The Economic Costs of Mexico’s War on Drugs

Earlier this week, online rumors surfaced about a raid on a Mexican drug cartel member’s home where $22 billion in cash was found, as well as exotic animals, an underground hot tub, and millions of dollars of stolen art. This news was perpetuated today as the Mexican government announced that it was successful in its Navy-marine raid of capturing Joaquin “El Chapo” Guzman, Mexico’s most notorious drug cartel leader. The billionaire cartel leader is famous for his storied rise from peasant farmer to head of the famous Sinaloa cartel. Many believe that the capture of El Chapo is huge news for Mexican President Enrique Pena Nieto of the PRI Party. The PRI party had long ruled Mexico until it lost power in 2000. Many criticize the party for its policies in the 1980s and 1990s that cemented drug cartels into the fabric of Mexico.

The successful capture of El Chapo signaled to many analysts the success of President Nieto’s anti-cartel efforts. Despite this, many citizens are still skeptical. Jose Careano, a 35 year old office worker responded to the news of the capture of El Chapo by saying, “They finally got him? It would be good for the country, but kind of doubt it. And if they have got him, they’ll let him go away. He’s untouchable.” (WSJ – Mexico’s Most Wanted Drug Lord Captured) The skepticism regarding the capture of El Chapo comes from previous occurrences where El Chapo was either captured and released by corrupt officials or barely escaped as military raids were suspiciously delayed by hours or days. This as well as El Chapo’s successful escape from a high security prison in a laundry cart make many Mexican citizens believe that he is untouchable.

Only time will tell if the capture of El Chapo proves to actually be a success, but what we do know is that the violence brought on by El Chapo and other cartel leaders has had grave economic costs on the Mexican economy. Violence in Mexico, has increased since the Felipe Calderon administration declared war on drug cartels. In 2011, there was over 50,000 drug related deaths in Mexico. The increased violence and uncertainty in the stability of the country has led to many businesses halting or pulling out investments.

In 2011, Mexico’s GDP grew at a rate of 1.84%, which was the lowest growth in over 20 years. It is hard to state the direct effects that the violence had on Mexico’s economy because 2011 was in the midst of a global recession. Despite the confounding variables, a study conducted by the World Bank stated that a reduction of 10 homicides per 100,000 produces an increase in GDP per capita between 0.7% and 2.9%. Another study showed that in 2000 violence in Latin America contributed to an overall loss of 14.2% of the regional GDP. Furthermore, an instrumental variable regression analysis conducted by Stanford showed that the increase in violence in Mexico contributed to a small decrease in average labor income and a decline in small business revenue. (Stanford – The Economic Consequences of Drug Trafficking Violence in Mexico) With all of this data, we can state the violence in Mexico has had profound impacts on Mexico’s economy. The successful capture of El Chapo would show that Mexico’s effort on the war on drugs is becoming more effective, and as shown by the data from multiple studies less cartel violence will ultimately lead to a more successful Mexican economy.