The Effect of Drug-Related Violence on Mexico's Economy : Labor Productivity, Greenfield FDI Projects, and Household Remittances. A Spatial Econometric Approach

Mexico’s War on Drugs strategy against drug trafficking organizations (DTOs) initiated in 2006 by the federal government has contributed significantly to increase the levels of crime and violence positioning Mexico as a reference of rising homicide rates in Latin America during the last decade. The range of homicide rate across Mexico’s territory was from 1.58 to 26.91 in 2007 while in 2011 went from 2.29 to approximately 87 homicides per 100,000 population. What is the effect of drug-related violence on Mexico’s economy? Has drug-related violence created spillover effects across Mexico’s states? Unlike many publications on this subject, I am looking to contribute to the research literature by exploring the effects of the drug-related violence on Mexico’s economy, specifically the engines of Mexico’s economic growth: labor productivity, greenfield investment, and household remittances. In doing so, each chapter includes the review of relevant literature, methodology, econometric specification, and an exploratory spatial data analysis (ESDA). Shedding light on the presence of spatial autocorrelation in the data generating process is important in order to adopt a spatial econometric approach. The main results suggest that i) Mexico’s War on Drugs strategy not only has intensified levels of violence, but violence has also significantly spread through Mexico’s states: both the global and local Moran’s I statistics show growing trends across space and time particularly over the period 2006-2011; ii) the Bivariate Moran’s I estimations in chapter two indicate that law enforcement in a specific state, specifically marijuana seizures and guns seizures are associated with drug-related violence in neighboring states; iii) GMM results in chapter two also indicate that drug-related violence not only exerts a negative and significant impact on labor productivity, but there is also evidence of the negative spillover effects of drug-related crimes on regional GDP per worker; iv) the NBGLMM regression results in chapter three show that the homicide rate per 100,000 population, as a proxy of violent crime at the sub-national level, exerts a significant and negative impact on greenfield FDI projects in the host economy; v) ESF regression results in chapter four report that household remittances have a statistically significant impact on reducing homicide crime per 100,000 population; and vi) geographic location matters: the spatial distribution of employment location quotients suggests that greenfield FDI projects are mainly located in host economies characterized by high intensity in secondary and tertiary economic activities; low labor productivity levels are mainly located in southern states; and above-average homicide rates have been spreading across Mexico’s states, particularly clustering in northern border states suggesting that the effects of drug-related violence on Mexico’s economic growth are relatively higher in northern border states than central and southern states.