Financial Dependence of Northern Border Municipalities

Demographic and economic growth rates of Mexican northern border municipalities are much higher than other Mexican regions. This should in theory place a heavier demand for public services and infrastructure in those border areas. However, local border governments may be able to handle well these forces if they efficiently manage tax and expenditure processes. The local political and institutional frameworks are also important since idiosyncracies of each state in which the municipality is located may have effects on local public finances. This article reexamines how financial dependence on federal transfers reacts to such regional and institutional exogenous forces. Estimating several econometric models of financial dependence for the year 2000 on a vast sample of 2,278 Mexican muncipalities, we find that dependency has an inverse relationship with both municipal per-capita income and population. The political affiliation of the mayor to the center-right PAN leads to a lower degree of financial dependence, which is consistent with the desire at the local level to be less dependent on transfers from the central government. We also find that institutional and regional factors should be considered in order to explain differences on financial dependence across municipalities.