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The Relationship Between Illicit Coca Production and Formal Economic Activity in Peru

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  • Peter L. Pedroni
  • Concha Verdugo Yepes
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    Abstract

    This paper investigates the relationship between unrecorded economic activity associated with the production of illicit coca and formally recorded economic activity in Peru. It does so by attempting to construct new regional level estimates for coca production and by implementing recently developed panel time series methods that are robust to regional heterogeneity and unobserved regional inter-dependencies. The paper finds that on balance illicit coca production crowds out formal sector production at the regional level, regardless of whether unanticipated changes occur nationally or regionally. However, total output nevertheless increases, since formal sector production is crowded out less than one for one.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/182.

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    Length: 51
    Date of creation: 01 Aug 2011
    Date of revision:
    Handle: RePEc:imf:imfwpa:11/182
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    Keywords: Regional economics; Peru; Latin America; drugs; economic impact; formal sector; cointegration; statistics; time series; formal sectors; Regional Economic Activity: Growth; Development; and Changes; Illegal Behavior and the Enforcement of Law; Macroeconomic Aspects of International Trade and Finance: Other; Multiple or Simultaneous Equation Models: Models with Panel Data;

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    1. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
    2. Rasul Shams, 1992. "The drugs economy and anti-drug policy in developing countries," Intereconomics- Review of European Economic Policy, Springer;German National Library of Economics;Centre for European Policy Studies (CEPS), vol. 27(3), pages 139-144, May.
    3. Peter Pedroni, 2004. "Panel Cointegration: Asymptotic and Finite Sample Properties of Pooled Time Series Tests with an Application to the PPP Hypothesis," Department of Economics Working Papers 2004-15, Department of Economics, Williams College.
    4. Peter Pedroni, 2001. "Purchasing Power Parity Tests In Cointegrated Panels," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 727-731, November.
    5. Peter Pedroni, 2000. "Fully Modified OLS for Heterogeneous Cointegrated Panels," Department of Economics Working Papers 2000-03, Department of Economics, Williams College.
    6. Pedroni, Peter, 1999. " Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 653-70, Special I.
    7. Melvin, Michael & Ladman, Jerry, 1991. "Coca Dollars and the Dollarization of South America," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(4), pages 752-63, November.
    8. David Canning & Peter Pedroni, 2008. "Infrastructure, Long-Run Economic Growth And Causality Tests For Cointegrated Panels," Manchester School, University of Manchester, vol. 76(5), pages 504-527, 09.
    9. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    10. Moreno-Sanchez, Rocio & Kraybill, David S. & Thompson, Stanley R., 2003. "An Econometric Analysis of Coca Eradication Policy in Colombia," World Development, Elsevier, vol. 31(2), pages 375-383, February.
    11. Daniel Mejía & Carlos E. Posada, 2007. "Cocaine Production and Trafficking: What do we know?," BORRADORES DE ECONOMIA 003955, BANCO DE LA REPÚBLICA.
    12. Michael Melvin & Bettina Peiers, 1996. "Dollarization In Developing Countries: Rational Remedy Or Domestic Dilemma?," Contemporary Economic Policy, Western Economic Association International, vol. 14(3), pages 30-40, 07.
    13. Garcia-Escribano, Mercedes, 2010. "Peru: Drivers of De-dollarization," Working Papers 2010-011, Banco Central de Reserva del Perú.
    14. Steiner, Roberto, 1998. "Colombia's income from the drug trade," World Development, Elsevier, vol. 26(6), pages 1013-1031, June.
    15. Mercedes Garcia-Escribano, 2010. "Peru; Drivers of De-dollarization," IMF Working Papers 10/169, International Monetary Fund.
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    Cited by:

    1. Verdugo-Yepes, Concepción & Pedroni, Peter & Hu, Xingwei, 2015. "Crime and the Economy in Mexican States : Heterogeneous Panel Estimates (1993-2012)," MPRA Paper 64930, University Library of Munich, Germany.
    2. Concha Verdugo Yepes & Peter L. Pedroni & Xingwei Hu, 2015. "Crime and the Economy in Mexican States; Heterogeneous Panel Estimates (1993-2012)," IMF Working Papers 15/121, International Monetary Fund.

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