Growth and Local Political Institutions: the Mexican Case

Elvira E. Naranjo Priego (Tecnológico de Monterrey)

Abstract: Growth is one of the central concepts in economic theory, but after decades of theoretical and empirical analysis a residual remains to be explained by traditional factors. Two decades ago Douglass North called attention into the effects of institutions in economic performance and empirical work began to flourish. Nevertheless, much of the empirical analysis is done on a cross-country basis where differences in the institutional framework are sufficiently clear. But a question that remains to be examined is what happens at the local level. Differences in economic performance remain important and despite national institutions being the same there are big differences in the way institutions are applied, the effects they have, or the extent to which they can be changed, enforced, control, or ignored by local actors. Understanding the factors that account for local growth is important not only for local governments but for the entire country since the existence of inefficient local institutions hindering local growth will cause not only within-country differences, but also lower national income (Acemoglu & Dell, 2009). Mexico is a big country organized as a Federal State and integrated by 32 states and more than 2,400 municipalities with enormous disparities. We develop an index of local political institutions and using data on municipal GDP we assess the effects of political institutions and the policy implications for growth at the local level.