Overview and directions: Raising the price of cocaine has been a longstanding strategy in the war on drugs. But how effective has this strategy proved? Your job is to explore the economics behind this by reviewing each of the texts, answering the questions that correspond to each section, and ultimately conduct a cost-benefit analysis that addresses the following question:
GUIDING QUESTIONS:
Is disrupting the supply of coca at its source the best way to raise the price of cocaine?
Do the benefits of doing this outweigh the costs?
Note: All written text excerpts below have been taken from Tom Wainwright’s book, “Narconomics.”
Wachus in the Andes Mountains
Response Questions:
1. Explain why farmers in the Yungas choose to grow coca instead of other crops such as coffee.
Its more profitable for farmers to harvest cocaine because it grants more profit and is demanded all over the world by other consumers, although coffee is still demanded it doesn’t have the benefit of being grown and harvested like cocaine and cocaine is easier to grow.
2. Imagine it’s an unseasonably hot and dry growing season. What would we expect to see happen to the coca crops? Analyze the effect this will have in the market by highlighting the appropriate option:
Change in supply / demand? ? (Increase / decrease)?
Market quantity sold: (increase / decrease)?
Market price: (increase / decrease)?
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“Despite international bans on the leaf, the Bolivian state supports various national industries that churn out all manner of coca-related products, from sweets, cookies, and drinks to coca-infused toothpaste. The industry is regulated by the Vice-Ministry of Coca, which imposes the limits on how much of the leaf can be grown. The idea is to license enough cultivation to feed the market for tea, toothpaste, and all the rest of it, without growing enough to leak into the cocaine trade.
The system is far from water-tight, though: the United Nations estimates that in 2014, Bolivia had about 20,400 hectares, or 50,400 acres, of land devoted to coca cultivation, enough to produce about 33,000 tons of dried leaf. In the same year, the country’s two licensed markets handled only 19,798 tons—less than two-thirds the estimated amount of coca leaf being produced. It is a safe bet that the rest found its way into the illegal market, to be turned into cocaine.”
1. Explain how the author is able to conclude that much of the land used to grow coca sold legally in government-licensed markets is actually being used to grow coca for illegal production of cocaine.
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“Because cartels depend on coca leaf to make their cocaine, governments have targeted coca plantations as a means of cutting off the business at its source. Since the late 1980s, the coca-producing countries of South America, backed by money and expertise from the United States, have focused their counternarcotic efforts on finding and destroying illegal coca farms.”
1. Based off of the statement above, state whether the counternarcotic strategy has been to target the supply or demand of cocaine. How do you know?
2. Analyze the desired impact counternarcotic agents hope this will have on each of the following in the cocaine market:
a. scarcity (remember: the two conditions of scarcity are: limited & desired)
b. cost to produce
c. quantity supplied
d. market price
e. quantity demanded
3. Illustrate these expected changes in the diagram below (use the lines on the right (you might not use all of them!) include arrows and new labels)
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“Colombia and Peru, which are currently on friendlier terms with the United States than Bolivia is, have taken an especially tough line.
The armies of both countries have been drafted as emergency gardening services, tasked with eliminating every trace of the coca bush. The mountainous geography has made this a fiendishly tricky task. Spotters fly up and down in light aircraft, looking out for the telltale terraces that show that coca production is under way.
Farmers have gotten better at hiding their crops, but the authorities are now better at seeking them out. Nowadays the spotters’ planes are helped by satellites, which take detailed images of the countryside for experts to pore over to try to tell the difference between legal plantations of bananas or coffee and illicit ones of coca.
Armed with these maps, soldiers are sent to destroy the crops by hand. In Colombia, some of the eradication has been done by spraying the farmland with weed killer from light aircraft. This destroys the coca—along with many other, perfectly legitimate crops, farmers complain. In 2015, Colombia indefinitely suspended its aerial spraying program, following a warning from an agency of the World Health Organization that the weed killer may cause cancer.”
1. What are two unintended consequences from Colombia’s coca aerial spraying program.
2. How might these unintended consequences change farmers’ support for the Colombian government’s anti-drug campaign?
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“The eradication campaign has been devastatingly successful, at least on the face of it. Over the past couple of decades, Bolivia, Colombia, and Peru have destroyed thousands of square miles of illegal coca plantations, eradicating more and more crops each year. Whereas in 1994 the three countries’ governments destroyed about 6,000 hectares (15,000 acres) of coca, in 2014 they laid waste to more than 120,000 hectares (300,000 acres), mostly by hand. It is an extraordinary feat: to picture the scale of the task, imagine every year weeding a garden fourteen times the size of Manhattan (while occasionally being shot at). By the rough calculations of the United Nations, nearly half of all the coca bushes planted in the Andes are now eradicated.
The annual loss of nearly 50 percent of production would be a crippling blow to most industries. But somehow, the cocaine market keeps bouncing back. As acre after acre of coca has been poisoned, burned, and sprayed, farmers have gone out and planted more bushes to replace the ones that have been destroyed. The result is that total output has not changed much. In 2000, following the first decade of intensive eradication measures, a total of about 220,000 hectares (545,000 acres) of land was successfully used to grow coca in South America—almost exactly the same as the amount in 1990.”
Peru, for instance, cut down on its coca farming in a big way in the 1990s. But the cartels have quickly found other sources of supply. Peru’s crackdown triggered a coca-growing boom in Colombia. When Colombia redoubled its efforts and drove the farmers out, the coca terraces reappeared in Peru. Western observers call this the “balloon effect”: if you squeeze in one place, it bulges up somewhere else. Latin Americans have an earthier name for the same phenomenon—the “cockroach effect.” Just like cockroaches, you can chase drug traffickers out of one room, but they soon take up residence somewhere else in the house.”
Excerpt from: Wainwright, Tom. “Narconomics.” iBooks.
1. Given the passage above, how “mobile” (easily moveable and transferable) do you think resources and labor are in the production of coca? How does this “mobility of resources” pose a challenge to destroying production at its source?
2. Using the word “incentive”, explain why the farmers have responding to the eradication of illegal coca plantations by quickly planting and replacing more coca plants.
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“For farmers to maintain high levels of output in the face of all the crop spraying, they have been forced to put in much more time in the fields. The need to create new plantations to make up for the ones destroyed by the armies imposes a significant cost on business. In the past, virtually all of the coca grown could be turned into cocaine. Nowadays nearly half goes to waste, yanked up by the roots or sprayed with weed killer by the authorities.”
Excerpt from: Wainwright, Tom. “Narconomics.” iBooks.
1. Advocates of the coca eradication campaign in South America argue that the point is not necessarily to eliminate coca farming completely. Using the passage above, briefly summarize the main idea behind their overall strategy by using the words, “cost of production” and “opportunity cost”.
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“But even though they are having to grow twice as much coca as before to harvest the same amount of leaf, the cartels haven’t had to raise their prices. In the United States, a gram of pure cocaine today costs about $180. (A typical gram bought on the street costs about half that, because it is only about 50 percent pure.) That is roughly what it has cost for the past two decades, in spite of the thousands of swipes of machetes and gallons of weed killer that have been deployed.”
Excerpt from: Wainwright, Tom. “Narconomics.” iBooks.
1. Given the passage above, what can you conclude about the overall success that the coca eradication efforts have had on increasing the market price of street-level cocaine.
2. Using the concepts of changes in supply/demand, explain why the market price of cocaine has remained stable over the past 20 years.
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“One explanation for a stable price at a time of a shock to supply would be a dip in demand. (In other words, there is less of the product to go around, but fewer people want to buy it, so the price stays the same.) But that doesn’t seem to be the case. Since the 1990s, the number of people regularly using cocaine in the United States has held pretty steady at between about 1.5 million and 2 million people. Recently there has been a significant dip in US consumption, but most of that has been made up for by much higher demand in Europe. The United Nations says that worldwide demand is stable.”
1. Given the information above, illustrate the following in the diagram below:
To do this, drag the appropriate labels, dotted lines, and curves onto each diagram.
a. Change in U.S. demand for cocaine (using the red curve)
b. Change in European demand for cocaine (using the line blue curve)
c. Change in quantity
d. Change in price
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“This makes for a puzzle: constant demand and restricted supply would normally lead to an increase in price, yet cocaine remains as cheap as ever. How have the cartels managed to defy the basic laws of economics?”
To understand how they have pulled off this trick, consider Walmart, which has sometimes seemed able to defy the laws of supply and demand in a similar way to the drug cartels. Walmart, the world’s largest retailer, has worldwide revenues of nearly half a trillion dollars per year. Its success is built on prices that seem not to have risen much since Bud and Sam Walton opened their first store in 1962.
Its extraordinarily low prices make Walmart wildly popular with its customers. But for the farmers and manufacturers who supply the goods, the low prices are sometimes crippling.
“Their complaint is that Walmart and other big chains have such a big share of the groceries market that they are able more or less to dictate terms to their suppliers. Everyone is familiar with the concept of a monopoly, in which one company is the dominant seller of a particular product and can therefore charge whatever price it likes. Critics of retailers such as Walmart accuse them of being “monopsonies”—that is, dominant buyers of certain products. (Just as the word monopoly is derived from the Greek for “single seller,” monopsony means “single buyer.”) In the same way that a monopolist can dictate prices to its consumers, who have no one else to buy from, a monopsonist can dictate prices to its suppliers, who have no one else to sell to.
The store knows this and is therefore able to squeeze suppliers hard. A survey by Forbes magazine found that suppliers that sold a high proportion of their goods through Walmart on average had lower profit margins than those that did less business with the store. Driving down prices and forcing suppliers to be more efficient is great for consumers, of course, and indeed it has benefits for the wider economy—such as lowering prices, increasing overall consumption, and improving productivity gains. But for suppliers, it makes life difficult. If a harvest fails and the costs of production go up, you can bet that it is the farmers, not the supermarket or its customers, that will be made to feel the squeeze.”
Colombia’s drug traffickers in the region have applied Walmart’s genius when it comes to leveraging the supply chain. To start with, the cartels are more like big-box retailers than one might imagine, playing the role of buyers rather than growers. It is tempting to imagine that the whole cocaine business is in the hands of the cartel from start to finish, with gun-toting mobsters lovingly tending their coca bushes in between massacring their rivals. But that isn’t usually how it works. The agricultural side of the cocaine industry is mostly handled by ordinary farmers who would just as happily grow tomatoes or bananas if they paid as well as coca. Cartels play a role more like that of large supermarkets, buying produce from farmers, processing and packaging it, and then selling it on to consumers.”
1. Briefly research the economic concept, “economies of scale” to get a basic idea of it, and then summarize it in your own words.
2. If cocaine cartels are able to increase the scale of their operations (i.e., expand their size) and act like a large multinational retail corporation like Walmart or Carrefour, how will this affect their average costs of production, efficiency, and the way they can negotiate with farmers and other producers within their supply chains?
3. How will the factors you considered above affect the price that cartels will be willing to sell cocaine for?
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If the supply-reduction strategy of eradicating coca plantations were working, one would expect areas that had undergone more eradication to see a greater increase in price than those that had been spared the weed killer. Less coca should mean that, other things being equal, the local cartels would have to pay the farmers more for it. But researchers have found no such pattern.
Instead, they discovered, eradication had virtually no impact on the price of coca leaf, or the various illegal refined-coca products that farmers also sometimes sell to cartels.
The reason, they hypothesize, is that the armed groups that control the cocaine trade in Colombia act as monopsonies. Under normal market conditions, coca farmers would be able to shop around and sell their leaves to the highest bidder. That would mean that in times of scarcity, coca buyers raised their bids, and the price of the leaf went up. But Colombia’s armed conflict is such that in any given region, there is usually only one group of traffickers that holds sway. That group is the sole local buyer of coca leaf, so it dictates the price, just as Walmart is sometimes able to set the price of the produce it buys.
This means that if the cost of producing the leaf goes up—owing to eradication, disease, or anything else—it will be the farmers who bear the cost, not the cartel. Just as big retailers protect themselves and their customers from price rises by forcing suppliers to take the hit, cartels keep their own costs down at the expense of coca farmers. The shock is assumed entirely by growers, as major buyers have the ability . . . to maintain fixed prices”
“In other words, it’s not that the eradication strategy is having no effect. Rather, the problem is that its impact is felt by the wrong people. The cartels’ Walmart-like grip on their supply chains means that any worsening in coca-growing conditions simply makes poor farmers even poorer, without doing much to cut the cartels’ profits or raise the price of cocaine for consumers.
“We’re against all of this,” says a farmer in Trinidad Pampa, who asks not to be named, referring to the official eradication programs that uproot any unlicensed plants.”“We’re always clashing with the government over it. It’s infuriating for us.” Even if they want nothing to do with the gangsters who control the cocaine business, growers resent being limited in what they can produce, he says. Any unauthorized plantations are summarily destroyed, leaving the farmers worse off but failing to affect the bottom line of their clients, the cartels. Production remains high, retail prices stay low, and the cocaine business continues.
Conditions elsewhere in the Andes are no richer: the United Nations estimates that in Colombia, the average coca farmer earns little more than $2 per day. The destitution of coca growers is starkly at odds with the image of wealthy cocaine barons, posing in Ferraris and managing private zoos.
1. Explain which group of people has been most affected by the increase in costs to produce coca which have resulted from the coca eradication campaign.
2. Based off of this passage, explain how someone could argue that the strategy of destroying coca fields has has been counter-productive, and has not achieved its desired goal of reducing the retail price and supply of cocaine.
3. The root of the cartels’ monopsony power is that the farmers have only one customer who they can sell their coca to.
a. With this in mind, how might the government increase the price that farmers are able to sell their coca for and make them less dependent on violent cartels?
b. What affect would this have on the ultimate retail price of a gram of street-level cocaine?
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“How might the cartels be forced to absorb some of these costs themselves? The root of their monopsony power is that the farmers have only one customer. So the obvious solution would be to create more competition in the coca-buying market, giving the farmers more potential buyers and forcing the cartels to pay a market rate for the product. There is just one snag: because coca is illegal in most places, governments cannot do much to increase the number of buyers in the market.
So governments have tried to force the price up in another way: by providing farmers with alternative ways to make a living, thereby making them less dependent on selling coca to the cartels.
Rather than using the stick of eradication to make coca farming less appealing, many policy makers suggest providing a carrot in the form of subsidies for other crops. Some European countries, whose diplomats are privately critical of the eradication-focused approach favored by the United States, have established projects to encourage other agricultural industries. The idea is that if it can be made more profitable to grow some other, legal crop than it is to grow coca, then farmers will change their focus.
There is interest among cocaleros (coca farmers). Even ÉdgarMarmani, the local union leader, says he would consider switching to other industries if the start-up costs were lower. “Poultry, tomatoes, pork—they’re all more profitable than coca, but they need investment,” he complains.
The European Union has put forward some cash to meet that need, funding projects in Bolivia that encourage the cultivation of bananas, coffee, and citrus fruits, among other things. Similar tactics have been tried in other parts of the world that have a problem with narco-agriculture: in Afghanistan, which grows most of the world’s opium, farmers have been nudged toward growing wheat or cotton as an alternative to opium poppies.
There is some evidence that this sort of strategy can work. A recent study by the Center for Global Development (CGD), a Washington, DC–based research organization, tried to get to the bottom of how Mexican farmers decided whether to grow legal crops or illicit ones. The authors focused on marijuana and opium, the country’s main drug crops, and compared them with corn, the main legal one.
For all its patriotic and practical importance, corn has been a tricky crop to make a living from in recent decades, with enormous fluctuations in price playing havoc with farmers’ finances. Mexican growers saw corn’s price tumble following the introduction of the North American Free Trade Agreement (NAFTA) in 1994, which opened the market up to competition from the United States. At other times its price spiked, following shortages caused by droughts north of the border.
As the price of corn fell during the 1990s, farmers started growing more marijuana, as well as more opium. The authors calculate that in areas where corn was being farmed, a 59 percent drop in the price of corn led to an 8 percent increase in cultivation of marijuana and a 5 percent increase in that of opium. But there was good news, too: as corn prices started to climb again, from 2005 onward, the amount of marijuana cultivation plummeted. There could be another explanation for this: America’s legal marijuana boom has greatly reduced the incentives for Mexican farmers to grow pot (see Chapter 10). And opium-poppy production remained high, even after the price of corn bounced back. Still, the authors found that corn’s price had a significant effect on farmers’ willingness to dabble in illegal crops.
“In other words, make it more profitable for farmers in the Andes to rear chickens or grow tomatoes, and they might grow less coca. This is effectively another way around the problem of monopsony: if the cartel demands too low a price for coca (or marijuana, or opium, or whatever else), the farmers can simply switch to growing corn, tomatoes, or some other crop. At the very least, the cartels will have to raise the price that they offer for drug crops if they want to persuade farmers to keep growing them.”
“This alternative-development strategy may offer more hope than eradication. And for a while, it looked as if some progress was being made. Since the turn of the twenty-first century, it has seemed for the first time as if eradication and alternative-development efforts have started to have some impact on the amount of land being devoted to growing coca. The area of land successfully used for coca cultivation in 2014 was about 130,000 hectares (320,000 acres), 40 percent less than in 2000. After years in which a few hundred thousand Andean peasants had resisted the combined efforts of three South American armies and the DEA, it finally looked as if a breakthrough had been made.”
In the diagrams below, illustrate the impact each of the following situations referenced in the text above:
To do this, drag the appropriate labels, dotted lines, and curves onto each diagram. Keep in mind only one curve may shift in each scenario.
Determinants of Demand Determinants of Supply
? The tastes of consumers
? The price of related goods (substitutes or complements)
? The expectations of consumers of future prices
? Consumers’ Incomes (depends on whether a good is normal or inferior)
? The number of consumers
? Special circumstances ? Government subsidies and taxes (subsidies increase supply, taxes decrease supply)
? Technology used in the production of the good
? Other goods’ prices (substitutes in production)
? Resource prices (raw materials or other resources needed to produce a good)
? The expectations of producers of future prices
? The number of producers
? Special circumstances
1. TheEuropean Union provides funding for growing citrus fruits in Bolivia
2. The European union signs agreement to purchase 100,000 tons of raw Colombian coffee beans every year from farmers in the Andes.
3. Colombian farmers believe the price of coffee will rise in the next few years following government price supports.
4. The North American Free Trade Agreement allows U.S. farmers to enter the market for corn in Mexico.
5. Terrible drought in Mexico.
6. A shortage of corn causes its price to rise by 150%.
7. The price of corn falls by 59%.
8. New production methods and technology are introduced to cocineros (i.e., “cocaine cooks.”).
9. Briefly summarize the rationale behind why the European Union’s would invest money to subsidize the production of legal crops in marijuana, coca, and opium-growing countries around the world.
10. Evaluate: is this policy a good idea or bad idea? Weigh up the costs and benefits and form a clear judgment.
