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

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  • Mr. Peter L. Pedroni
  • Ms. Concha Verdugo Yepes

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.

Suggested Citation

  • Mr. Peter L. Pedroni & Ms. Concha Verdugo Yepes, 2011. "The Relationship Between Illicit Coca Production and Formal Economic Activity in Peru," IMF Working Papers 2011/182, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2011/182
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    References listed on IDEAS

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    1. Garcia-Escribano, Mercedes, 2010. "Peru: Drivers of De-dollarization," Working Papers 2010-011, Banco Central de Reserva del Perú.
    2. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(3), pages 597-625, June.
    3. Peter Pedroni, 2000. "Fully Modified OLS for Heterogeneous Cointegrated Panels," Department of Economics Working Papers 2000-03, Department of Economics, Williams College.
    4. Rasul Shams, 1992. "The drugs economy and anti-drug policy in developing countries," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 27(3), pages 139-144, May.
    5. 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.
    6. Steiner, Roberto, 1998. "Colombia's income from the drug trade," World Development, Elsevier, vol. 26(6), pages 1013-1031, June.
    7. Peter Pedroni, 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(S1), pages 653-670, November.
    8. Ms. Mercedes Garcia-Escribano, 2010. "Peru: Drivers of De-dollarization," IMF Working Papers 2010/169, International Monetary Fund.
    9. 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 752-763, November.
    10. 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, September.
    11. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
    12. Daniel Mejía & Carlos E. Posada, 2007. "Cocaine Production and Trafficking: What do we know?," Borradores de Economia 3955, Banco de la Republica.
    13. 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 653-670, Special I.
    14. 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.
    15. 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.
    16. 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, July.
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    Cited by:

    1. Ms. Concha Verdugo Yepes & Mr. Peter L. Pedroni & Xingwei Hu, 2015. "Crime and the Economy in Mexican States: Heterogeneous Panel Estimates (1993-2012)," IMF Working Papers 2015/121, International Monetary Fund.
    2. Tomas Williams & Pablo Slutzky & Mauricio Villamizar-Villegas, 2019. "Drug Money and Bank Lending: The Unintended Consequences of Anti-Money Laundering Policies," Working Papers 2019-5, The George Washington University, Institute for International Economic Policy, revised May 2020.

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