Regional per capita income inequality and fiscal policy in Mexico, 1989–2021

Abstract In this paper, we use trends in GDP gaps per capita or relative GDP per capita indicator as an aggregate alternative measure to show regional per capita income inequality between the states of Mexico. The indicator compares each state's gross domestic product per capita (GDPpc) with the annual average of each year and 2019; this allows for evaluating growth performance before and after the COVID-19 pandemic. The econometric method is a spatial dynamic panel, and the convergence–divergence model is conditioned to the behavior of the fiscal policy followed in each state: The fiscal policy indicators are current expenditure and public investment. In general, it is concluded that the amounts of current spending and public investment, in an active fiscal policy context, tend to favor states with higher relative per capita income, which is why an increase in regional inequality is observed. However, it tends to affect low-income regions more, with higher ratios of current spending and investment to GDP, which reduces regional inequality. Therefore, the short-term effects of active fiscal policy to reduce regional disparities can be neutralized.