Fiscal decentralization, intergovernmental relations, and education finance: Welfare and efficiency considerations in educational expenditures and outcomes in Mexico

While the theoretical arguments for fiscal decentralization developed over the past thirty-five years have proven compelling enough for the concept to win great favor, very little empirical work has proven the merits of such policies in the forms governments have actually implemented. We examine the results of educational fiscal decentralization in a developing country with an established framework for fiscal federalism and a concomitant history of intense centralization. The structure of the flow of funds in the Mexican education sector provide an example to study: (1) the importance of the spatial distribution of outcomes resulting from expenditures rather than simply the distribution of the expenditures alone; (2) the distribution of resources to subnational political units; (3) intergovernmental relations and the resulting incentive structure for service provision, particularly with respect to fiscal transfers and grants administration; (4) the effects from decentralization efforts over the past decade, and the resulting implications for probable outcomes from efforts to decentralize; and (5) the interplay of centralized versus decentralized finance and administration. We develop methods to analyze political and socio-economic factors that affect intergovernmental fiscal allocations. The results show that (1) the Federal Government does trade some efficiency for the sake of distributional concerns in the provision of educational resources, but in doing so may discriminate against subnational jurisdictions based on factors like voting behavior or marginalized minority populations; and (2) the pattern of Federal-to-state allocations may not be replicated at the state-to-municipal level, even by Federal agencies at the state level. We also provide evidence that states may not currently be as effective educational providers as the Federal Government, raising concern for efforts to decentralize. Policy implications and recommendations resulting from Mexico's experience revolve around the development of an accountable matching grant mechanism for fiscal transfers that would retain those aspects of centralized financial control beneficial to efficient and equitable service provision, while stimulating the improvements that may result from augmenting regional and local fiscal and administrative responsibilities for education.