Conditional Transfers to Promote Local Government Participation in México

Abstract: México is a very centralized country mainly as a result of the involvement of the federal govemment (FG) in functions that would be more efficiently provided by subnational governments (SG). The concentration of activities in the FG is the result of two institutional features: the unclear legal assignment of expenditure functions across levéis of govemment, and the assignment of sources of revenue that concentrates a larger share of revenues in hands of the FG. In the presence of múltiple uses of federal transfers, and in the absence of Information on the costs of providing SG Services, the FG has been reasonably reluctant to decentralize more func-tions. As long as the FG remains in control of most of govemment revenues, it is important to ensure that the benefits from decentralization also accrue to it. The transfer of functions should avoid SG neglect of those functions that genérate benefits to the rest of the country and keep control over the size of transfers. One instrument that can achieve both objectives is a widespread use of conditional grants