INTERNATIONAL NARCOTICS TRADE, FOREIGN AID, AND ENFORCEMENT

I. INTRODUCTION It is widely accepted that the problems that a country may face as a direct result of narcotics-related activities are numerous. (1) Moreover, drug production and trade are intimately tied to other serious international concerns, notably the financing of insurgencies and terrorist activities (Shughart 2006; Keefer, Loayza, and Soares 2008, Intriligator 2010; Piazza 2011). A prime example is the involvement of the Taliban in Afghanistan in the production and trafficking of heroin (see Blanchard 2009; Clemens 2013a, 2013b). Similar issues are observed in Colombia and Mexico. Hence, the indirect costs of narcotics-related activities are also substantial. Nonetheless, the enforcement of prohibitions on the production, consumption, and movement of narcotics remains among the most controversial issues in international relations, not least because the global response has met with somewhat limited success. (2) Even taking the objective of reducing global consumption of narcotics as given, it is unclear which of the available policy tools are likely to be the most effective at meeting the objective. The consumption and distribution in narcotics importing countries can be targeted directly, although the history of the past one and a half centuries indicates that it is very difficult. Alternatively, and more realistically, the supply side can be targeted. Law enforcement authorities in narcotics-exporting countries can be used to eradicate production facilities and to interdict trafficking, and alternative production activities can be encouraged by providing technical assistance, or by direct subsidization. In all cases involving the supply side, however, it must be recognized that the global production of narcotics is concentrated in developing economies. Many of these countries lack the enforcement resources to engage effectively against well-funded producers and well-armed traffickers and their supporting terrorist and rebel groups. Therefore, foreign aid to finance law enforcement activities is essential. (3) Alternative development policies may also be supported through foreign technical assistance, or by directing foreign aid toward alternative production subsidies. The effects of these policies on narcotics-exporting economies have not, however, been adequately addressed in the literature. Our work adds a new dimension to the existing literature on the economics of narcotics. (4) We construct a theoretical model that explores the effects of foreign financing of anti-narcotics enforcement activities in narcotics-producing/exporting countries, along with other potential policy interventions. While previous literature has taken a partial equilibrium approach to analyzing related issues, our work differs substantially in adopting general equilibrium methods. As Martin and Symansky (2006) note, opium production in Afghanistan, for example, accounted for approximately 27% of economic activity in 2005/2006. Given this fact, substantial general equilibrium effects must be present, and deserve full exploration. We focus attention on the consequences of the multitude of severe distortions that narcotics production and enforcement introduce to factor markets. We envisage an economy where workers engage in both licit and illicit activities, are paid a premium for the risk of incarceration (or seizure of their marginal product) involved in the latter, and a nonproductive law enforcement sector uses real resources to combat illicit activity. Our work draws on a number of strands of economic theory, including tied aid, factor market distortions, dual economies, illicit markets, and law enforcement. A number of important new results emerge from our analysis. Foreign aid will increase enforcement activity and will generally lower narcotics production. The more market power the narcotics-producing country has, the less effective foreign aid will be, however. In fact, aid intended for anti-narcotics enforcement may effectively be siphoned into the wages of narcotics workers. …