Income Distribution of Rural Households in Mexico

Abstract

Despite the efforts to reduce poverty in rural municipalities income inequality persists in Mexico. This study presents an analysis on rural household income distribution in the country, since it is argued that conditional federal transfers fail on improving income distribution among rural households. The hypothesis stated that, because of local public goods are also part of individual budget constraints, it is rational to think that an expansion in the provision of local public goods will increase total income and, if such public goods are financed with conditional grants that target low-income groups, it is expected that income inequality may decrease. Thus, the objective was to classify rural municipalities in order to observe which among them have benefited from federal grants and those that did not, finding the reasons why assuming grants are accepted as an instrument contributing to reduce poverty and income inequality in recent years. Each group was analysed as a cluster to observe the effect of federal transfers on rural household income distribution. Main results showed that municipalities with rural low income-inequality and better economic development indicators improve income distribution when obtaining unconditional grants. This means that, in such cases, those transfers designed to reduce poverty also reduce rural income inequality. But that was not the case for the high income-inequality groups, where conditional grants did not have any effect on inequality and, in some cases, inequality increased. For the rural high income-inequality group, unconditional grants showed not to have a positive effect on reducing inequality. The clustering and regression analyses revealed large heterogeneity in the rural areas in terms of income and economic development.