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Mexico's decentralization process called
looming, "great fiscal black hole"

By David Gaddis Smith

Mexico has gone about decentralization the wrong way and has created a looming, "great fiscal black hole," economist Deborah Riner told the Institute of the Americas in San Diego.

deborahriner"I don't know how they are going to solve it," said Riner, chief economist for the American Chamber of Commerce of Mexico. "It's going to be extremely difficult and painful."

Expert have long said that Mexico needed to decentralize to become more efficient and responsive to its people, and Mexico has been taking steps in that direction. Riner said last week of the decentralization effort: "It's happening, but in a bad way." A 2008 CIDAC think tank report said state governments had duplicated their spending in the previous 15 years and municipalities had gained more autonomy and resources in the previous five years.

"Essentially the way it works in Mexico is the federal government collects the taxes and then it gives money to states — to governors and to mayors — particularly governors — to spend. So what's the incentive at work here? Governors pay absolutely no political cost for spending more money because they don't have to raise taxes. They just get it from the government, right, from the federal government, which has to do the heavy lifting."

She said this flawed model of decentralization is seeing transfers to the states growing at 11% and "it's consistently increasing."

She said states have not spent or accounted for the money wisely. She said a recent study from the IMCO think tank found that most of the transferred money is spent on current expenditures.

"If you think transparency and accountability are issues at the federal level, you don't even want to go to the states," Riner said.

"The worst case, I think, is Baja California Sur. She said its budget was two pages — "The first page is a cover page and the second page says income, expenditures." It remains to be seen how the state's new National Action Party governor, who is taking over from the leftist Democratic Revolution Party, will handle the situation.

Riner said Veracruz state borrowed "a tremendous amount of money" using the future money it was going to receive from the federal government as a guarantee.

She said the debt is so great that "Standard & Poor's has downgraded Veracruz."

She said Veracruz's new PRI governor, who has just succeeded another PRIista, calls the situation "a mess" and "he says there is no way it can service this debt."

Riner asked, "Is the federal government going to stand by and let states default? I doubt it."

The Tijuana newspaper Frontera on Monday, March 14, had a story saying that Baja California had doubled its debt during Gov. José Guadalupe Osuna Millán's term. Frontera's story

She said decentralization, which is widely supported by Mexico's three major parties, "has been the tool that governments, presidents, have used to buy support for some sorts of reforms and other policies."

She concluded, "I think the model of decentralization that has been implemented in Mexico is the great fiscal black hole that is looming."

Riner said that while Mexico is in much better shape now, say, than it was in 1984, its economy faces numerous problems, including vastly inadequate job creation, tax collection, declining oil production, the presence of efficiency-killing quasi-monopolies, security issues that increase the cost of doing business, an educational system that does not serve the population well and misleading or incomplete financial statistics.

informalemployment graphOne misleading statistic is Mexico's unemployment rate. She said Mexico uses the Organization for Economic Cooperation and Development's definition for unemployment, which is that "if you work more than one hour a week, you're employed." She said employment in the informal economy falls consistently between 25% and and 30%, and figured that a truer indicator of unemployment would be to add the official unemployment figure to the informal unemployment figure listed in the graph she showed at left. She arrived at a jobless rate of about 33%. Riner's PowerPoint presentation
Institute of the Americas' President Jeffrey Davidow interviews Riner

Riner said, "In the end I would argue that Mexico's economic problem is political. The way things work has got to change."