The World society faces a big issue since 1970 when pure cocaine started to be traded in huge volumes, unfortunately Colombia is a focal point in this trade as a producer and consumer. Coca production along corruption and lack of security for democracy have brought an internal war in Colombia, for instance this month there is an actively protest in Catatumbo region due to coca crops eradication, the result is four murders, it is a small picture of Colombia conflict, whole Colombia can be divided by regions of cocaine crops production: Catatumbo, Sierra Nevada, Sur del Bolivar, Amazonia, Pacífico, Putumayo-Caqueta and Meta-Guaviare, these regions face the internal war conflict every day (this regions are whole Colombia). United Nations as World society along Colombian government have worked on Drug Policy program but it is not enough still, to improve this program the legality of consumption and production have to be in this agenda. The actual program takes coca leaf eradication, alternative crops and policies in consumption as mechanism to reduce coca market, nevertheless cocaine production faces huge profits due economies of scale and potential demand around World (high income and low income countries), these profits can remove positive results from eradication and alternative crops through higher salaries to local farmers who grow coca leafs, it does not matter if alternative crops go first that eradication does. The supplier of cocain enjoys a monopoly market with huge profits, for instance the cost of pure cocain kilogram was US$2,468 in 2011 in Colombia while market price abroad was US$80,000!!! (from my point of view, coca productions is better business than tabacco, spirits, colas drink or legal drugs), it is hard to believe that potatoes crops, tomatoes crops and yucca crops can be competitive when coca crops can increase more than twice the minimum salary in Colombia for small farmers who care coca crops. This note highlights the cost of illegal production of cocain in Colombia and how a regulated legal monopoly can wrap up the end of Colombia “internal” war conflict.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Twitter: Humberto_Bernal
Cataumbo a small picture of Colombia reality
Catatumbo is a region located in the northwest of Colombia, she counts with six municipalities, it is inside of Norte de Santander local government administration, she borders with Venezuela as figure 1 shows. This region is rich in crude oil, the volume of production was 3,294 barrels per day in 2011 and 3,439 in 2012, Colombia produced 915,263 barrels per day in 2011 and 944,119 in 2012, nevertheless the only municipality that gets important volume of royalties is Tibú. Catatumbo counts with 727,915 hectares (Ha) out of 114,5 million Ha in Colombia. One can find 97 types of crops in Catatumbo region where the main ones are rice, yucca, plantain, potatoes, sugar cane, tomatoes and coca leaf. Catatumbo is highlighted through local media due to closeness to Venezuela, coca leaf crops and as an internal war conflict focal point. Nowadays, citizens from this region, mainly frames, make other actively protest due to coca leaf crops eradication, this eradication was low before 2011 when reached 92 Ha from 2,030 Ha in 2011. Central government points that this protest comes from lack of government social investment in this region but this assessment is not true at all, the big issue is farmers protest due to coca leaf crops eradication which is supported through political environment and coca managers, in this case guerrilla FARC. I work on these issues in this note, moreover I claim for coca production legalization through international monopoly management through United Nations to wrap up the end of Colombian “internal” war conflict.
Figure 1. Catatumbo region by municipality in Colombia
Source: Own calculations Stata 12.1
Catatumbo is an average region in Colombia, as this region there are others where coca leaf are growth such as Amazonia, Meta-Guaviare, Orinoquía, Pacífico, Putumayo-Caqueta, Sierra Nevada and Sur del Bolivar, in other words through whole Colombia (coca crops takes 64,000 Ha after eradication in 2011). Coca production is management by guerrilla FARC mainly, therefore one can take this production as monopoly. Catatumbo has a population of 108,873 in 2011 classed as table 1 shows, Tibú is the main municipality with a population of 35,545. Catatumbo is poor in tertiary education, for instance Convención municipality just counts with 4.4% of her population with finished tertiary education and Teorama municipality with 1.4%. Citizens in poverty state count with no less than 45.1% of Catatumbo’s citizens, for instance El Carmen municipality showed an Unsatisfied Basic Needs (UBN) of 66.5% in 2010. Democratic participation is low with no more than 63% of total people in age to vote in 2011. This region shows a high homicide rate per 100 thousand of inhabitants, for instance El Tarra municipality showed a homicide rate of 129 in 2011!!!. These municipalities depend in huge from central government economic resources, for instance 87.5% of Convención municipality’s government income came from central government in 2010 and the local investment per capita is above of national investment per-capita, while national investment per capita was US$134 in 2010, El Carmen municipality invested US$327 per citizen (this investment should had been invested in real projects but it went to corruption). These indicators let coming up with a conclusion: Catatumbo region is a poor region inside of huge mineral and natural resources that shows monopoly management, Crude oil is managed by few foreign firms, coca crops are managed by guerrilla FARC and public resource are managed by corruption, one can be tempted to assert that this socioeconomic disease comes from local government corruption and coca eradication. Corruption lets using economic resources inefficiently and coca eradication brings armed conflict, moreover this conflict pushes down by force farmers’ income.
Table 1. Socioeconomic indicators Catatumbo’s municipalities in Colombia
2010-2011
Municipality
|
Population
(Number)
|
Tertiary education (%)
|
UBN (%)
|
Democracy participation* (%)
|
Homicide rate*
|
Dependency from central government (%)
|
Annual investment per-capita
(US$)
|
Convención
|
14,974
|
4.4
|
45.1
|
47
|
102
|
87.5
|
210
|
El Carmen
|
15,149
|
2,0
|
66.53
|
58
|
33
|
49.9
|
327
|
El Tarra
|
10,831
|
1.8
|
73.11
|
61
|
129
|
73.6
|
312
|
San Calixto
|
12,992
|
2.2
|
73.89
|
62
|
46
|
81.8
|
238
|
Teorama
|
19,382
|
1.4
|
56.53
|
63
|
101
|
84.4
|
277
|
Tibu
|
35,545
|
2.4
|
56.76
|
45
|
25
|
82.8
|
334
|
Colombia
|
46,044,601
|
12.2
|
27.8
|
67 (49)
|
35
|
--
|
134
|
*: data for 2011.
(...): national participation in presidential elections 2010. The other figures are for local elections 2011.
Source: Bureau of Statistics Colombia (DANE), Federación Nacional de Municípios Colombia, Medicína Legal Colombia and Own calculations.
(...): national participation in presidential elections 2010. The other figures are for local elections 2011.
Source: Bureau of Statistics Colombia (DANE), Federación Nacional de Municípios Colombia, Medicína Legal Colombia and Own calculations.
Catatumbo is one of main regions that produces cocaine in Colombia. Total land taken to grow coca leaf were 1,938 Ha out of 64,000 Ha in Colombia in 2011, this land is classed as table 2 shows, Tibú is the main region that grew coca leaf in 2011, from this land 92 where eradicated and the total pure cocaine production was 19.26 metric tonnes (mt) in 2011 out of 345 mt in Colombia in 2011. The illegality of this crops brings armed forced conflict that counted with 32 armed fights in 2008 and 2009 (typical years), moreover the number of cumulated displaced people from this region is 62,432 people and a homicide rate above of 25 per 100 thousand of inhabitants. These facts: corruption, coca production, armed conflicts, displaced people and homicide rates are taken by politicians to worse the outlook, the last week the result was “another” four murders.
Table 2. Socioeconomic indicators Catatumbo’s municipalities in Colombia
2010-2011
Municipality
|
Displaced people
(Number)
|
Coca crops no eradicated
(Ha)
|
Coca crops eradicated
(Ha)
|
Pure cocaine production
(mt)
|
Number of fightings between guerrillas, Paramilitaries and legal armed forces
(Number)
|
Convención
|
10,251
|
180
|
2
|
1.79
|
6
|
El Carmen
|
3,477
|
212
|
10
|
2.11
|
5
|
El Tarra
|
10,926
|
410
|
0
|
4.07
|
7
|
San Calixto
|
4,224
|
66
|
0
|
0.66
|
No information
|
Teorama
|
4,609
|
298
|
14
|
2.96
|
3
|
Tibú
|
28,945
|
772
|
66
|
7.67
|
11
|
Sub total
|
62,432
|
1,938
|
92
|
19.26
|
32
|
Colombia
|
5,405,629
|
64,000
|
34,170
|
345
|
626
|
Source: Federación Nacional de Municípios Colombia, United Nations and Own calculations.
Cocaine as monopoly business
Pure cocaine market is huge in term of consumers, according to United Nations there were about 19.5 millions of consumers in 2010 but it can be more due to pure cocaine is spreading around the World and her technology is under economies of scale, it means as the volume of production increases their Average Cost (AC) and Marginal Cost (MC) per kilogram decreased, figure 2 shows the relation between cost per kilogram and volume of production. One realizes that this cost decreases as volume increases, for instance in 1979 the volume of production was 90 thousand of kilograms while her cost was US$51,326 per kilogram at 2005 prices, nevertheless in 2001 the volume traded was 695 thousand of kilograms and her price was US$1,731 per kilogram at 2005 prices, therefore there is a clear evidence of economies of scale.
Figure 2. Pure cocaine cost and production in Colombia 1975-2011
(US$ and kilograms)
Source: Own records from specialized books and United Nations and Own calculations.
Pure cocaine market is managed as Monopoly Market. Bolivia, Colombia and Perú are main countries that produce pure cocaine in the World. In Colombia case those who manage the pure cocaine chain are guerrillas and paramilitaries, they produce pure cocaine at her MC and sell it at market price that is driven by market demand forces, figure 3 shows the huge difference between market price (red dashed line, right axis) and MC (blue line, left axis), as example in 2011 the cost per kilogram was US$2,468 at current prices while market price was US$80,000 per kilogram at current prices, really it is a huge profit. This profit will make the difference between right World Drug Policies as I try to explain below.
Figure 3. Pure cocaine cost and market price
(US$ per kilogram)
Source: Own records from specialized books and United Nations and Own calculations.
Taking data from 1975 to 2011 from serious reports and specialized books about pure cocain market in Colombia, I run an econometric model that takes into account pure cocaine production as monopoly market managed by FARC guerrilla. The three main equation from monopoly as microeconomic textbooks point are Market demand, Marginal Cost (MC) and Marginal Income (MI), these equations let getting the equilibrium (market price, marginal cost and volume), results are reported in table 3, they are controlled by crude oil price at 2011 prices, it is taken as input costs and Gross Domestic Product per capita (GDP) at 2005 prices from Euro Zone, the United States, Japan and Australia, they are the main cocain consumers due to they are willing to pay (at the end, market size will increase due to economies of scale: more volume demanded will let lower cost per kilogram and this decline will increase World demand from low income countries). Results from this table can be read as pure cocaine production increase in 1.0%, then the MC shows a decline in 1.78%; the increase in crude oil price in 1.0% lets an increase of 0.47% in MC. For market demand an increase in volume demanded in 1.0% lets getting a decrease in price in 2.32% (This is an example of the Law of Demand). MI behaves as theory points also, its slope is negative and the curve is under market demand curve. Figure 4 shows result for 2011 values, there is an interesting result for World Drug Policy, the Average Cost (AC) that let getting zero profits for guerrilla FARC are a market price of US$500 per kilogram (red letters in the figure). This result is so important due to monopoly managed under legality conditions have to set this price in order to take guerrilla out of the cocaine business, of course it brings more production-consumption but there is when World Society have to regulate this volume through storage without increasing price and educational polices in school and universities as obligatory subjects.
Table 3. Monopoly market pure cocaine
(Variables in natural logarithms, 3SLS model)
Variable
|
MC
|
MI
|
Market demand price
|
Pure Coca
(volume in kg)
|
-1.78
|
-3.41
|
-2.32
|
Crude oil price
(US$ chained of 2011)
|
0.47
|
||
GDP per capita main countries
(US$ chained 2005)
|
5.00
|
4.98
|
|
Constant
|
28.95
|
No constant
|
no constant
|
Observations
|
37
|
37
|
37
|
R2
|
0.75
|
0.98
|
0.99
|
All coefficients are significative at 0.05 level under 1,500 Bootstrap replications.
MC: Marginal Cost,
MI: Marginal Income,
Source: Own calculations Stata 12.1.
Figure 4. Monopoly market pure cocaine
(US$ and kilograms)
Source: Own calculations.
Conclusions
Cocaine production can be taken as monopoly market managed by guerrilla FARC in Colombia, the cost per kilogram was US$2,468 in 2011 and the market price was US$80,000 per kilogram in 2011, it is a huge profit that feed Colombian internal war conflict, as evidence nowadays there is other actively protest in Catatumbo with four murders.
Cocaine production shows economies of scale, as volume demanded increases, the price per kilogram face a reduction, moreover there is a global effective and potential demand (more than 19.5 million of people, this number increases every day), it is not just a consumption problem in high income countries, it is a global consumption issue. Therefore, policies to prevent coca leaf production such as eradication and alternative crops for farmers is not enough, it have to come with:
Consumption legalization along obligatory signatures in high schools and universities where Drug consumption is the issue,
Production legalization managed by international body as United Nations where coca price has to be lower than cocaine Average Cost to avoid illegal production.
The Average Cost as a maximum price takes guerrilla and others cocaine producers out of the business, the other way there is a huge room to produce pure coca in the illegality scenario. To make clear this point, if cocaine price is not regulated under legality, then guerrilla can be competitive in farmers’s income although governments gives alternative crops. Profits from coca production are huge to compete with profits from tomatoes crops, potatoes crops and rise crops. The point is farmers will grow few hectares of potatoes, tomatoes and rise that let not getting economies of scale as coca production does.
References
Note: Cocain production from 2001 is calculated by Office of National Drug Control Policy (USA) but her calculations are below of United Nations, the UN report shows the procedure to calculate this production while the first one does not, therefore I took into account UN data.
Data comes from:
Castillo, F. 1987. Los Jinetes de la Cocaína. Editorial Documentos Periodísticos, pag. 150.
Henderson, J. 2012. Víctima de la Globalización: la historia de como el narcotráfico destruyó la paz en Colombia. Editorial Siglo del Hombre.
Henman, A. 1978. Mama Coca. Hassel Free Press.
Junguito y Argáez. 1978. “La otra Economía”. Revista Coyuntura Económica, Fedesarrollo, Colombia, Vol VIII, No. 4, Diciembre.
Rocha, R. 2000. La economía Colombiana tras 25 años de narcotráfico. Cuadros 8 y 9 Anexo. editorial Siglo del Hombre.
Stainer, R. 1996. “Los ingresos de Colombia producto de la exportación de drogas ilícitas”. Revista Coyuntura Económica, Fedesarrollo, Colombia, Vol XXVI, No. 4, Diciembre.
United Nations (UNODC). 2003-2011. Censo de cultivos de Coca, Colombia. Editorial UN.
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