Between 2000 and 2014, Mexico experienced income convergence across municipalities, but inequality increased within municipalities (López-Calva, Ortiz-Juárez, and Rodríguez-Castelán 2019). While the average real per capita income growth of municipalities in the lowest decile of the distribution was 25 percent in 2000– 14, municipalities in the highest decile grew at an average rate of 7 percent (Figure 1). Furthermore, the average income growth of the 10th percentile and the median was positive between 2000 and 2014, unlike the 90th percentile, the average income of which declined in real terms in 2005–10. Yet, contrary to previous trends, inequality within municipalities increased between 2010 and 2014. Before 2010, most of the inequality reduction occurred in municipalities with higher income per capita, while, in 2010–14, less than 20 percent of the municipalities in the highest quantiles experienced a reduction in the Gini coefficient (Figure 2).

# ii. Administrative data on public finances

The analysis uses administrative data on public expenditure among municipalities from the State and Municipal System Databases (SIMBAD) produced by the National Institute of Statistics and Geography (INEGI). SIMBAD provides access to public expenditure variables from 1988 until 2015, including investment spending. The analysis aggregated the fiscal accounts in the following groups: (1) own resources, including taxes; (2) unconditional transfers; (3) conditional transfers, excluding FAIS; and (4) the FAIS. (For a detailed breakdown of the fiscal accounts of municipalities, see Annex 1.) Reported data on the observed FAIS may often differ from the original allocation of resources because of revisions and reallocations between and within municipalities. To smooth the possible effect of measurement error, the anaysis therefore generated a variable that aggregates the monthly average of the FAIS per capita for the three consecutive years of the observation. For example, the variable FAIS in 2014 corresponds to the monthly average per capita of FAIS in 2011–13.

Municipalities with less ability to collect their own fiscal revenues typically receive more resources through the FAIS and other earmarked transfers. For instance, in 2014, the FAIS accounted for 38.3 percent of the total own fiscal revenues among municipalities with the lowest own revenues. In contrast, the FAIS represented only 5.8 percent of the resources in municipalities with highest values of own fiscal resources. This finding could be problematic because some authors have shown that infrastructure projects financed through the FAIS are utilized on public works, which are not productive projects that can generate wealth (Smith 2019).

Figure 3. Fiscal revenues at the municipal level, by deciles of own revenue, 2014 <!-- Start of picture text --> 7,000<br>6,000<br>5,000<br>4,000<br>3,000<br>2,000<br>1,000<br>0<br>1 2 3 4 5 6 7 8 9 10<br><<Lower Higher>><br>Fiscal revenues by deciles of own revenue<br>Own revenue Unconditional transfers FAIS Other conditioned transfers<br>Mexican Pesos (Millions)<br><!-- End of picture text --> _Source:_ Calculations based on information in SIMBAD (State and Municipal System Databases), INEGI. _Note:_ For the years in which a municipality does not report financial statements, financial statements within the nearest two years in which information was available have been used.

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