U.S. Drug Prohibition and Institutional Stability in South America

This paper utilizes the ownership, location, and internalization (OLI) paradigm to identify host country characteristics that provide advantages to extralegal enterprises in South America. In addition to the ownership, location, and internalization characteristics, the effect of United States drug prohibition enforcement is empirically tested using a random-effects panel data model to understand the characteristics that expand extralegal enterprises in South America. Results indicate that greater ability to control government resources for private gain, greater taxes on products, and greater federal spending to reduce the supply of drugs in the United States and abroad promote the expansion of extralegal enterprises. Other results suggest, that the region’s political stability affects the decision of extralegal enterprises to locate in South America. Extralegal enterprises are more likely to expand in countries with greater risk of political instability. Our findings confirm that restrictions to voluntary exchange and increasing drug prohibitions by the United States promote the growth of extralegal enterprises in South America. However, repeal of drug prohibitions could affect foreign exchange reserves and price levels of non-traded goods that could further weaken already destabilized institutions