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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Blogger Jonathan said...

It's all about the political implications...supply and demand doesn't operate when it comes to evonomics...

2:51 AM  
Blogger Alvaro Ruiz-Navajas said...

You are right. But just for once I was trying to show the extent to which politics dominate economics in Evo's government.
What do we end up with? Double standards and, quite possibly, a pariah state. Not quite what reform-seeking voters were looking for.

8:31 AM  
Blogger Katie said...

It's a bit of a chicken v egg situation here, I think...
This principle could (should) also be applied to the US' "War on Drugs". If coca farmers had profitable alternatives to coca, and if cocaine weren't in such high demand thus resulting in high coca prices, then militarisation and aerial spraying like we see in Plan Colombia wouldn't need to happen. Low demand for coca, and high profits in other crops would reduce the problem.
As I understand it, Morales is trying to delist Coca as a poisonous substance with the UN in order to be able to develop further legitimate markets for coca. If it's not a UN banned substance then importing and exporting the plant and it's products should be fairly straightforward, and marketing products using coca, like bread or shampoo, will result in greater legitimate use of the plant.
Until the plant is legitimised with the UN, profitable alternatives to cocaine can't fully be explored.
Of course, it seems unlikely now that these products would ever yeild as much profit as cocaine... but forcing people NOT to supply to a demand, as the "WOD" attempts to do, is surely doomed to fail?

9:27 PM  
Anonymous Anonymous said...

The only reason coca-leaf is and remains illegal is because the tobacco,coffee,and pharmasutical industries dont want the American people or the world to find out that chewing coca -leafs and drinking the tea,is a toxic-free way to get the mild euphoric stimulation and anti-depressive effects that these industries want to keep their grip on. \You are absolutly wrong if you think that coca-leaf will not be a MAJOR cash-cow once legal for the coca-producing counrties. look how many millions of people die each year from tobacco, the biggest killer-drug in history. The fact that there IS so much potential money in it for the latin-american countries that can grow it is precicely WHY it is being kept illegal.

10:36 AM  
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