London School of Economics and Political Science Local Government Taxation and Accountability in Mexico Caroline Pöschl A Thesis Submitted to the Department of International Development at the London School of Economics and Political Science for the Degree of Doctor of Philosophy, London, April 2015 1 Declaration I certify that the thesis I have presented for examination for the PhD degree of the London School of Economics and Political Science is solely my own work other than where I have clearly indicated that it is the work of others (in which case the extent of any work carried out jointly by me and another person is clearly identified in it). I confirm that Chapters 1-3 contains passages that were additionally used in co-authored papers with Professors Weingast (Pöschl & Weingast, forthcoming), Brosio and Ahmad (E. Ahmad, Brosio, & Pöschl, 2015). The copyright of this thesis rests with the author. Quotation from it is permitted, provided that full acknowledgement is made. This thesis may not be reproduced without my prior written consent. I warrant that this authorisation does not, to the best of my belief, infringe the rights of any third party. I declare that my thesis consists of 97,155 words. London, 2 April, 2015 2 Abstract The taxation-accountability theory broadly states that if governments are dependent on taxation, they will become less corrupt and more accountable to citizens. The need to raise tax revenue is said to spark incentives that lead to mutually beneficial bargaining between government and citizens. Citizens agree to make tax payments in return for more accountable governance and increased influence in government decision-making. Several scholars have shown empirical evidence in support of this taxation- accountability theory at the national level, yet few have studied it at the local government level. This paper explores this theory in the context of Mexican municipal governments using a mixed methods research approach. It first surveys the relationship between taxation and accountability using econometric analysis and then employs a comparative case study of six urban municipalities that are under considerable pressure to raise their tax revenue. The latter is based on several months of field research conducted in the states of Guerrero, Tabasco, Baja California Sur, Aguascalientes, Yucatán and Coahuila. It reveals the processes that evolve from revenue pressure, whether they lead to tax bargaining, and the extent to which greater accountability can be expected as a result. The findings provide some evidence of tax bargaining and positive correlations between the importance of taxation in a government’s budget and accountability. However, the causal link to greater accountability is not straightforward and is greatly hindered by the institutional framework surrounding local government. While implicit agreements between government and citizens showed that equilibrium between taxation and accountability was consistently maintained, restrictions on local power and other institutional factors stood in the way of increased local taxation sparking greater local accountability. These factors may be remedied by reform. 3 Table of contents Declaration ........................................................................................................................................................ 2 Abstract ............................................................................................................................................................... 3 List of tables ...................................................................................................................................................... 6 List of figures .................................................................................................................................................... 8 List of acronyms ............................................................................................................................................ 10 Acknowledgements ...................................................................................................................................... 12 Chapter 1: Introducing taxation-accountability linkages ...................... 13 1.1 Location in the development debate ................................................................................... 16 1.2 Theoretical arguments linking taxation and accountability in the literature ................................................................................................................................................. 23 1.3 The large-N evidence ................................................................................................................. 31 1.4 Small-N evidence and related literature ............................................................................ 37 Conclusion and structure of the thesis....................................................................................... 43 Chapter 2: Theoretical framework for analysing taxation- accountability linkages ......................................................................................... 47 2.1 General approach and key actors ......................................................................................... 48 2.2 Causal pathways .......................................................................................................................... 54 2.3 Conditions and Context ............................................................................................................. 62 2.4 Research questions and key considerations for the local context .......................... 69 Conclusion.............................................................................................................................................. 75 Chapter 3: The context around local governments in Mexico ............. 77 3.1 Municipalities: the third tier of Government ................................................................... 78 3.2 Overview and evolution of municipal level revenues in Mexico ............................. 88 3.3 Tax revenue potential and sudden revenue needs ........................................................ 99 3.4 Transitions resulting in a patchwork democracy ....................................................... 107 Conclusion........................................................................................................................................... 113 Chapter 4: Methodology for nation-wide quantitative analysis ...... 117 4.1 Methodological challenges of testing the relationship quantitatively ............... 118 4.2 Operationalising the variables 1: Transparency and Drainage coverage ............................................................................................................................................... 126 4.3 Operationalising the variables 2: Electoral competition and Taxation ............................................................................................................................................... 136 4 4.4 Estimation Strategy ................................................................................................................. 145 Conclusion........................................................................................................................................... 154 Chapter 5: Results of nation-wide quantitative analysis .................... 157 5.1 Preparing the dataset and exploring associations ...................................................... 158 5.2 Looking for causation ............................................................................................................. 168 5.3 Pathway, context and tax type ............................................................................................ 175 5.4 Summary and Interpretation in light of the Five Hypotheses ............................... 183 Conclusion........................................................................................................................................... 190 Chapter 6: Methodology for qualitative case study analysis ............. 192 6.1 Complementary mixed methods ........................................................................................ 193 6.2 Research questions, design and data ............................................................................... 199 6.3 Case selection ............................................................................................................................. 207 6.4 Further information on the cases ...................................................................................... 213 Conclusion........................................................................................................................................... 219 Chapter 7: Acapulco, Centro and La Paz ..................................................... 221 7.1 Acapulco: Murder by the sea ............................................................................................... 222 7.2 Centro: Oil wealth and street vendors ............................................................................. 229 7.3 La Paz: Intergovernmental rivalries ................................................................................. 239 7.4 Case comparisons ..................................................................................................................... 246 Conclusion..........................................................................................................................................