FISCAL DECENTRALIZATION AND INTERGOVERNMENTAL RELATIONS: AN ANALYSIS OF FEDERAL VERSUS STATE EDUCATION FINANCE IN MEXICO

While decentralization is on the forefront of the reform agenda of many developing countries, few studies have performed empirical analysis to provide a holistic picture of the important fiscal, efficiency, and equity issues. Specifically, decentralization nearly always involves fiscal and administrative decisions by both national and sub-national governments, as well as intricate intergovernmental relations. Here, two empirical models are presented for the Mexican primary and secondary education sector. The first analyzes the efficiency-equity trade-off implicit the Mexican Federal Government's educational fiscal transfers to states. Unlike most similar analyses, this model analyzes the distribution of outcomes not simply expenditures. The second model analyzes the relative productivity of separate expenditures by the Federal and state governments before Mexico's recent educational decentralization legislation. The findings show that before the decentralization, the Federal Government exhibited some concern for equity, but that in doing so also treated states unequally according to criteria that have little to do with either efficiency or equity. In addition, the results show that the Federal Government may indeed have been the more efficient provider of primary and secondary education, raising concern for the fiscal and administrative relationship set up by the decentralization legislation: the Federal Government will continue to pay, while the states have gained relative autonomy over expenditures.