Edited By: Lavanya Goswami
This article analyses the recent crash in cocaine prices in Colombia–the probable causes behind it, and the negative humanitarian implications that have followed. In doing so, the article will explore in some detail the structure of the cocaine trade and the production chain behind it. From this point, the article will segue into the Colombian government’s efforts to counter the drug trade and will focus on a specific policy–that of giving cash handouts to farmers of the illegal coca crop, the raw material behind cocaine. The article will finally look at whether these handouts are ultimately a good policy choice. While prima facie such a policy sounds absurd–as it is ultimately a subsidy on cocaine production–it also has potential benefits. While the policy has been used in the past as a ‘crop substitution program’, with limited results, it may serve as an important source of relief to poverty-stricken coca farmers, who have faced severe losses due to the cocaine price crash. Exploring this argument, the article will seek to come to an informed conclusion as to what may be the best way out of this dilemma for the Colombian government.
The past few weeks have witnessed a steep crash in cocaine prices across Colombia, one of the several Latin American countries notorious for its illegal narcotics industry and the associated organised crime. To put this in perspective, the country is the source of about 60% of the global cocaine supply. The crash of cocaine prices in the country is itself quite severe. Using the price of coca leaves–the raw material behind the drug’s production–as a proxy can be helpful: in some parts of the country, prices of the leaves have dropped by over 45% over the course of a year.
To experts, this may be surprising, given a global surge in cocaine demand, particularly in Australia. This demand has been consistently surging there, as well as in parts of Europe and Asia, for the past decade. Then what explains this crash in prices? Clearly, we must turn to the supply side story.
From boom to bust: No single reason for the crash
Riding a boom in the cocaine industry for the past decade, production rapidly surged across all stages of the supply chain. While the area dedicated to cocaine production increased by 43% over 2020-21, rising to a historic high, the farming process has itself become more efficient. At the same time, labs have become more efficient, increasing the productivity of the refining process. Overall, productivity increased by 21% in this period. Other Latin American countries, including Peru, Guatemala, and Honduras have also seen varying degrees of increases in the cocaine supply.
Thus, the most obvious factor behind the Colombian ‘bust’ is overproduction. However, experts claim there is more to the story than just a glut in the market. For one, an important factor is likely to be the shift in the structure of the cocaine trade in Colombia. Earlier, the cocaine market used to be dominated by one or two powerful players–Pablo Escobar’s Medellin cartel in the 1990s, and later, armed groups like FARC (“The Revolutionary Armed Forces of Colombia–People’s Army”) and ELN (“The National Liberation Army”). However, as of recently, the government’s peace process with both groups has been fruitful, leading to a reduction in their respective narcotics activities. Consequently, the vacuum has been filled by fragmented smaller players distributed across the country. Reportedly, this has led to a collapse in accepted norms of production and pricing, thus contributing to the glut in prices. This is economically intuitive–monopolies and oligopolies tend to inflate prices much higher than competitive markets. Further, the powerful cartels and guerilla groups probably had the power to dictate prices above what supply-demand forces would determine, while the fragmented players of today are likely more subservient to the ‘invisible hand’.
The humanitarian crisis: Cocaine farmers aren’t all that bad
For the average coca farmer, basic survival has become a significant challenge. One farmer reported that while his costs of growing the crop were around $600, he only managed to sell produce worth $145, as opposed to his normal expectation of $4000. The story across the board is similar, where a large number of these farmers are now selling their products at a loss. Overall, farmers have experienced a drop in prices of almost 66% for their products. The irony is that, owing to the surging cocaine demand worldwide, the final product may still be as valuable as ever. If anything, it is just the farmers drawing the short end of the stick, with cocaine dealers and various intermediaries celebrating larger profit margins. According to experts, the glut in the coca leaves market will not have a significant impact on the cocaine trade.
The resulting humanitarian crisis is worrying. According to the UN, this phenomenon may lead to a food security crisis in the country, given the economic margins the coca farmers reside in. The crash has “paralyzed” coca production, directly affecting the 400,000 households whose income relies on it. The situation is exacerbated by food inflation currently affecting Colombia. According to farmers, their income is “barely enough to buy a pound of rice and a little oil.”
Where does the government come in?
Under previous right-wing Colombian governments, a program of crop substitution was implemented, which entailed providing cash handouts to coca-producing families. The incentive would be that the cash handouts would cover up for the opportunity cost of producing legal crops instead of the then more profitable coca. However, this program never succeeded in incentivizing crop substitution and instead became a form of subsidy for coca production. This led to an increase in coca production, as the handouts became an incentive for more households to participate, thus leading to the opposite of the intended outcome.
The present left-wing government abandoned the handouts, and went for a more aggressive approach, seeking to destroy coca fields. However, this policy has also not yet been more successful than those of earlier governments, in terms of reducing area under cultivation for coca. Now, given the brewing humanitarian crisis, the government has been compelled to provide these handouts as a form of relief to the families, as a “contingency plan”.
Conclusion: To subsidise or not to subsidise?
So far, neither the monetary nor the hard-handed approaches have worked to incentivize farmers away from growing coca. This is understandable, given the historical trend of coca production being more profitable than that of legal crops. In this light, the present crash could be seen as a blessing. Now that coca farming comes at a heavy loss, farmers across the country are likely to realize the pitfalls of excessive dependence on the crop. Further, the price security they may have enjoyed under the monopolies of Escobar, FARC, and the ELN, no longer exists. No dealers in Colombia, or the ones in Europe who deal directly with the source country, have incentives to support the farmers, given the high cocaine demand and the consequently rising profit margins. Further, it has been reported that several dealers, both European and local, have moved to consolidate the entire supply chain themselves, thus crowding out the traditional rural farmers. With these circumstances in mind, it is likely that the Colombian farmer now realizes the inherent insecurity and exploitation that coca production exposes them to, and should act as an incentive to stick to legal crops. Ultimately, a ‘hard landing’ may have been the necessary wake-up call.
As for the subsidy itself: it is a policy failure in terms of reducing coca production, but is also a necessity in times of humanitarian crisis in the rural country. The evidence shows that providing a subsidy–as should be expected–would only incentivize farmers to grow more coca rather than less. However, the government is compelled to prevent a mass hunger crisis across the country, and therefore, the subsidy becomes a prudent short-term measure. This short-term relief can be meaningful in the long-run if the government uses it as an indicator of good faith and a willingness to work constructively with local communities and as a starting point for stakeholder-oriented discussions on how to promote legal farming. This opportunity must be leveraged by the government to make coca farmers aware of the risks involved in the coca trade, and thus help avoid a humanitarian crisis such as this in the future. Just this once, subsidising cocaine might not be a terrible idea.