a contingency reserve.

  4. State GDP from INEGI, Sistema de Cuentas Nacionales de México in http://www.inegi.gob.mx. Employed population and income of employed population from INEGI, XII Censo General de Población y Vivienda 2000, Aguascalientes, 2001.

  5. Own construction with data from INEGI. Finanzas Públicas Estatales y Municipales de México: Aguascalientes, 2001.

  6. We acknowledge, as an anonymous referee has suggested, that the economic activity generated by migrants should be incorporated into the empirical model. We are not aware, however, of any available data for the 300 municipalities considered in this study. We leave the construction of a possible proxy on migration flows and a full assessment on their effects for future work.

  7. Revenue received by means of conditional transfers other than participaciones federales could affect financial dependence through the municipality’s own resources. If, as a consequence of conditional transfers, municipal expenditures increase by a larger amount than the transfer, own resources would have to rise (p. 804 in Stine 1994) and municipal dependence would fall. Otherwise, such transfers would affect municipal expenditure without requiring the generation of additional own source revenue. In such a scenario, the local government would apply the transfers on the expenditure item for which it was conceived. However, the amount received by the municipality could create a disincentive to exploit own revenue sources if the federal government takes care of the fiscal needs, moving up the degree of dependence. Therefore, the effect on the degree of local government dependence would depend, in general, on the reaction to federal transfers and especially on expenditure price elasticity.

  8. The concept is due to Musgrave and Musgrave (1980) and has been empirically implemented by Badu and Li (1994) and Mercer and Gilbert (1996). It is defined as the ratio between revenue generated from taxes and revenue from taxes if the standard tax rate were applied. It is thus the ratio between the observed tax rate and the standard tax rate.

  9. We also estimated the empirical model with CONC included as the independent variable instead of T. We did not include both in the right hand side due to multicolineality. Those estimations suggest that both institutional differences and regional features of border municipalities help explain variations in the degree of financial dependence for Mexican logal governments. These are ommitted to save space and are available upon request from the interested reader.

  10. The results with the model including CONC are qualitatively the same and are available upon request from the interested reader.

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Acknowledgements

The authors would like to thank Lida Sotres Cervantes for superb work in constructing the data set employed in this article and to Cynthia J. Brown and José de Jesús Salazar for helpful discussions on this subject. We also acknowledge several useful comments from an anonymous referee and from Prof. Roger R. Stough, Editor of this journal. The usual disclaimer applies. The authors acknowledge financial support from the “Cátedra de Investigación del Tecnológico de Monterrey: Agenda Económica de la Frontera Norte de México” (Research Group on the Economic Agenda of Mexican North Border sponsored by Monterrey Tec.).

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Ibarra Salazar, J., Mollick, A.V. Mexican northern border municipalities, financial dependence and institutions. Ann Reg Sci 40, 859–874 (2006). https://doi.org/10.1007/s00168-005-0036-4

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JEL Classification

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  • H7