Housing Markets on Cocaine: Explaining the Relationship between Cocaine Exports and Local Housing Markets in the Andes
Navarro, Ignacio A., Journal of Housing Research
This paper explores the effect of illegal good exports on urban housing markets. It argues that while exports of illegal goods affect housing markets through an employment multiplier effect just as legal exports do, they additionally tend to have an impact on housing markets through violence-generated labor displacement and money laundering. Empirical estimates using time series data from Bolivia and Colombia, two of the world's largest exporters of cocaine, demonstrate that cocaine exports in these countries tend to have a significant impact on urban home prices and construction permits that differ considerably from those of other legal exports. Further, the estimates indicate that only a small fraction of the total effects of illegal exports on housing markets is accounted for by employment effects, suggesting that illegal export effects on housing markets in Bolivia and Colombian during the time studied occurred mainly through money laundering.
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The effect of a country's export activity on its urban housing markets is well known and documented in the urban/regional economics literature. From an urban economics perspective, the relationship between exports and housing markets is straightforward: urban centers serve as transshipment points and process centers of export goods that bring income into a region. The extra income is translated, through an income multiplier effect, into growth and higher urban land values led by immigration (Wheaton, 1974; Jacobs, 1984). In this context, and other things being equal, exports have a direct impact on urban land markets and have the potential to transform entire urban areas (O'Sullivan, 2008). Examples of this phenomenon are common in the urban studies literature. Faola and Salm (2006), for example, argue persuasively about the close link between African urbanization processes and the involvement of African countries in the global economy. Similarly, Roberts (2005) describes how Latin American urban development has been affected greatly by the region's exports and policies affecting these exports since colonial times.
While there is little discussion on how exports of legal goods impact urban development, the effect of exports of illegal goods on urban economies is still relatively unexplored in the mainstream urban studies and real estate literature. For the most part, empirical studies that explore the connections between crime and housing markets focus on the negative externality created by crime in neighborhoods with relatively higher concentrations of criminal activity (Thaler, 1978; Gibbons, 2004). Not many studies, however, have focused on how housing markets are affected when an urban area is a net exporter of illegal goods or services. Several observers have drawn connections between illegal export booms and housing markets in cities serving as production centers or transshipment points in the drug trade, but the literature contains no formal attempts to explain or quantify the underlying forces behind these booms. In principle, urban economic theory predicts that exports of illegal goods would be similar to those of legal goods in terms of income generated for a region. Illegal exports, however, may affect housing markets in additional ways than those of legal exports. This paper contends that in addition to the employment effects produced by exports in general, money laundering mechanisms and violence-generated labor displacement, which are specific to illegal exports, have an important effect on housing markets in urban areas that serve as net exporters of illegal goods.
Understanding the underlying forces of urban growth and their relationship to criminal activity at the city level is not only crucial for the development of effective housing, economic, and social policy in countries that are net exporters of illegal substances in an age of criminal globalization, but also for the development of security policies in countries that are net importers of illegal substances. …