Tuesday, January 31, 2006

On Morales' Coca Policy

On the (Bolivian) news, you will find today the reactions of Morales' speech in the Chapare, where he promised to let all peasant grow one "cato" (1.600 square meters) of coca until the European-financed study on traditional consumption is ready. In the meanwhile, he vowed to take matters to the United Nations, in order to take coca out of the list of prohibited substances. The US, the main advocate of coca eradication, pointed out they were "not aware" of the "cato" policy ( more here).

What I want to discuss now is not the political implications of the speech, but rather, the chances of success of this policy.

As I understand it, Evo wants to legalize coca in order to let peasants in the Chapare region improve their living standards through the production of this lucrative crop. Coca is indeed the most lucrative crop Bolivian farmers can hope to grow -with prices reaching several times those of legal alternatives- because of cocaine. The prices of coca are high, because coca is the raw material for cocaine, which is itself an expensive product. In other words, if cocaine did not exist, the prices of coca would be even lower than those of legal alternatives, since its demand is quite limited and inelastic.

Now, let's make a couple of assumptions, as we economists love to do: first, Morales manages to get coca out of the list of prohibited items of the UN, and second, the regional governments manage to control that the production does not go into drug trafficking.

The implication of the first assumption would translate into a boom of coca farms, not only in Bolivia, but also in Colombia, Peru and probably Ecuador. There would be a surplus of coca supply and, because no coca is going into drug trafficking (second assumption), we only have a handful of uses for it: traditional consumption, herbal tea and toothpaste. Will herbal tea and toothpaste producers be able to pay coca growers the same prices as cocaine producers? Obviously not. The reasons are simple: one, neither coca-based herbal tea nor toothpaste costs as much as cocaine, and two, there would be an excess in the supply of coca. So, prices for coca would plummet and coca growers would be as poor as before. In fact, if the government is able to curb drug trafficking effectively, they would be worse off.

So, if Evo's plan works as intended (coca becomes legal - none of it goes to drugs), it will fail, because coca growers will not be able to improve their living standards and profit from growing coca. Evo is probably working under the assumption that coca is intrinsecally valuable, but clearly, it is not.

And so we reach the (catch-22) conclusion: Evo needs drug trafficking to take place in order for his coca policy to work.

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EVOnomics - Great new blog

Antonio, from "The Economist en su Laberinto" started a new blog, "EVOnomics", which will be dedicated to the analysis of economic policy under Evo. All signs point to this being a must-read for everybody interested in the reforms going on under Morales. In Spanish.

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