Over-Indebted Subnational Mexico: Does Political Polarization Affect Debt Policy Decisions?

Abstract

Does polarization promote overspending and increase local deficits? Alesina and Tabellini (1990) suggests that more conflict between political parties encourages the opposition to over spend causing inefficient levels of public debt. According to cross national OECD data analyst find that high-level of political conflict result in surging fiscal deficits. The larger the ideological difference, the higher the likelihood of not being reelected. Thus, the incumbent will have higher incentive to spend in order to meet campaign promises. These promises often exceed current expenditures and therefore lead to public officials to access the debt market, ultimately raising the total amount of debt spending. Empirical studies to evaluate this inefficiency are typically done at the state level or cross national, but few have evaluated sub-sovereign debt issuance (Alt and Lassen 2006; Alesina1989; Alt 1985; Drazen and Eslava 2010). This research evaluates Alesina and Tabellini?s polarization theory within the newly democratizing Mexico. By using data from 2000-2014, the study first uses Dalton (2008) measure of polarization, based on voter perceptions of party positions in the Comparative Study of Electoral Systems (CSES), and secondly as the margin of victory in a panel data set with public finance indicators (percentage of total expenditures gathered by Mexico?s National Geography and Statistics Institute (INEGI) and type of debt issuance presented by Mexico?s National Treasury office (Secretaria de Hacienda y Credito Publico ?SHCP). Next the study evaluates not only when in the electoral political cycles (Hibbs 1977, 1987 and Cox and McCubbins 2001) influence deficit spending, but also which type of debt does (public bond bank, commercial banks, trusts funds of the bond market increases that debt). The tentative results show that municipal debt increases in non-electoral years, i.e. the year before and after the next election, which is congruent with other research on Mexico (Benton and Smith 2017); but also that debt issuance increases for commercial bank loans and the public bond bank in those years, suggesting the easier the accessibility of the type of debt will have more probability to be effected by these ideologically difference in the electoral cycle.