countries, 2.6% in Latin American countries, and by 2.8% in African countries, whereas Meon et al. (2008) argue that corruption is always detrimental in countries where institutions are effective, but may be positively associated with efficiency in countries where institutions are ineffective. Finally corruption is likely to be much more damaging to investment and growth in small as opposed to large developing countries (Bonnett and Rock 2004). Taking Foreign Direct Investment as a determinant of growth, Wei (1997) argues that the less predictable is the level of corruption, the greater is the impact of corruption on FDI and finds that an increase in uncertainty from the level in Singapore to that of Mexico is equivalent to raising the tax rate on multinational firms by 32 percentage points, and Wei (1997) shows that an increase in the corruption index by one point reduces the flow of FDI into a country by about 11 percent, which is equivalent to a 3.6 percentage points increase in the marginal tax rate.

There has been a substantial literature that has analyzed the relationship between corruption and growth in large cross-sections of countries, but only very few articles have studied the relationship in a cross-section of regions inside a single country. Using state level cross-section data from the United States, Akai et al. (2005) found a negative effect of corruption on economic growth over the medium and long term time spans, but insignificant effects in the short-term. The case of Mexico could be illustrative of other emerging market economies.

# **3. Regional Growth in Mexico**

# **a) Literature Review**

Given the large regional disparities and income inequality which exist in Mexico, the literature has examined the extent of convergence or divergence among Mexican states during the last decades. Most of the authors have focused their analysis on the consequences of trade liberalization reforms on the convergence process in Mexico, especially after having joined the General Agreement on Tariffs and Trade (GATT) in 1986 and the North American Free Trade Agreement (NAFTA) in 1994. They are concordant with the fact that there was a process of convergence among Mexican States during several decades, which broke down in 1985 after trade reforms were adopted. Most of the literature uses the Barro and Sala-i-Martin (1992) methodology to analyze the convergencedivergence evolution among Mexican states.

For instance, Chiquiar (2004) finds that the trade reforms induced a process of regional divergence in per-capita output levels, because only some of the richer states had appropriate infrastructure to take advantage of the new sources of growth. He concludes that Mexico’s liberalization has increased the ties between northern Mexico and the U.S. and at the same time has weakened the ties between northern and southern Mexico. Aguayo-Tellez (2006) finds that the variance of average income across Mexican states fell by 60% during the period 1940-1985, but started to diverge after the adoption of trade liberalization policies and other market-oriented reforms. As an explanation, he points to the rise in the education premium, which hindered the progress of poor states and increased the variance of average state wages and labor earnings. Other factors include the initial level of education, the size of the agricultural sector and the distance from the U.S. border, while public infrastructure does not affect divergence in his state-level regression. Esquivel and Messmacheer (2002) conclude that output per capita converged across states in Mexico only during the 1970s, while remaining relatively stable in the 1960s and 1980s and diverging in the 1990s. Esquivel (1999) finds that regional disparities in Mexico declined at a rate of 1.2% per year 4