of 23
7/30/2019 Political Policies, FDI and Trade
1/23
Political Policies, Foreign Investment
and Drug Traffic
Rafael Salvador Espinosa Ramrez
Universidad de GuadalajaraMexico
7/30/2019 Political Policies, FDI and Trade
2/23
Introduction Drug Trafficking in the world has been a growing
problem. Drug use is widely blamed for a broad range of
personal and social ills.
In the U.S.A. total turn over in the illegal drug
industry almost certainly is over 10 billion U.S.
dollars and by some estimates it is about 50 billion
U.S. dollars.
The most common response to these perceptions isa belief that governments should prohibit the
production, traffic, sale and consumption of the
currently illegal drugs
7/30/2019 Political Policies, FDI and Trade
3/23
Introduction
the certification policy adopted by the U.S.government is a policy used by U.S. to urge for a
tough policy against drug production and drug
trafficking.
One of the most important effect of this policy hasbeen on the flow of Foreign Direct Investment (FDI)
into LAC.
The effectiveness of this policy contrasts with the
significant political influence of drug barons whichmake political contributions to protect their interests.
7/30/2019 Political Policies, FDI and Trade
4/23
Introduction The government in these LDCs has to weight the
benefit (from FDI) and costs (loss of politicalcontribution) in deciding the level of enforcement of
domestic drugs levels.
Two goods are produced in the recipient country of
FDI: a legal (by FDI) and illegal good (drug barons).
The drug barons lobby the government not to
enforce laws restricting drugs production and
trafficking.
The number of foreign firms entering the country is
inversely related to the amount of drugs reaching
the home country of FDI.
7/30/2019 Political Policies, FDI and Trade
5/23
The model
n foreign owned firms.
A homogeneous good X legally produced anda good D (drug) illegally produced.
Two types of individuals in the host country:honest (labeled ) and dishonest (labeled ).
Unemployment in the host country.
The number of foreign firms is determinedinversely by the amount of drug exported bythe host country 0' Dnn
7/30/2019 Political Policies, FDI and Trade
6/23
The model
The host country government chooses a level
of enforcement used to catch drug dealers.
This affect the probability of drug dealers
success.
The utility of the honest people is given by
The Utility of the dishonest people is given by
0',
CS DCXnCI DX
,1 DCDCPI DDD
7/30/2019 Political Policies, FDI and Trade
7/23
The model
The political contribution schedule for the
drug dealers is denoted by
The host government's objetive function is
given by where >1.
The political equilibrium is the outcome of a
two-stage game. In stage one of the game,
the drug dealers choose their contributionschedule. The government then sets its
enforcement policy in the second stage.
c
, IIcG
7/30/2019 Political Policies, FDI and Trade
8/23
The model
Dixit et. al. (1997) develop a refinement
known as truthful equilibria that implement
Pareto efficient outcomes.
The equilibrium ischaracterized by
ooooo IIc ,,,
,,0, MaxIc o
,, ooo IIIcArgmax
,,1
ooooo IIIcII
7/30/2019 Political Policies, FDI and Trade
9/23
The model
Where
and
where is the basic concept of thecompensating variations.
, II o
.1oIIArgmax
7/30/2019 Political Policies, FDI and Trade
10/23
The model
Drug dealers behave as a monopolist
Foreign firms behave as Cournot oligopolist
We assume a linear demand function
.'
DD CDPDP
,' XCQPXQP
7/30/2019 Political Policies, FDI and Trade
11/23
Case 1: Export oriented economy
I shall examine how the enforcement level is
affected by changes in the degree of
corruption and the consumption of drugs.
Solving the political equilibrium from thegovernment objective function we have
.011''''
DCDDnnXC
DPG DX
D
7/30/2019 Political Policies, FDI and Trade
12/23
Case 1: Export oriented economy
A change in the corruption level
where
and
When on ly the drug dealers lobb y the government ,an increase in the degree of corrupt ion redu ces
the level of drug enforcement.
0
G
G
d
d
0' DPG D 0G
7/30/2019 Political Policies, FDI and Trade
13/23
Case 1: Export oriented economy
A change in the demand of drugs
where
When on ly the drug dealers lobb y the government ,
the change in th e enfo rcement level given by anincrease in demand for drugs w i ll depend on
co rrup t ion parameter level .
,if0
if0
1
1
A
A
da
d
.01
2
2'
1
bn
DnXCA
X
7/30/2019 Political Policies, FDI and Trade
14/23
Case 2: Non-tradable sector.
The good produced by foreign firms are takento be a non-tradeable good.
Two kind of honest people: those who are
consumers of the output produced by themultinationals who also work for the drugdealers, and those who receive their incomefor working for the multinational firms.
The drug dealers and the employees of themultinationals lobby the government in orderto maximise their own benefits.
7/30/2019 Political Policies, FDI and Trade
15/23
Case 2: Non-tradable sector.
Restructuring the model we have
CS, DCI D1
,2
XnCI X
,1 DCDCPI DDD
.2121 IIIccG
7/30/2019 Political Policies, FDI and Trade
16/23
Case 2: Non-tradable sector.
A change in the corruption level
When the drug dealers and emp loyees of the
mul t inat ionals lobb y the government of the host
coun try, an increase in the corrupt ion parameter
inc reases (decreases) the enfo rcement level i f
the size of the drug m arket is su ff ic ient ly smaller
(greater) than the size of the legal good market.
.
if0
if0
XD
XD
d
d
SS
SS
7/30/2019 Political Policies, FDI and Trade
17/23
Case 2: Non-tradable sector.
A change in the demand of drugs
When the drug dealers and the employees of the
mul t inat ionals lobb y the government of the host
country , an inc rease in the demand fo r drug s
w il l inc rease (decrease) the enfo rcement level i f
the market forX is suf f ic ient ly large (sm all).
.
0if0
0if0
X
X
da
d
S
S
7/30/2019 Political Policies, FDI and Trade
18/23
Case 3: Export oriented economy II
I shall determine endogenously the number
of firms in an export oriented economy.
One possible policy option for the authorities
in the countries affected by drugs is to levy atax on all firms that invest in the country that
sending drugs.
or,DnT .nDT
7/30/2019 Political Policies, FDI and Trade
19/23
Case 3: Export oriented economy II
I assume that the host country is small in the
market for FDI, i.e., firms would move into
(out of) the host country if the profits it makes
in the host country is larger (smaller) than thereservation profits , it can make in the rest
of the world.
TXCP XX
7/30/2019 Political Policies, FDI and Trade
20/23
Case 3: Export oriented economy II
A change in the corruption level
where
and
When only the drug dealers lobb y the government
and n is endogenously determ ined, an increasein the degree of corrupt ion redu ces the level ofdrug enforcement .
,0
G
G
d
d
0' DPG D 0G
7/30/2019 Political Policies, FDI and Trade
21/23
Case 3: Export oriented economy II
A change in the demand of drugs
When only the drug dealers lobb y the government
and n is endogenou sly determ ined, the change
in th e enfo rcement level given by an inc rease indemand for drug s w i ll depend on marginal
disu t i l ity for d rugs and the size of legal market
good .
0if0
0if0
0if
00if
X
X
da
d
S
S
7/30/2019 Political Policies, FDI and Trade
22/23
Conclusions
Misunderstanding the action of the drug
producers on the society's interests may lead
to unsuccessful enforcement policies.
The corruption in the government and thebenefit that drug traffic gives to the
inhabitants of producing countries can inhibit
any action leaded by the internationalcommunity.
7/30/2019 Political Policies, FDI and Trade
23/23
Conclusions
Sometimes corruption is overestimated. Even
when bribes are the origin and the
consequences of corruption, they are not
playing the definitive role in the political gameas many other factors are taken into account.
The political actors are rational in the
decision process.