From: [S--Y--A] at [SUVM.SYR.EDU] (Sergio Rivera)
Newsgroups: talk.politics.drugs,soc.culture.colombia,soc.culture.bolivia
Subject: RAND's report for the Pentagon
Date: Sat, 11 Mar 95 13:32:03 LCL

              A Simple Economic Model of Cocaine Production
                                  1994
 
SECTION: MR-201-USDP; Chapter 5; Pages 39-40
HEADINE: Conclusion
BYLINE: By Michael Kennedy, Peter Reuter and Kevin Jack Riley
 
   The following results have been derived from the model analyses
presented here.
 
   ''Crop substitution'' programs will have a negligible impact on the
world cocaine market. As desirable for other reasons as improving
economic conditions in Peru, Bolivia, and Colombia may be, an improved
economy will not lower cocaine supply. This is because cocaine
traffickers can easily match and exceed any increased economic
opportunity, resulting from a crop substitution program, that is
presented to workers currently in the cocaine industry.
 
   The cost of compensating workers currently in coca or cocaine
production if the cocaine trade is destroyed is relatively low. About a
five billion dollar investment in the economies of Peru, Bolivia, and
Colombia would provide employment opportunities for all those currently
producing coca leaf, coca paste, cocaine base, or cocaine at a wage equal
to their current wage. This is because their current wage is rather low;
the cocaine traffickers, who earn huge fortunes, could not be compensated
by such investments.
 
   Cocaine supply control strategies that seize and destroy 70 per cent
or less of production, without limiting the total level of production,
will have little impact on the market. If cocaine traffickers have the
option of increasing gross production to make up for some percentage of
their product being destroyed, and if the percentage is 70 per cent or
less, the increased cost of the higher gross production is low relative
to the retail value of the cocaine that survives. Thus the natural market
reaction to such a production attack program would be to step up gross
production, and the resulting increase in the retail price or decrease in
overall consumption will be small. There will simply be more cocaine
produced to ensure a relatively constant amount supplied to market.
 
   Charges in the size of the world cocaine market have a relatively
modest long-run impact on the standard of living of average workers in
Peru, Bolivia, and Colombia. In particular, if there is a decrease in the
size of the market due to law enforcement or drug education and treatment
in the consuming countries, there will be only a small decrease in the
average wage of workers in cocaine-producing countries. This is because
employment in growing coca and processing it into cocaine is not a large
percentage of total employment in these countries. Cocaine traffickers
would suffer very large income losses.
 
   The results of this study are insensitive to the data uncertainties
concerning the cocaine market. It is natural that data about the cocaine
trade are hard to obtain due to its clandestine nature. However, the
results presented here hold up over a wide range of possibilities about
the true nature of the market. No plausible variations in the data have
been found yet that fundamentally change these results.
 
   The results are sensitive to assumptions about how prices in the
production sector affect retail prices. If a 10 per cent increase in the
export price of cocaine were to raise retail prices by 10 per cent, or by
some significant fixed fraction of 10 per cent, then the source country
control programs might be more effective. This suggests the need for more
refined analyses of the determinants of markups in the distribution of
illegal drugs.
 
   None of these results say that enforcement and crop substitution
programs are without value. The results refer to the long-run adaptations
that the industry can make to various interventions. Enforcement programs
may have substantial and valuable short-term effects. However, the
results do provide a cautionary note about what can be expected in the
long run even if the programs are implemented.
 
   This modeling approach has been useful in illustrating some of the key
aspects of the cocaine market from the economic point of view. Despite
the simplicity of the approach, insights have been derived that have
policy relevance, and which are not now common wisdom. This encouraging
beginning suggests that further work along these lines may be worthwhile.