Reform of Decentralization in Mexico

1
Reform of Decentralization in Mexico
2
Context in Mexico

• Rapid process of decentralization
• Driven by political democratization
• federation was always there on paper
• short-circuited for decades by 1-party state
• Lack of coherent plan for decentralization
• Lots of resources transferred to states and
  municipalities
• sometimes with large responsibilities

3
Context for Banks work

• Broad ESW before loan
• international comparisons
• laid out long-term strategy options
• short-term agenda as first steps
• Work first on Federal policy as framework for
  state behavior
• set incentives for autonomous states
• contrast to state adjustment loans first in
  Argentina and Brazil

4
Key Problems in Mexicofor the short term

• Moral hazard in borrowing by states
• effective federal guarantees of state debt
• history of bailouts
• banks did not worry about state creditworthiness
• lack of transparency and accountability for
  decentralized resources
• Weak institutions --
• coordination at federal level
• management at subnational levels

5
Agenda for the medium and long term

• increase subnational revenue raising
• reduce dependence on transfers
• especially for marginal resources
• increase state authority to manage programs,
  especially in education
• All these require hard budget constraint on
  borrowing and fed. transfers --gtshort term

6
DAL Policy Matrix Debt

• End federal guarantees for (new) state debt
• Differential capital risk weighting to reflect
  creditworthiness -- credit rating agencies
• require states to publish fiscal data in order to
  get good capital risk weighting
• Tighten rules for lending by federal development
  bank to states

7
DAL policy matrix budget and institutions

• End discretionary transfers by executive
• Publish distribution of federal resources
• make TA available to states and municipalities
• set up federal Decentralization Committee and
  technical secretariat
• publish info. on state pension liabilities
• performance agreements -- 2 pilots

8
Initial reaction to reforms

• Credit rating agencies feeding frenzy
• pressure on states to improve financial image
• End of (executive) discretionary transfers in
  budget
• ad hoc transfers to states put in the budget by
  Congress

9
Next steps

• National Fiscal reform
• Fiscal Adjustment by key states