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The Tortuga disease: the perverse effects of illicit foreign capital

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  • Jablonski, Ryan S.
  • Oliver, Steven
  • Hastings, Justin V.

Abstract

Transnational crime brings substantial foreign capital into a number of fragile and developing states. Yet the economic and political impacts of such capital have rarely been studied due to the challenges of obtaining accurate data on illicit activities. We overcome this challenge by compiling a dataset on the amount and disbursement dates of ransom payments made by ship owners and insurers to Somali pirates from 2005 to 2012, along with sub-national commodity prices and trade flows in Somalia. Using a difference-in-differences strategy, we hypothesize and find that ransoms have effects similar to those associated with the Dutch Disease. These effects include appreciating the local currency, decreasing export competitiveness, and increasing import dependence. The results illuminate a new channel through which illicit capital can undermine long-term economic development and foster an economic and political dependency on illicit sectors.

Suggested Citation

  • Jablonski, Ryan S. & Oliver, Steven & Hastings, Justin V., 2017. "The Tortuga disease: the perverse effects of illicit foreign capital," LSE Research Online Documents on Economics 67105, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:67105
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    References listed on IDEAS

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    JEL classification:

    • N0 - Economic History - - General
    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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