Redrawing the Federal Map

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The Economist, March 27, 2003

Mexico's political system

Redrawing the federal map

Long a fiction, Mexican federalism has become a political reality, but not yet a fiscal one. That carries dangers

Mar 27th 2003

MEXICAN pedants like to point out that their country's correct name is the Estados Unidos Mexicanos—with the stress firmly on the first two words. But the official claim that the country is a union of federal states was long mendacious. Rather, for most of the seven decades of rule by the Institutional Revolutionary Party (PRI), Mexico was a highly centralised one-party polity. State governors, and even many mayors, were named by the president and answered to him, even if they were duly elected, by fraud if need be.

In a modernising country of 100m, this became impossible to sustain, especially as Mexico evolved into a multi-party democracy (see map). Vicente Fox, whose victory in Mexico's presidential election of 2000 finally ended one-party rule, is pledged to devolve power. One of the founding principles of his conservative National Action Party (PAN) was the defence of local autonomy. Back in 1989, it made the first serious dent in the PRI's monopoly of power when it won the governorship of the border state of Baja California Norte; the new governor promptly challenged the fiscal settlements handed down to him from the presidency. Mr Fox himself was later a successful governor of Guanajuato state. Carlos Medina Plascencia, a PAN senator, argues that Mexico's 2,470 municipalities should govern themselves with “the minimum necessary interference from the federal government”.

Federalism is more widely in fashion in Mexico. Ernesto Zedillo, Mr Fox's predecessor, devolved management of education to the states (though the centre still controls the education budget). The main parties each try to outdo the others in their enthusiasm for local democracy. But as with so many other policies, Mr Fox is finding it hard to turn rhetorical support for federalism into real change. Ironically, that is because his own power is curbed by the opposition's control of Congress.

Power may be dispersed, but money is not. About 80% of federal revenues are appropriated by the centre; most of the rest falls to the states, though 5% is spent by the municipalities. In Brazil, by contrast, the federal government controls only around half of total government revenues.

Under Mexico's law of “fiscal co-ordination”, the states' powers to raise local revenues are restricted. They consist chiefly of fairly small taxes on payrolls and on cars; municipalities must rely on symbolic property taxes. At one extreme, the Federal District, the quasi-state which includes much of Mexico City, raises about 45% of its $8 billion budget itself. Most states are at the other extreme—lucky if they gather 10% of their spending.

For the other 90%, they must rely on federal transfers, divided up under a notoriously complicated formula dating from 1980. Each state's slice of the pie is fixed by its past share, its population and its local tax revenues, though several poor states, such as Chiapas, get a bit extra.

Many states have a vested interest in blocking change. They fear that they would be losers under any devolution of tax-raising powers. The exceptions are the richer, faster-growing states of parts of the north (many governed by the PAN).

Predictably, rather than seek new revenue-raising powers, the governors are pressing for a bigger chunk of federal funds. To do so, Ricardo Monreal, the young governor of Zacatecas, in 1999 set up an umbrella group of governors from his leftish Party of the Democratic Revolution (PRD). Last year, this evolved into a powerful all-party lobby group called the National Conference of Governors (Conago). Not coincidentally, since 1999 the governors have extracted a slowly rising share of the national budget, though it slipped slightly this year. Earlier this month Mr Fox, in a nod to the rising influence of the governors, attended a Conago meeting—“to listen”, he said.

But if federalism is really to mean more in Mexico, the states will have to shoulder more of the financial responsibility for their political ambitions. That requires changing the fiscal co-ordination law. Even optimistic federalists do not expect this to happen soon. So local politicians are looking at other ways to raise money. The Federal District is experimenting with what it calls “off-budget revenues”, such as allowing advertising on bus-stops. Early next month, Tlalnepantla, a PAN-governed municipality encompassing some of the prosperous northern suburbs of Mexico City, plans to issue a $9m municipal bond to finance a water-conservation project. It will be Mexico's first municipal bond not guaranteed by the federal government. Tlalnepantla has turned instead to the International Finance Corporation, the private-finance arm of the World Bank, for a $3m guarantee.

Unless it achieves an overarching new federal pact reassigning responsibilities and revenues, Mexico may lose more than it gains by piecemeal devolution. Mr Fox argues that if states are to get more federal money, they must clean up their administrations and submit to independent audits. In addition, Mexico's hard-won and still recent reputation for fiscal responsibility could be at risk. Already, the governors have been pressing for Congress to exempt transfers to the states from provisions under which the Finance Ministry can automatically trim public spending when oil revenues fall. No wonder officials have mused in public about whether to rename the country just plain Mexico.

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