Social Impacts of Legalization of Drugs And Prostitution SOCIAL IMPACTS OF LEGALIZATION OF DRUGS AND PROSTITUTION BY CHAI YIANG SHIN CHEOW MEI XIN CHYE CHIA HUI LOH SIN YI YAU LEI YI A research project submitted in partial fulfilment of the requirement for the degree of BACHELOR OF ECONOMICS (HONS) FINANCIAL ECONOMICS UNIVERSITI TUNKU ABDUL RAHMAN FACULTY OF BUSINESS AND FINANCE DEPARTMENT OF ECONOMICS AUGUST 2017 Undergraduate Research Project Page 1 of 89 Faculty of Business and Finance Social Impacts of Legalization of Drugs And Prostitution Copyright @ 2017 ALL RIGHTS RESERVED. No part of this paper may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, graphic, electronic, mechanical, photocopying, recording, scanning, or otherwise, without the prior consent of the authors Undergraduate Research Project Page 2 of 89 Faculty of Business and Finance Social Impacts of Legalization of Drugs And Prostitution DECLARATION We hereby declare that: (1) This undergraduate research project is the end result of our own work and that due acknowledgement has been given in the references to ALL sources of information be they printed, electronic, or personal. (2) No portion of this research project has been submitted in support of any application for any other degree or qualification of this or any other university, or other institutes of learning. (3) Equal contribution has been made by each group member in completing the research project. (4) The word count of this research report is 16, 524. Name of Student Student ID: Signature 1. CHAI YIANG SHIN 1406873 _________________ 2. CHEOW MEI XIN 1407607 _________________ 3. CHYE CHIA HUI 1306150 _________________ 4. LOH SIN YI 1303149 __________________ 5. YAU LEI YI 1305003 _________________ Undergraduate Research Project Page 3 of 89 Faculty of Business and Finance Social Impacts of Legalization of Drugs And Prostitution ACKNOWLEDGEMENT We would like to take this opportunity to express our deepest gratitude and appreciation to our supervisor, Dr. Wong Chin Yoong, for his guidance along the period that we complete this final year project. Dr. Wong guides us with his past experience and professional knowledge in economic sector. Our work will not be completed without his suggestions and encouragement. His suggestions help us to cope with difficulties when we are facing doubts. He guides us back to the right path when we deviate from main direction. The facilities and database provided in UTAR provide convenience when we are obtaining data and view the research from others. Thus, we would like to acknowledge UTAR for providing such a good environment and facilities for student in our campus life. The complete of this research not just only depend on our team effort but also the encouragement and guidelines of many others. We would like to take this opportunity to express our deepest gratitude to the people who have been instrumental in the successful completion of this project. Undergraduate Research Project Page 4 of 89 Faculty of Business and Finance Social Impacts of Legalization of Drugs And Prostitution TABLE OF CONTENTS PAGE Copyright Page ………………………………………………………..………... i Declaration ………………………………………………………..…………….. ii Acknowledgement ………………………………………………………..…….. iii Table of Content ………………………………………………………..………. iv List of Tables ………………………………………………………..………….. v List of Figures…………………………………………………………….…….. vi List of Abbreviations…………………………………………………...………. vii List of Appendices……………………………………………………...………. viii Abstract……………………………………………………………….…………. ix Chapter 1 Research Overview 1.1 Research Background …………………………………… 1 1.1.1 Does Legalization Bring Impact to the Country? .... 3 1.1.2 When Legalization Started? ....……………………. 5 1.2 Problem Statement ……………………………………… 6 1.3 Research Objective ……………………………………… 11 1.4 Research Question ………………………………………. 11 1.5 Hypothesis ………………………………………………. 12 1.5.1 Abortion …………………………………………… 12 1.5.2 HIV ……………………………………………….. 12 1.5.3 Fertility …………………………………………… 12 Undergraduate Research Project Page 5 of 89 Faculty of Business and Finance Social Impacts of Legalization of Drugs And Prostitution 1.6 Significance of Study …………………………………. 13 1.7 Chapter Layout ………………………………………... 14 1.8 Conclusion ……………………………………………. 14 Chapter 2 Literature Review 2.0 Why and Why Not Legalize Drugs and Prostitution? … 15 2.1 Decreased in Abortion Rate? ………………………….. 15 2.2 Reduce HIV/AIDS? ……………………………………. 16 2.3 Reduce Fertility Rate? …………………………………. 18 2.4 Reduce Crime Rate? …………………………………... 19 2.5 Improve Public Health? ………………………………. 21 2.6 Hypothesis Development …………………………….. 23 Chapter 3 Methodology 3.0 Introduction …………………………………………... 24 3.1 Breaking down the model ……………………………. 3.1.1 The Model ……………………………………… 24 3.2 How does the model work? ………………………….. 3.2.1 Fertility ………………………………………… 26 3.2.2 HIV …………………………………………….. 28 3.2.3 Abortion ……………………………………….. 30 3.3 How do we collect and process data? ……………….. 3.3.1 Data Collection Method ………………………. 31 3.3.2 Data Sources ………………………………….. 31 3.3.3 Data Collection Method and Data Processing... 32 Undergraduate Research Project Page 6 of 89 Faculty of Business and Finance Social Impacts of Legalization of Drugs And Prostitution 3.4 Constructing the Basic Models …………………….. 3.4.1 Pooled OLS …………………………………… 34 3.4.2 Fixed Effect Model …………………………… 35 3.4.3 Random Effect Model ………………………… 36 3.5 How Preferred Model Is Chosen? …………………… 3.5.1 Likelihood Ratio Test ………………………….. 37 3.5.2 Breusch and Pagan Lagrange Multiplier Test …. 38 3.5.3 Hausman Test ………………………………….. 38 3.6 Conclusion …………………………………………… 39 Chapter 4 Data Analysis ……………………………………….. 4.0 Unit Root Test ……………………………………….. 40 4.1 Basic Model …………………………………………. 41 4.2 Preferred Model ……………………………………… 45 4.3 Does Legalization of Prostitution increase or decrease the Fertility rate and HIV prevalence? ……………….. 46 4.4 Does Drug legalization Contribute effect to Fertility Rate and HIV prevalence? …………………………………….......... 49 4.5 Conclusion …………………………………………… 51 Chapter 5 Conclusion …………………………………………… 5.0 Introduction ………………………………………….. 57 5.1 Discussion on Major Findings ………………………. 57 5.2 Policy Implication …………………………………… 61 5.3 Limitations of the Study …………………………….. 62 5.3.1 Omitted Variables ……………………………... 63 Undergraduate Research Project Page 7 of 89 Faculty of Business and Finance Social Impacts of Legalization of Drugs And Prostitution 5.3.2 Different Proxy for legalization …………………… 63 5.4 Recommendations for Future Research ……………... 5.4.1 Conduct the Determinant Based on Different Perspective …………………………………………. 64 5.4.2 Improve the Sensitivity of Scale ……………… 64 5.5 Conclusion ………………………………………….. 65 Undergraduate Research Project Page 8 of 89 Faculty of Business and Finance Social Impacts of Legalization of Drugs And Prostitution List of Table Pages Table 1.1 Legalization status of 37 countries 2 Table 3.1 Summary of variables and data sources 33 Table 4.1 Unit root test 40 Table 4.2 Basic model for abortion 42 Table 4.3 Basic model for fertility 43 Table 4.4 Basic model for HIV 44 Table 4.5 Results for abortion rate after prostitution is 52 legalized through social variable Table 4.6 Test Results for Variable With and Without 53 Interactive Term Regressed Against Fertility Table 4.7 Test Results for Variable With and Without 54 Interactive Term Regressed Against HIV Table 4.8 The Impact on Fertility Rate before and after 55 Legalizing Drug Table 4.9 Test Results for Variable With and Without 56 Interactive Term Regressed Against HIV Undergraduate Research Project Page 9 of 89 Faculty of Business and Finance Social Impacts of Legalization of Drugs And Prostitution List of Figure Pages Percentage of youth abuse rate Figure 1.1 4 on drugs Police recorded crime rate in Figure 1.2 5 Belgium Figure 1.3 Fertility rate among general population in Portugal and 7 Russia Figure 1.4 Drugs use among general population among generation in 8 Sweden Figure 1.5 The HIV among general 9 population in Bolivia Impact of legalization of Figure 1.6 10 prostitution Undergraduate Research Project Page 10 of 89 Faculty of Business and Finance Social Impacts of Legalization of Drugs And Prostitution LIST OF ABBREVIATIONS ADF Augmented Dickey-Fuller Test CP Contraceptive Prevalence DLGDP Log Real Gross Domestic Product FAMPLAN Family Planning FEM Fixed Effect Model FRN freedom Of Religion HC Human Capital HDI Human Development Index LA Latin America LEGALDRUG Legalization of drugs LEGALPROS Legalization of Prostitution LLC Levin, Lin and Chu test LM Lagrange Multiplier LR Likelihood Ratio POLS Pooled Ordinary Least Square REM Random Effect Model Undergraduate Research Project Page 11 of 89 Faculty of Business and Finance Social Impacts of Legalization of Drugs And Prostitution CHAPTER 1: RESEARCH OVERVIEW 1.1 Research Background Over the years, there are variety of studies have discussed on the issue that whether the government should legalize immoral activities such as drugs and prostitution or not. Based on our research, countries that had legalized drugs and prostitution are mostly western countries. Therefore, many studies investigated this topic focusing on western countries on the social impacts found from legalizing drugs and prostitution. In our research study, we will focus on 37 countries in the region of Latin America and Europe to investigate the social impacts after legalization of drugs and prostitution. 1.1.1 Does legalization bring impact to the country? According to David & Evans (2013), legalization will not merely bring economic impacts to a country but also social