How does corruption affect
economic growth in Mexico?
A View on Drug Wars
Beth Blankenheim
Liseth Bucheli
Arnav Doshi
Abbie Gudmundson
Jim Huynh
OUTLINE
What is Corruption?
 How are drug cartels related to corruption?
 What are the economic effects of corruption?



General economic effects
Economic effects of cartels in Mexico
How do drug cartels function?
 What is America’s role in the Mexican drug wars?
 What is being done to address this problem?
 Conclusions

WHAT IS CORRUPTION?
WHAT IS CORRUPTION?
According to Carl Fredrich (1972 p.18):
“Corruption is a kind of behavior which deviates
from the norm actually prevalent or behaved to
prevail in a given context, such as the political. It
is deviant behavior associated with a particular
motivation, namely that of private gain at
public expense.”
 Corruption can be defined as “the abuse of
public power for private benefit”(European Physical

Journal)
WHAT IS CORRUPTION?

Corruption can work to enable an informal
economy through various ways:

Bribery



Diversion of Police Resources



Whenever someone in a position of power uses his or her
discretion and monopoly power to accept or extort a bribe from
a civilian for personal or institutional gain
Bribes can be solicited or unsolicited, in return for nonenforcement of an illegal activity
When officers sell or provide their legitimate police services to
criminals
These criminals can be primarily drug lords, prostitutes, and
drug dealers (Sayed and Bruce, 1998).
Kickbacks and Similar Payments

Characterized as a transfer of income from one party to another
by illegal arrangement
WHAT IS CORRUPTION?

Corruption Perceptions
Index (CPI)

Developed by
Transparency
International, a global
civil organization
supported by various
global institutions
Mexico CPI= 3.5
Source: Franko, pg. 162
HOW ARE DRUG CARTELS RELATED TO
CORRUPTION?
The drug war fosters corruption because it
increases private gain (money) at public expense
(violence)
 The drug war and its actors employ many forms
of corruption in order to carry out illegal
operations
 The drug war is a very serious problem and one
that is unique to Latin America
 The economic magnitude makes this an
important issue.

GENERAL ECONOMIC EFFECTS OF
CORRUPTION
GENERAL ECONOMIC EFFECTS

Corruption can affect economic growth in a
number of different ways through:





Foreign direct investment
Tax revenues
Allocation of Public services
The quality of goods and services
Rationality of transactions
GENERAL ECONOMIC EFFECTS




According to World Bank research,
countries who fight corruption and
improve the rule of law can increase
national income as much as four
times in the long run
Estimate for Colombia suggests that
1% of GDP is lost to corruption
Estimate for Brazil suggest that each
citizen pays $6,000 annually due to
corruption
Average Mexican household spend
14% of income bribing
government officials
Correlation between higher
CPI and GPA per capita:
Source: European Physical
Journal
GENERAL ECONOMIC EFFECTS
Using CPI index as a
measure of Corruption,
Research finds that
less corrupt countries
receive more foreign
investments over a period
from 1999-2005
(European Physical Journal)

Source: European Physical
Journal
The findings of this study are
similar to the findings of other
literature
GENERAL ECONOMIC EFFECTS

Tax revenues is affected by corruption in two
ways:

Direct:
Sales Tax
 Income Tax
 Import/Export tax
 Value Added Tax


Indirect:

The reduction of economic activity
GENERAL ECONOMIC EFFECTS

Corruption can lead to higher prices for public
services:


In Paraguay, the cost of roads in rural areas
increased from $13 Million to $24 Million due to
kickbacks
Additionally, corruption can lead to irrational
investments (i.e. contracts not awarded to those
with best return) (Seligon)
SPECIFIC ECONOMIC EFFECTS RELATED
TO DRUG CARTELS IN MEXICO
ECONOMIC EFFECTS OF CARTELS IN
MEXICO

Mexico’s GDP composition:
Agriculture 4%
 Industry 31%
 Services 65%  Tourism (CIA)

Tourism is the third most important economic
activity in Mexico, representing 8.3% of the
nation’s GDP.
 The eighth most visited country in the world with
over 20 million tourists a year. (WTTC)
 For 2010, Mexico is expected to generate 1,601
billion pesos ($122 billion US)

ECONOMIC EFFECTS OF CARTELS IN
MEXICO
Profits have steadily declined as the drug cartels
unleash unremitting violence against rivals and
the Mexican government.
 Cartel tactics are becoming more violent in
retaliation.
 There are tourist sites that are already affected
extremely or slightly by the Mexican drug fiasco;
other places are waiting in premonition of
declines in business.


The peso has devalued with respect to the US dollar
so it is now cheaper to spend in Mexico.
ECONOMIC EFFECTS OF CARTELS IN
MEXICO
ECONOMIC EFFECTS OF CARTELS IN
MEXICO

In Tijuana, a once-thriving city just across the
border from San Diego, the increasingly deadly
drug war has touched almost every part of life.



In 2005, 4 million people visited Tijuana.
In 2008, the number dropped to 400,000.
Local residents too are fleeing in fear from the local
drug cartel (Tijuana Cartel).
(Worldfocus)
ECONOMIC EFFECTS OF CARTELS IN MEXICO

Some say that Mexico’s war on drugs is a war on its
economy:
The loss of the drug business is estimated to shrink
Mexico’s economy by 63% in the short run. (Global
Envision)
 Bank loans are expensive and hard to get, so traffickers
have stepped in to provide small-business loans.
 U.S. Treasury’s blacklist of businesses (2006) suspected of
drug relation: a day care, a gym, an electronics store,
meatpacking plants, dairies, hotels, horse stables, gas
stations, and a mining company. (USATODAY)


Estimates say that cartels have laundered more than
$689 million in the banks of the state of Sinaloa, and
that drug money is driving nearly 20% of the state’s
economy. (UNESCO)
HOW DRUG CARTELS FUNCTION IN
MEXICO?
HOW DO DRUG CARTELS FUNCTION?
Drug cartels are criminal organizations
developed with the primary purpose of promoting
and controlling drug trafficking operations.
 They range from loosely-managed agreements
among various drug traffickers to formalized
commercial enterprises.

HOW DO DRUG CARTELS FUNCTION?
Although Mexican cartels have existed for
sometime, but have become increasingly powerful
in recent years with the demise of the Medelin
(1993) and Cali (1995) cartels in Colombia.
 Closure of the cocaine trafficking route through
Florida also pushed cocaine traffic to Mexico,
increasing the role of Mexican cartels in cocaine
trafficking.

HOW DO DRUG CARTELS FUNCTION?
The National Drug Intelligence Center now
considers Mexican drug cartels as dominating the
U.S. illicit drug market.
 Colombian groups continue to "maintain
significant control over South American cocaine
and heroin smuggling and distribution in the
eastern United States, although their role has
diminished as that of Mexican groups has
expanded.

HOW DO DRUG CARTELS FUNCTION?
According to the Mexican government there are
seven drug cartels operating in Mexico.
 The Mexican government reports that the major
cartels – Gulf, Sinaloa, and Juárez -- are present
in much of Mexico.
 In recent years, the major cartels have formed
alliances with one another; the two rival alliances
now compete for turf.

HOW DO DRUG CARTELS FUNCTION?
Several cartels have also formed an alliance
known as "The Federation."
 The Federation is led by representatives of the
Sinaloa, Juárez, and Valencia cartels.
 The cartels work together, but remain
independent organizations.
 The Federation tries to limit the supply hence
keeping the prices high. However, the incentive
to cheat is too high.

HOW DO DRUG CARTELS FUNCTION?
BEFORE ALLIANCES
AFTER ALLIANCES
HOW DO DRUG CARTELS FUNCTION?
Cartel A
Cartel B
Collude
Not Collude
Collude
(10 , 10)
(1 , 20)
Not collude
(20 , 1)
(5 , 5)
Dominant Strategy:
Cartel A “Not collude” (20 , 1)
Cartel B “not Collude” (1 , 20)
Nash Equilibrium:
“Not Collude” (5 , 5)
Pareto Efficiency dominate over Nash Equilibrium
(10,10) > (5,5)
HOW DO DRUG CARTELS FUNCTION?

Drug war-related violence has exploded across
Mexico since Felipe Calderon launched military
assault against the cartels beginning in
2006. Since then, over 18,000 people connected
with drug trafficking has been killed.
WHAT IS AMERICA’S ROLE IN MEXICAN
DRUG WARS?
WHAT IS AMERICA’S ROLE IN MEXICAN
DRUG WARS?




Mexico is the main supplier of marijuana to the U.S.
and is also a major trafficker of methamphetamine
and heroin.
Moreover, ~90% of cocaine entering the U.S. transits
through Mexico.
Mexican drug cartels now operate in almost every
region of the United States and bring in as much as
$23 billion a year in revenue. (Washington Post,
2007)
U.S. criticism of drug trafficking and crime in Mexico
is perceived by many to be unfair because most of the
drugs being trafficked through Mexican territory are
for consumption in the U.S. (Congressional Research
Study, 2007)
WHAT IS AMERICA’S ROLE IN MEXICAN
DRUG WARS?

“We need the U.S. to stay
committed in this war in
reducing demand, in
stopping the flow of
weapons and stopping the
flow of cash.“
-- Medina Mora
Mexican Attorney General

U.S. law enforcement
officials estimate that $12 to
15 billion a year flows from
the United States to the
Mexican traffickers. And
that is just the bulk currency
amount, actual dollar bills,
and doesn't include all the
money sent by wire
transfers. (MSNBC, 2008)
~95% of weapons seized
come the U.S. which fosters
violence.
WHAT IS BEING DONE TO ADDRESS THIS
PROBLEM?
WHAT IS BEING DONE TO ADDRESS THIS
PROBLEM?
S2
PRICE
S1
P2
P1
D1
Q2
Q1
QUANTITY
WHAT IS BEING DONE TO ADDRESS THIS
PROBLEM?




Calderón has employed 24,000 additional soldiers &
federal police to halt illicit drug production.
NGO’s call for increased penalties to deter growth in
cartel membership.
Obama administration has taken steps to seize drug
money as well as raise shared intelligence spending by
13%.
The U.S. maintains a policy of interdiction and
eradication.
 Prohibition increases profitability.
 Eradication leads to negative externalities.
WHAT IS BEING DONE TO ADDRESS THIS
PROBLEM?
PRICE
S1
P1
P2
D2
Q2
Q1
D1
QUANTITY
WHAT IS BEING DONE TO ADDRESS THIS
PROBLEM?

“As long as it is
demanded, the
prohibition of cocaine
serves merely to make
production hugely
lucrative, not to halt it”
(Economist, 2003)


Washington Office on Latin
America calls for education
programs, drug prevention,
and treatment.
Drug prevention programs
constitute 35% of US
counterdrug spending
although only 1/3 of school
offer anti-drug curricula
(2007).
Decreased demand makes the
drug market less lucrative.
WHAT IS BEING DONE TO ADDRESS THIS
PROBLEM?

Government Proposals

President Fox Proposal

Felipe Calderón Proposal
WHAT IS BEING DONE TO ADDRESS THIS
PROBLEM?


Mexico's federal government has introduced
several measures to eliminate non-transparent
practices in its public and private sectors in order
to stimulate private sector growth.
Anti-corruption initiatives, activities and
legislation have increased significantly since
2000.
WHAT IS BEING DONE TO ADDRESS THIS
PROBLEM?

Vicente Fox (2000 – 2006)
o Felipe Calderón (2006- Present)
WHAT IS BEING DONE TO ADDRESS THIS
PROBLEM?

Mexico's anti-corruption strategy has focused on
three areas:
Prisons
 Police force
 Customs

President Fox pursued free market policies by
introducing several liberal reforms as well as a
range of measures aimed at improving the
Mexican business climate.
 President Calderon's government has devoted
much attention and resources to combating
organized crime related to drug trafficking.

WHAT IS BEING DONE TO ADDRESS THIS
PROBLEM?

1.
2.
3.
Main goals:
Recognition of the role of Popular attitudes and
culture in facilitating corruption.
Creation of Anti-corruption initiatives targeting
culture and popular attitudes.
Increase the involvement of social organization
on the struggle
WHAT IS BEING DONE TO ADDRESS THIS
PROBLEM?
Felipe Calderón is focused on providing greater
public safety, fighting crime, generating
investment and employment to reduce poverty,
and continuing to promote greater transparency
in government and access to information.
 Key areas needing attention in countering
corruption:






Political funding
Government records
Conflict of interest
Government ethics
Protection of whistleblowers
WHAT IS BEING DONE TO ADDRESS THIS
PROBLEM?

On the political agenda, the fight against
narcotics is a special focus area. President
Calderon's government has devoted much
attention and resources to combating organized
crime related to drug trafficking.
WHAT IS BEING DONE TO ADDRESS THIS
PROBLEM?

Corruption Perception Index
Mexico
Year
1988-1992
1980-1985
Corruption Perceptions Index
2008
3.6
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
3.5
3.3
3.5
3.6
3.6
3.6
3.7
3.3
3.4
3.3
2.66
3.3
2.23
1.87
There are very low levels of trust in the public administration and in politicians
CONCLUSIONS
CONCLUSIONS:

In addition to the negative criminal and social
effects accompanying drug smuggling, the cartels'
enormous economic power has fueled high levels
of police corruption.

The police is believed to be on cartels' payroll,
especially in Northern States, where cartels smuggle
drugs into the US.
An increasing number of public agencies and
initiatives have been dealing with anti-corruption
in Mexico since a change of government in 2000
 Mexico collaborates with the US to combat drug
smuggling. Among other sources, Global
Integrity 2007 reports of drug lords being
extradited to the US for prosecution

CONCLUSIONS:
Mexico has a strong anti-corruption legal
framework; however, enforcement of legislation is
still a problem
 Many of the problems are fueled by inadequate
control systems in local state administrations,
and some Mexican states suffer from notoriously
poor governance
 The federal structure of the Mexican political
system is thus frequently cited as contributing to
the inefficiency of federal anti-corruption
initiatives

CONCLUSIONS:
The degrees and types of corruption that
companies encounter in Mexico vary a lot
between the federal, state and municipal level.
 Business surveys reveal that companies still cite
corruption and inefficient government
bureaucracy as major obstacles for doing
business in Mexico
 In the short run, fighting illicit drug cartels will
lead to greater short term violence

QUESTIONS?
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2010.
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REFERENCES
“CIA: The World Factbook." Web.
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