The effects of corruption of public officials on the dimensions of financial sustainability of state governments in Mexico

Abstract

One of the most concerning types of corruption of public officials is the one associated with budgeting and financial management in government. This type of corruption represents a structural phenomenon that influences governments' financial sustainability (FS); in other words, corruption impacts the government's capability to consistently meet its financial obligations while continuing to provide public services and infrastructure. A traditional venue of research examines the effects of corruption on economic performance and fiscal conditions of governments. Recent efforts have been dedicated to exploring the effects of corruption of public officials on the size and allocation of public spending and debt. The present investigation contributes to this recent body of the literature by analyzing to what extent corruption of public officials influences the dimensions of FS of state governments in Mexico. FS is a framework to assess how governments meet their financial obligations using different ratios and indicators in five dimensions: cash solvency, budget solvency, long‐term solvency, service‐level solvency for revenues, and the service‐level solvency for expenses. For this analysis, techniques of a dynamic panel of generalized method of moments are used to examine a dataset of 30 state governments in Mexico using census governmental data for the period 2011–2016. The results are conclusive for some dimensions of FS and not conclusive for others, but in general the analysis confirms the influence of corruption of public officials in some of the hypothesized directions of these FS dimensions. Several policy implications are also discussed.