The Impact of Parties and Elections on Municipal Debt Policy in Mexico

Abstract

Opportunistic electoral fiscal policy cycle theory suggests that all subnational officials will raise fiscal spending during elections. Ideological partisan fiscal policy cycle theory suggests that only left‐leaning governments will raise election year fiscal spending, with right‐leaning parties choosing the reverse. This article assesses which of these competing logics applies to debt policy choices. Cross‐sectional time‐series analysis of yearly loan acquisition across Mexican municipalities—on statistically matched municipal subsamples to balance creditworthiness across left‐ and right‐leaning governments—shows that all parties engage in electoral policy cycles but not in the way originally thought. It also shows that different parties favored different types of loans, although not always according to partisan predictions. Both electoral and partisan logics thus shape debt policy decisions—in contrast to fiscal policy where these logics are mutually exclusive—because debt policy involves decisions on multiple dimensions, about the total and type of loans.

Violent Crime and Capital Market Punishment: How Violent Crime Affects the Supply of Debt to Municipal Mexico

“…Opportunistic electoral concerns may lead subnational incumbents to ramp up spending ahead of elections, while politically weak mayors may be more compelled in this way (Sakurai et al 2008;Veiga et al 2007;Sáez 2016;Benton et al 2016). Left-leaning governments may demonstrate a greater tolerance for expansionary fiscal policy and right leaning ones a lower tolerance for it (Rodden 2006;Franzese 2002;Benton et al 2016;Hernández-Trillo et al 2009). I include a municipal election year dummy, the margin of victory, and dummies to capture right-leaning National Action…”

Party Leader or Party Reputation Concerns? How Vertical Partisan Alignment Reins in Subnational Fiscal Profligacy

“…Low municipal administrative capacity might result in poor fiscal choices (captured with population, human development, and vertical fiscal imbalances; Avellaneda 2009;Ibarra Salazar, Sandoval Musi, and Sotres Cervantes 2001;Mendoza 2004;Smith and Benton 2017). Mayors might raise debt ahead of municipal elections or state gubernatorial races, or amid weak political mandates (captured with mayoral and gubernatorial election dummies, winning municipal margins; Benton and Smith 2017;Drazen and Eslava 2010;Sakurai and Menezes-Filho 2008;Veiga and Veiga 2007), even if vertical partisan alignment affects the relative magnitude of these effects. Partisan ideological differences might influence fiscal spending (Benton and Smith 2017), or partisan organizational differences might affect the strength of vertical partisan effects across parties (captured with partisan dummies).…”

“…Mayors might raise debt ahead of municipal elections or state gubernatorial races, or amid weak political mandates (captured with mayoral and gubernatorial election dummies, winning municipal margins; Benton and Smith 2017;Drazen and Eslava 2010;Sakurai and Menezes-Filho 2008;Veiga and Veiga 2007), even if vertical partisan alignment affects the relative magnitude of these effects. Partisan ideological differences might influence fiscal spending (Benton and Smith 2017), or partisan organizational differences might affect the strength of vertical partisan effects across parties (captured with partisan dummies). Data are from the National Institute of Geography and Statistics (http://www.inegi.gob.mx), its National Population Council (https://www.gob.mx/conapo), and state electoral institutes.…”

“…To this end, I theorize about how each mechanism would operate at a third, lower tier of municipal government found in most decentralized systems but that has rarely been examined for vertical partisan effects. Yet, municipal mayors often enjoy the same policy and budgetary autonomy, and vertical fiscal imbalances and soft budget constraints, as state governors, raising spending around elections for political ends (Benton and Smith 2017;Drazen and Eslava 2010;Sakurai and Menezes-Filho 2008;Veiga and Veiga 2007). If mayors can raise spending for political purposes, then vertical partisan alignment should matter to their calculations as well.…”

“…include debt refinancing and restructuring (Fitch Ratings 2011; Hernández-Trillo and Smith-Ramírez 2009; Hurtado and Zamarripa 2013; Revilla 2013).Loopholes in Mexico's approach to managing its subnational capital market thus created opportunities for subnational fiscal excess(Benton and Smith 2017;Espinosa and Martell 2015;Giugale et al 2000;Hernández-Trillo, Díaz-Cayeros, and Gamboa González 2002).…”