“Plata O Pomo” – Baja California Sur

John Gaugin-Rosenthal and Matthew Mesisklis

Baja California has served as a tourist hub for decades – luxurious real estate, pristine beaches, and excessive (well-deserved) drinking characterize the area. Now, a year following the extradition of El Chapo, several factions are battling it out in hopes of claiming majority power over the fractured drug market. With El Chapo gone, an even playing field has emerged, leading to increasing violence.

Homicide rate data indicates that 2017 has been the peak of the drug war in Mexico, and its impact has proven detrimental to Mexico’s economic development. With 2100 homicide victims, Baja California is quickly losing travel appeal, putting hundreds of attendants, construction workers, and food servicers out of work. A downtick in tourism to Baja could be disastrous for the region, especially considering how sensitive tourism is to crime rates.

http://www.businessinsider.com/narcomantas-hanging-bodies-los-cabos-growing-violence-2017-12

 

Local Businesses, Tourism, and Employment

The drug war takes a toll on local businesses. Bar and restaurant owners, retail shops, and family-owned tourist boutiques are often given a choice: “plata o pomo”. Either they pay a fee to the cartel and continue its operation, or suffer the consequences. This takes away from profit margins, thus impacting profitability. Furthermore, violence in the region harms larger sectors: “for every increase of 10 percentage points in homicide rates in Mexico, you see an increase in unemployment in that region of half a point,” Rios said at the Wilson Center. “Unemployment currently in Mexico is 5%, so for each 10 points of increase in the homicides rates, you see half a point extra on unemployment. That’s pretty significant.” Violence impacts firms’ productivity: staff tardiness, temporary halts in production, employee absences – all caused by drug activity and violence – severely impact productivity and overall production in major sectors. Theft, particularly in the oil industry, has impacted a once-blossoming sector. These effects pose problems to the quality of life for Baja California’s citizens as violence impacts tight-knit communities directly. The war on drugs also impacts these communities indirectly as economic struggles are far-reaching.

Note: the 9% increase (found in the article) in foreign travel can be attributed to the devastating Hurricanes which impacted Caribbean tourism and essentially eliminated a seasonal competitor.

The bar graph below displays ‘resilient’ and ‘sensitive’ sectors. Those on the left are more responsive to the increasing violence in the region. The more sensitive sectors tend to be labor-intensive. Given that Mexico’s economic production is predominantly labor-intensive, it is poised to struggle amidst the growing violence.

 

Brain Drain

The brain drain dominates the Mexican economy, as it does most underdeveloped economies due to a lack of financial opportunities. The intensifying violence in the region attributed to the drug war has apparently amplified the consequences of the brain drain; now, students possessing significant amounts human capital – a truly valuable economic asset – leave the country not just due to scarce opportunities, but also due to the uptick in violence. Now, students also leave in hopes of finding a safe haven.

The cartel landscape has changed severely in recent times; the extradition of El Chapo has seemingly vacated a spot at the top of the order of power and it has several drug factions battling one another over territory and profit. As the issue intensifies and continues to develop, the Mexican economy – the oil, tourism, and retail industries in particular – will be negatively impacted and will face several challenges to growth. In terms of economic development, the increasingly struggling economy will severely impact the quality of life (access to schools, disposable income, safety, real estate value…etc.).

Discussion Questions:

  • How will the war on drugs impact FDI?
  • How will the increasingly dangerous cartel activity impact economic development (education, health…etc.)?
  • How will the drug war impact the political landscape of Mexico, and how will this translate to economics?
  • Will 2018 see a new peak in cartel violence?

Sources

Decriminalization to aid anti-addiction efforts:

Rolling Stone: In an effort to curb violence which originally peaked in 2015, mexican legilators have pushed to make small amounts (up to 5 grams) not carry a legal repurcussion. Although this was marketed as a medical issue, meaning addicts should wean themselves off using small doses, this also means Wealthy Americans like can now use small amounts of narcotics while on vacation, which poses a problem that might entangle tourists in the drug war.

Business Insider and CNN for a Timeline

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7 Responses to “Plata O Pomo” – Baja California Sur

  1. rietanob18 says:

    “Plata O Pomo” is a great title for this blog post, as it embodies the issue as a whole, both literally and figuratively. You cite “Plata O Pomo” in regards to individuals: “tourist boutiques are often given a choice: ‘plata o pomo’. Either they pay a fee to the cartel and continue its operation, or suffer the consequences”. This is individual specific, but this is also essentially what the cartels are telling the government — let us do what we want, or face the consequences. And, the government has exhibited some willingness to do what the cartels want: “Mexican legislators have pushed to make small amounts (up to 5 grams) not carry a legal repercussion”. With El Chapo out of the picture, the Mexican government may have expected the drug war to get easier. However, the elimination of El Chapo has furthered Mexico’s drug war problems, and it will be interesting to see how they handle this new battle. They can either accept the cartel’s terms, or face the consequences associated with challenging the cartels. Regardless, their are unfortunate consequences with either decision.

  2. ahny19 says:

    The severe effects of El Chapo’s extradition on sectors of the Mexico’s economy are shocking. Beyond increased violence and crime rates that have brought Mexico’s drug war to its peak, its direct detriment on Baja California’s Tourism and labor-intensive sectors is a phenomenon I wouldn’t anticipate the drug market to incite. As local businesses are already suffering the consequences of a fractured drug market, foreign direct investment in Baja California and also Mexico more broadly is almost certain to experience adverse effects from the uncertainty that has overcome its private sector. Foreign investors will consider the cartel landscape and its apparent effects on exacerbating the country’s brain drain, firm productivity, and business profitability, becoming more reluctant to invest in a country terrorized by drug factions. Mitigating the violence and conflict created by the country’s drug factions is in not only the best interest of Mexico’s safety but the livelihood of its economy—thus meriting tremendous concern among the country’s policymakers.

  3. reamest18 says:

    There is an obviously similar parallel with Pablo Escobar and his cartel operating out of Colombia. Cartels present a real threat to society – Popeye (Escobar’s hired hitman) is rumored to be responsible for over 3,000 homicides alone. Obviously, times are different than they were in the 90’s but how much so? The Medellin cartel did not just intimidate government officials. They assassinated and even won political elections. Therefore, Mexico should respond but do so carefully. These drug cartels operate under their own rules – plato o pomo – and failing to adhere to their wishes might mean further violence.

  4. the prof says:

    Where are the rest of the comments?

  5. herndono20 says:

    Unfortunately, the cartel has an incredible influence on the economic and political decisions made in Mexico through intimidation and violence. An optimist might hope that the extradition of their leader would assuage the violence in the region but in reality, the response was just the opposite. With the vacancy at the top of the drug game, gang violence will likely increase until a new leader assumes the position. With the cartel’s living in anarchy, and the government facing the option of complying or facing the consequences. With the cartel’s assuming a cut of whichever industry’s profit they choose, economic efficiency is quite limited. This will have negative impacts on FDI for this region because countries will be reluctant to invest in areas where their money will be reallocated into the drug war. Tourism will suffer as a result of violence as well. Maintaining these areas will be harder because of the financial restrictions, and ultimately people don’t want to be concerned with their safety when on vacation.

  6. pezzij19 says:

    This is definitely like the old saying, “you cut off the head of the Hydra and two more grow”. Something like that. The increase of fighting comes from the power vacuum of getting rid of a drug kingpin. But are we not going to get rid of drug kingpins fearing a violent fallout? This brings up an interesting question on how to deal with the aftermath, which to me appears to be a political problem. The aftermath just needs to be dealt with better but that isn’t the only thing to be addressed clearly. But because this is an international problem, largely a result of the United States’s incredible demand for drugs, the solution still isn’t clear. I realize these aren’t economy issues, but they are discussed, inseparable from the economic solution for a struggling Mexican economy.

    Part of me thinks that drug production and the violence that coexists with it could go down as a result of a more prosperous economy. But as the authors mentioned, the violence and crime from Drug Trade is also a major inhibitor on the economy.

  7. Chris DuPont says:

    It’s quite interesting, and also troubling to learn about this development in California. One would think that as one of the most notorious drug cartel leaders ever is out of power, that violence would decrease, not increase. It seems as though in order to once again notice a smaller level of homicides in the region, a new cartel leader must emerge and claim power. It’s almost as if this void has created a sort of underground drug cartel power vacuum and someone needs to bring back the order.

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