“ A two - sided coin : Disentangling the economic effects of the ‘ War on drugs ’ in Mexico ”

Mexican President Felipe Calderón was sworn into office in December 2006. From the outset, his administration was to deploy an aggressive security policy in its fight against drug trafficking organizations (DTOs), in what became known as the Mexican ‘War on Drugs’. The policy was strongly condemned because of the 68,000 unintentional deaths directly attributable to it. Here, we evaluate the economic effects of this ‘War on Drugs’. To disentangle the economic effects of the policy, we study the effects of homicides and the rise in the homicide rate together with the impact of federal public security grants and state-level military expenditure on economic growth. Using spatial econometrics, we find that at the state-level the number of homicides reduced the Mexican states’ GDP per capita growth by 0.20 percentage points, while the growth in the homicide rate increased the states’ per capita GDP by 0.81 percentage points. The government’s efforts to fight DTOs had a positive and highly significant impact on economic growth. JEL classification: D74; K42; H56; R11