Electoral Democracy and Local Finances: Fiscal Populism in Mexico

Abstract

This article explains variation in the composition of municipal spending, focusing on Mexican urban municipalities. Contrary to the conventional wisdom that electoral competition produces more responsive governance, I uncover strong evidence that competitive elections drive municipal governments to underinvest in infrastructure and overspend on current expenditure. I explain this puzzling finding with the concept of fiscal populism—a set of budgetary policies meant to be electorally popular in the short run, despite their long-run detrimental welfare effects. Fiscal populism leads to underinvestment through two mechanisms: (1) excessive spending on patronage hiring to reward electoral allies and (2) neglecting to increase own revenue—especially taxes—for fear of electoral costs. This argument is supported through a multi-method research design. A large- n statistical analysis establishes the positive correlation between electoral competition and current expenditure. A qualitative comparison of eight municipalities uncovers the mechanisms by which electoral competition drives municipal fiscal decisions.