Political Policies, FDI and Trade

7/30/2019 Political Policies, FDI and Trade

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Political Policies, Foreign Investment

and Drug Traffic

Rafael Salvador Espinosa Ramrez

Universidad de GuadalajaraMexico


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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


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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.


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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.


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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


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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


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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


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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


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The model

Where

and

where is the basic concept of thecompensating variations.

, II o

.1oIIArgmax


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The model

Drug dealers behave as a monopolist

Foreign firms behave as Cournot oligopolist

We assume a linear demand function

.'

DD CDPDP

,' XCQPXQP


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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


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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


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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


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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.


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Restructuring the model we have

CS, DCI D1

,2

XnCI X

,1 DCDCPI DDD

.2121 IIIccG


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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


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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


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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


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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


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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


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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


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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.


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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.

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Political Policies, FDI and Trade