Reform of Decentralization in Mexico

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

Context for Bank’s work w Broad ESW before loan international comparisons laid out long-term strategy options short-term agenda as first steps w 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

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

Agenda for the medium and long term w increase subnational revenue raising w reduce dependence on transfers especially for marginal resources w increase state authority to manage programs, especially in education All these require hard budget constraint on borrowing and fed. transfers -->short term

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

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

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

Next steps w National Fiscal reform w Fiscal Adjustment by key states