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Fiscal Federalism in Mexico: Distortions and Structural TrapsEnrique Cabrero Mendoza*1 The decentralization process in Mexico has shown significant progress by trying to empower local and state governments. However, the Mexican case makes clear that the transfer of greater powers to subnational governments does not necessarily means an increase in their institutional capacities. Thus, due to the lack of institutional capacities at the subnational level, the prevailing arrangement of fiscal federalism in Mexico has generated vertical imbalances that result in “structural traps”. As a consequence, the current framework fails to guarantee the three basic premises that should be fulfil ed by today’s intergovernmental fiscal arrangements: fiscal responsibility, compensatory duties and accountability. This article (1) explores the current state of fiscal federalism in Mexico, (2) makes a comparison with OECD countries to show how levels of government interact in both, federal and unitary regimes and (3)makes an assessment of the institutional capacities of subnational governments in Mexico. Keywords: Fiscal federalism, decentralization policies, intergovernmental El proceso de descentralización en México ha mostrado avances significativos al otorgar más facultades a los estados y municipios. Sin embargo, el caso mexicano demuestra que la transferencia de más atribuciones no significa necesariamente una mejora en las capacidades institucionales de los gobiernos subnacionales. En ese sentido, la configuración actual del federalismo fiscal mexicano cuenta con trampas estructurales generadas por importantes desequilibrios verticales, lo que le ha impedido garantizar las tres premisas básicas en * Center for Economic Research and Teaching (CIDE), Mexico City. 1 Roberto Rodríguez is acknowledged for his support in the organization of information las que se sostienen los modelos fiscales intergubernamentales actuales: la responsabilidad fiscal, la función compensatoria y la rendición de cuentas. Este artículo (1) explora el estado actual del federalismo fiscal en México, (2) realiza una comparación con los países de la OCDE para demostrar cómo interactúan los niveles de gobierno tanto en los regímenes unitarios como en los de carácter federal y (3) realiza una evaluación de las capacidades institucionales de los IntroductionIn today’s world, nations interested in growth, social development, com-petitiveness and effective deployment of welfare policies need to establish mechanisms for collaboration and coordination between tiers of govern- ment. There are many collaboration mechanisms already in existence, including European multi-level government systems, which promote maximum collaboration between governments as a means to provide public services in the timeliest manner. There is little room for doubt that in the current context, no strong nation can exist without strong subna- Federal systems have certain advantages. Each level of government enjoys relative autonomy, allowing for a much more dynamic entrepre-neurial capacity, while opportunities abound for interaction with other government levels. Such a system lays a foundation for competition and cooperation, thus enjoying the benefits associated with both. Within these cooperation and coordination schemes lies the fiscal system, under-stood as the definition of powers and responsibilities between levels of government in order to collect taxes and manage public spending. When analyzing the fiscal system at the local level, one must make reference to decentralization in general with special attention to fiscal decentraliza-tion. Decentralization is defined as the transfer of powers and responsi-bilities from the central government to the subnational governments so as to empower them to manage and make administrative decisions about issues in their own regions. Currently, this transfer of powers occurs in Mexico without an optimal, versatile framework thus impeding an more effective distribution of fiscal responsibilities. None of the current schemes has been able to guarantee a basic set of key premises, such as fiscal responsibility, compensatory duties and accountability guidelines. First, these three premises highlight

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