DRUG TRAFFICKING AND ITS IMPACT ON COLOMBIA: AN ECONOMIC OVERVIEW
RICARDO ROCHA GARCÍA1 Universidad de los Andes, Bogotá, Colombia
Abstract. This article analyzes the effects of drug trafficking on the Colombian economy and concludes that its overall impact has been negative. It questions the idea, commonly held in Colombia, that this phenomenon has had mixed social and political impacts, but that its crucial role in sustaining the national economy has been beneficial. The repatriation of money equivalent to 3% of GDP is considerable, but not overwhelming. Most important, this money has not been of much benefit to the rest of the economy, since it was mainly invested in luxury construction and speculation in rural property. Furthermore, repatriation has not had a strong effect on the exchange rate, as previously thought. To form a comprehensive picture of the economic impact of drug traffic, other effects should be taken into account, such as increasing corruption and violence, distortions in the allocation of public funds and in processes of savings and investment, and environmental harm. Initial attempts at estimating the economic cost of these factors sustain the argument that the economic effects of the drug trade on Colombia have been negative. Résumé. Cet article analyse les effets du trafic de drogue sur l’économie colombienne et conclue que, dans l’ensemble, son impact a été négatif. On y questionne l’idée, communément soutenue en Colombie, que ce phénomène a eu des impacts sociaux et politiques mitigés, mais que son rôle de soutien de l’économie nationale a été bénéfique. Le rapatriement de cet argent, équivalent à 3% du PIB est considérable, mais pas exorbitant. Qui plus est, cet argent n’a pas été bénéfique pour le reste de l’économie, puisqu’il a principalement été investi dans la construction immobilière de luxe et la spéculation sur la propriété
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rurale. De plus, le rapatriement n’a pas eu d’effets importants sur les taux de change, tel qu’initialement prévu. Une meilleure vision d’ensemble sur l’impact économique du trafic de drogue exige de prendre en compte d’autres facteurs, tels que la corruption et la violence grandissante, les distorsions dans l’allocation de fonds publiques et les processus d’épargne et d’investissement, ainsi que la dégradation environnementale. Les tentatives initiales d’évaluation des coûts économiques de ces facteurs renforcent l’argument que les effets économiques du commerce de drogues en Colombie ont été négatifs.
Introduction Colombia’s economy, the fifth largest in Latin America, has been characterized by steady growth over a long period of time, and can boast an increasingly diversified and internationalized production sector. Colombia has also enjoyed a long-lasting democracy. Nonetheless, little of this is perceived by international opinion; from the 1990s onwards, the very mention of Colombia has immediately conjured up images of drug trafficking and the criminality associated with it. Of course there is a reason for this: by the end of the 1990s, Colombia had become the principal supplier of illegal drugs in the Andean area, while the country’s economy had weakened considerably and its sociopolitical situation had become seriously impaired. There has been much discussion, both in Colombia and abroad, about the real economic and socio-political effects of this illegal traffic. Many people believe that Colombia’s economy depends on the repatriation of enormous profits from the drug trade, and that therefore its impact—in economic terms, at least—has been beneficial. Economic studies have a great deal to teach us on this matter, and this article proposes to bring together some of the findings of such studies. The central issue is the repercussions of drug trafficking on the Colombian economy, but we will also look at what led to the drug trade in Colombia and its socio-political consequences. By way of introduction, the first section will outline the development of the drug economy between the years 1980 and 2000. The second section deals with the earnings from the drug trade that are brought back into the country, describing the channels used to effect this repatriation of funds and
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the relationship between this amount of money and Colombia’s macroeconomy, as well as the economy in the various regions and sectors of Colombia. We conclude that drug trafficking accounts for a relatively small portion of Colombia’s economy, although it is by no means negligible. In order to assess the impact of the drug trade on Colombia, one must look beyond the merely economic aspect. The third section therefore examines other effects of this activity and presents the advances made in calculating its monetary value. After assessing all aspects of the drug trade, we conclude that its overall effect is clearly a negative one. This essay concludes with a summary of the main points and the presentation of two possible future scenarios.
Background to the Drug Market and the Drug Industry It was in the mid 1970s that Colombia became involved in the traffic of narcotics, when the eradication of marijuana plantations in Mexico led to the large-scale cultivation of marijuana in Colombia’s northeastern area near the Caribbean coast. Planters took advantage of the excellent climatic and soil conditions there, and also of the area’s long-established contraband network. In the 1980s, coca paste began to be imported into Colombia from Bolivia and Peru; it was processed in Colombia to meet a growing demand in the United States, while at the same time Colombian marijuana crops were being eradicated. During the 1990s, Colombia became the world’s main exporter of cocaine, largely thanks to the continuous expansion of coca planting within the country. The cocaine trade continues to be Colombia’s main illegal export product, while heroin production has increased, without yet rivaling that of Asia. Thus, over the past two decades, the major part of Colombia’s illegal export of drugs has been in cocaine and its principal market has been the United States, although sales to Europe have been growing apace in recent times. In the United States, these past 20 years have seen a reduction in both the consumption of cocaine and the retail price of the product. This reduction was especially noticeable in the 1990s, due to the popularity of synthetic drugs. It is worth mentioning, too, that there has been less cocaine on offer, thanks to large-scale confiscations (see Figures 1 and 2).
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Before examining the economic impact of the drug trade, we will look at its historical development. To do so, we highlight three different phases (see Figure 3), for each of which we specify the total earnings repatriated from the drug trade (see Figure 4).2 Figure 1. World cocaine market, annual averages
516 500
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consumo USA US consumption 160 producción neta Net production decomisos 140 precio Price
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20 -
0 1985-1990
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Source: Rocha (2000), UNDCP, ONDCP, and author’s calculations. Figure 2. Index of drug consumption in the US, annual averages Cocaine Cocaína
Consumption index
14 12
Marijuana Marihuana
10
Heroin Heroína
8 6 4 2 0
Average 1970s
Source: ONDCP.
Average 1980s
Average 1990s
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The Cartel Phase In the early 1980s, the drug business became exceptionally profitable thanks to the trade routes that were developed to place the product on the wholesale market. The search for economies of scale led to the formation of a limited number of Colombian export organizations, commonly known as cartels, capable of competing with organizations of other nationalities. At this time, Colombia’s home-grown raw material (that is, the coca leaf) began to replace imports, and the drug Figure 3. Phases of the drug industry
Earnings, share of GDP
6
intraindustry strife
5
Fragmentation
4 3
Cartel
Restructuring
2 1 0 1982-1985
1986-1990
1991-1995
1996-2000
Source: Rocha (2000), DNE, DNP, author’s calculations. Figure 4. Income repatriated into Colombia per illegal export, annual averages 6
Share of GDP
5 4
Total Total Cocaine Cocaína Marihuana Marijuana Heroína Heroin
3 2 1 0 1982-1985
1986-1990
1991-1995
1996-2000
Source: Rocha (2000), DNE, DNP, author’s calculations.
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traders began to gain control of establishment institutions. Income that could be repatriated into Colombia was equivalent to 2.7% of Colombia’s Gross Domestic Product (GDP).3 The Phase of Intra-industry Strife In the second half of that same decade (the 1980s), cartels that had become strong over the preceding years began to fight among themselves for control of export markets. Thus the achievement of a competitive position by means of economies of scale continued to be crucial. During this period, local areas of coca-leaf farms in the hands of multiple producers began to expand at a great rate, facilitating improvements in quality control and a reduction of costs. Suppliers in Bolivia and Peru were decreasingly required as intermediaries, and therefore the risk of police interdiction was reduced considerably. The cartels sought to repatriate larger amounts of their earnings, and these rose to represent 5.5% of Colombia’s GDP. At the same time, the cartels continued to put pressure on establishment institutions to legitimize their newly accumulated wealth. As a result, Colombia entered into a phase of violence that has no equivalent in living memory. In their efforts to maintain and increase their wealth, the cartel bosses either intimidated or bribed judges and police officers, as well as legislators, journalists, politicians, Roman Catholic priests, trade union leaders, left-wing activists, human rights defenders, ex-guerrilla fighters, and many more. The cartel managers wanted to preserve Colombia as a sanctuary for their investments and for their export industry, in response to the initiatives being taken by the US government to reduce the supply of illegal drugs from the Andean region. This led to adverse reactions in different sectors of Colombian society and growing persecution on the part of the state. The Phase of Fragmentation During the first half of the 1990s, confrontation with the state increased dramatically, and this prompted a dismantling of the cartels and the imprisonment of their lobbyists and political sympathizers, combined with a severe crisis of governability and diplomatic tensions when it was discovered that President Ernesto Samper’s election campaign had been financed in part by drug money. These events led to the fragmentation of the cartels, leaving them with less control
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over the wholesale market. In fact, they were replaced by new actors in the field, both national and international. This explains the extraordinary increase in coca planting during the 1990s, as producers looked for new competitive advantages such as larger crops and a monopoly on supply. During this phase, earnings that could be repatriated back into Colombia were equivalent to 4.5% of the country’s GDP. The Phase of Restructuring During the second half of the 1990s, Colombia’s home-grown crops were used as a substitute for imported material to such an extent that Colombia became the world’s largest producer of coca leaf. Peru and Bolivia were forced out of the market, and Colombian export organizations were largely dismantled. But these changes only led to a more virulent expansion of illegal crops in agricultural border areas, where growers enjoy the protection of armed insurgents who have found a source of financing and a motivation to become involved in export activities.4 Thus the search for competitiveness generated a connection between the drug trade and Colombia’s armed conflict. At this time, earnings repatriated were a mere 2.6% of Colombia’s GDP. The patterns observable in prices and the regional distribution of crops reflect the changes that took place during the course of the four phases mentioned above. In the 1980s, during what we have called the cartel phase and the phase of intra-industry strife, when the competitive advantage of the drug trade was due primarily to the export side of the business, greater profits were made in the wholesale market than were made by those who sold the product at the final retail price. This advantage was to diminish later on when the industry was restructured (during the phases of fragmentation and restructuring: see Figure 5), while the share of the cost of the paste in cocaine’s wholesale price went down (Figure 6). According to non-official estimates,5 by the year 2000, more than 125,000 hectares were under coca cultivation in Colombia, which made Colombia the world’s largest producer with 67% of the total area of coca crops in the world. The area thus planted had increased with amazing rapidity if one considers that in 1990 the area planted with coca in Colombia was merely 20% of the world total. In the rest of the Andean region, the opposite was the case. From the mid 1990s onward, Bolivia implemented the policy of reducing its offer of coca
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leaf to the amount required to meet internal demand; it did this when the army manually eradicated 30,000 hectares of coca in the Chapare region. In Peru, aerial controls, higher costs, and a diminished quantity obtained from Peruvian traders (Reyes 2001), together with the increase of crops in Colombia, led to the reduction of areas dedicated to export products in the Alto Huallaga region (Cabieses 1999) and to a drop in the price of coca paste. Figure 5. Costs of raw materials for wholesalers and retailers 35%
Precio cocaína Cocaine price wholesaler/retailer may/min Base price/Cocaine Precio base / precio wholesaler price cocaína may
30% 25% 20% 15% 10% 5% 0%
1981-1985
1986-1990
1991-1995
1996-2000
Source: ONDCP, UNDCP, and author’s calculations. Figure 6. Areas with coca plantations in Andean countries 250,000
Hectares
200,000
Perú Bolivia
150,000
Colombia Total
100,000
50,000
Source: Policía Nacional, INSCR several numbers.
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1998
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1990
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Repatriation and its Economic Effects Considerable incomes have been earned from Colombian cocaine traffic over the past 20 years, and traffickers have endeavoured to introduce these earnings into Colombia. Nonetheless, of the earnings that might have been repatriated, not all have in fact been introduced into the country (Table 1). The process of repatriation of funds runs up against the problem of money laundering, against which the government has set up certain controls. The process is also limited by the size and structure of the Colombian economy. In the era of a closed economy, the blatant smuggling of imports and foreign currency and the practice of fiddling invoices by over-pricing or under-pricing were the normal ways of moving illegal capital funds to sidestep fiscal and exchange controls. In Colombia, capital flows retain the economic and personal identification of those who perform such transactions. There is a tax placed on the handling of foreign currency between the parallel market and the regulated one, and a margin of exchange intermediation that raises the cost of repatriating capital funds through capital accounts. In the matter of foreign trade, there is also an impediment to repatriating earnings: those who accept the preferential schemes on matters of tax TABLE 1. Estimates of illegal drug earnings that could be repatriated and undercover capital flows Authors Caballero and Junguito (1978) Gómez (1988) Gómez (1990) Kalmanovitz (1990, 1992) Sarmiento (1990) Steiner (1997) Rocha (1997) Rocha (2000)
Period
Earnings*
UCF**
1970-1977 1981-1985 1981-1988 1976-1988 1981-1988 1982-1995 1985-1994 1982-1998
2,7 3 4 11 4 and 10 5 2 and 10 4
1,4 n.d. 2,4 6,6 2,5 5 3,3 2,9
* Earnings which could be repatriated (% of GDP) ** Undercover capital flows (% of GDP)
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and administration are clearly identified and thus are greatly hampered when it comes to money laundering through the use of fiddled accounts and invoices. Those who do not accept these schemes are involved in complicated paperwork and will probably come under the careful scrutiny of the authorities. Moreover, agreements between the Colombian tax authorities and multinational companies have helped to reduce substantially the supply of imported goods on the contraband market. Something similar has occurred in the case of programs for identifying transactions, programs that have been adopted by the financial system, and the capital market. Among the structural aspects of the Colombian economy that place limits on the absorption of earnings from drug traffic, the closed nature of industrial and financial property, which is concentrated in the hands of a mere dozen or so business conglomerates, should be mentioned. A widespread notion persists that money from the drug trade had a lot to do with the building industry in Colombia, an idea that is probably related to the fact that Colombian mafia bosses showed a special preference for the construction of sumptuous residences and apartments. However, their participation in other areas of the building industry was far less significant, since building in Colombia is dependent on an institutionalized system of finance with built-in requisites for detailed information. Investment in rural areas, on the other hand, is far less controlled. In Colombia, rural properties tend to have outdated titles that have never been properly registered. This, together with the fact that guerrilla groups often indulge in the extortion of traditional property owners, makes it easy for mafia bosses to acquire large tracts of land. Drug traffickers’ investments can also be seen in what is called “informal commerce” (that is, in the black market), as well as in the hotel business and in casinos, where cash transactions are the normal rule. Several studies have produced estimates of drug-related earnings that could be repatriated into Colombia and of the net incomes, based on the value of exports at wholesale prices (see Table 1). Only recently have we been able to observe the consistency between cocaine supply and demand based on estimates of consumption in the United States and the control of wholesale markets attributed to Colombian mafias (Steiner 1997, 2). The same is true of estimates of the demand for the product in Europe, the costs involved in money laundering, and estimates of the amount of coca paste being imported (Rocha 2000).
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The net drug income liable to be repatriated oscillated around 4.4% of Colombia’s GDP over the period from 1982 to 2000, with a noticeable decline in the 1990s when, during the last three years of that decade, it dropped to an average of 2.6% (see Figure 7) (Rocha 2000). Three-quarters of this income (namely 3% of the GDP) was repatriated by means of money transfers and black market imports, and, to a lesser degree, by means of fiddled accounts. Between 1991 and 1995 most drug-related earnings were brought back into the country (Figure 8), but this has not been the case in more recent years. Part of these earnings, therefore, continue to circulate within the international financial system, which naturally makes it difficult to keep track of them, despite the increasing homogeneity of international legislation and worldwide controls.6 The repatriation of earnings from drug traffic to the extent of 3% of GDP could represent a re-composition of the country’s balance of payments and of the macroeconomic balance, mainly as a measure of capital accounts, private savings, and GDP. Up to this point we have considered only earnings from the drug trade as such, but not what is earned by growers. If this amount is included, one could say that Colombia’s GDP has been underestimated by an average of 3.5% during the past two decades (see Figure 9). At first glance it would appear that the repatriation of earnings from the sale of cocaine, heroin,
Figure 7. Undercover capital flows and earnings that could be repatriated, annual averages 5
Share of GDP
4
Undercover capital flows Contraband TTransfers Mis-invoicing Balance of payments errors
3 2 1 0 -1 1980-85
1986-90
1991-95
1996-00
Source: Rocha (2000), DANE, DNP, and author’s calculations.
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and marijuana could be considered in the same way as any other agroindustrial export. In fact, in recent years the drug trade has represented a figure almost equivalent to the export of bananas, coffee, and flowers. However, the drug-trade money’s relation to the rest of the economy is much less significant than earnings from normal legal products. This is due to the visible preference of mafia bosses for the consumption of luxury items and speculative investments. Figure 8. Earnings that could repatriated, minus undercover capital flows 2 Share of GDP
1 0 -1 -2 -3 2000
1999
1997
1998
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
-4
Source: Rocha (2000), DNP, DANE, and author’s calculations.
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1998
1996
1994
1992
1990
1988
1986
1984
1982
FCE UCF
UCF
PIB GDP
8 6 4 2 0 -2 -4 -6 1980
GDP
Figure 9. Earnings that could be repatriated, undercover capital flows (UCF) and GDP, annual growth rates (1998 prices)
Source: Rocha (2000), DNP, Steiner (1997), IFS, and author’s calculations.
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Pioneer studies based on figures from the 1980s point to some of those sectors preferred by drug traffickers when it comes to investment, and also show the impact caused by such drug-money investments on Colombia’s economy. The drug traffickers’ tendency to invest in rural estates and in costly structures was so much in evidence that it was presumed that the undeniable dynamism witnessed in these sectors was due in great part to the investment of repatriated drug money (Sarmiento and Moreno 1990; Giraldo 1990). Drug money was also thought to have had noticeable effects on real salaries in areas where illegal production was high, and to explain regional variations in the influx of cash from this illegal trade into the financial system, as well as variations in unemployment rates. Kalmanovitz (1990, 1992) reveals certain positive impacts on both technology and infrastructure in the areas of agriculture and grazing, as well as investments in urban properties, the media, chain stores (such as pharmacies), and certain industries. It was understood that the macro-economic effects occurred through speculation in expensive constructions, thus producing negative effects on investment and growth, a fact exacerbated by the exaggerated amount of foreign currency that came onto the black market. On the one hand, this tendency increased contraband imports and damaged local industry; on the other, it helped finance capital flight (Gómez 1988). In this way, cocaine money had been dedicated to financing contraband, overseas tourism and capital flight, none of which activities contributed to Colombia’s economic growth. However, they did complicate the management of the country’s macro-economy (Urrutia 1990). Among the findings of more recent research is the fact that there is little relationship between drug earnings and Colombia’s foreign exchange rate. This reality undermines popular wisdom on the subject (Steiner 1997). In other words, the exchange rate has not proved to be a mechanism by which drug trafficking has affected the working of Colombia’s economy. While many thought that the low value of foreign currency on the black market, when compared to the higher official rate, was a factor that owed its existence to money from the drug trade, this is not as obvious as was once believed. When controls on the exchange market were lifted in the 1990s, a tax was imposed on the entrance of foreign currency into the legal exchange market, and it was found that the amount of this tax coincided with the differ-
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ence of the price on the two markets, the official one and the parallel one. If the influx of drug money were the main cause of this difference, the value of black-market money would be much higher. Moreover, the lifting of controls led to an opening up of the exchange market and a relative reduction of black-market money on offer. In fact the relation between repatriated funds and transactions on the exchange market dropped from 12% to 5% over the past two decades (Figure 10). It might have been expected that, by reducing the pressure to repatriate funds, the black-market exchange rate should increase. But, in fact, the very opposite has happened. Previous studies have not demonstrated the existence of obvious effects of the repatriation on GDP composition through the exchange rate. Early in the 1990s, people expected drug trafficking to result in the so-called “Dutch disease” (Sarmiento 1990, 1991). That is to say, it was thought that the abundant influx of foreign-currency earnings from the drug trade should have strengthened the local currency and, as a result, should have led to a reduction in exports and a decrease in industrial and agricultural production. A glance at “Dutch disease” indicators—that is, DDI, or agricultural and industrial GDP, versus the total GDP—vis-à-vis earnings liable for repatriation and those actually repatriated (undercover capital flows) does not give the expected result. It is thought, on the one hand, that the permanence of these capital flows did little to help; neither did their relative unimportance when compared with the overall economy, nor their meager impact on income from taxes (Thoumi 1994). On the other hand, a considerable portion of these repatriated funds have been channeled through the black market to finance capital flight and have
Percent
Figure 10. Illegal earnings and the exchange market Earnings/Market Utilidades/Mercado
300 250 200
Market/GDP Mercado/PIB
150 100 50 1980-1985
1986-1990
1991-1995
Source: Rocha (2000) and author’s calculations.
1996-2000
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therefore had little effect on the exchange rate (Steiner 1997). In fact, relatively few dollars are sold to the official market by black-market money-changers (Rocha 2000). Besides, a lot of other capital funds, apart from those earned on the drug market, are repatriated through contraband, transfers, and fiddled accounts. These are sums of money on which people hope to avoid being taxed and on which they expect to make a good profit by dealing in foreign currency. Despite the large amounts of money repatriated into Colombia in the 1980s, the Dutch disease index did not react as expected (see Figure 11). In the 1990s, both the index and the repatriated earnings became less important, thus making it evident that the re-composition of the GDP in favour of non-tradable sectors had little to do with
2000
1998
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6 5 4 3 2 1 0 1984
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Source: DNP, Rocha (2000, and author’s calculations.
Dutch disease index
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FCE UCF IEH DDI
8 7
1982
UCF, share of GDP
19922
Utilidades Earnings IEH DDI
8 7 6 5 4 3 2 1 0 19822
Eranings, share of GDP
Figure 11. Dutch disease index (DDI), earnings that could be repatriated, and undercover capital flows (UCF), percentage of GDP
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drug trafficking, but did correspond fundamentally to an increase in local demand vis-à-vis the expectations arising from oil exports in the early 1990s. In fact, those exports that are most affected by the real exchange rate—non-traditional ones or, in other words, exports not related to mining or coffee—increased noticeably between the years 1980 and 2000 at an average rate of 8% and grew to a 35% (and up to 45%) share of export products. Drug trafficking has not produced systematic effects on a regional or sectoral basis. Although it is frequently argued that the drug trade does affect the composition of products both by sectors and regions, its relationship to the construction industry’s participation in the GDP, or to that of the financial and commercial sectors of the economy, do not show that there are important links. The construction industry, for example, behaves in a manner contrary to the repatriation of earnings, and therefore gives no support to the thesis that building benefited greatly from the drug trade. It is true that luxury building did benefit from a process of speculation due to drug-traffickers’ acquisition of sumptuous properties. However, there is evidence to show that the sector’s dynamism was the result of factors proper to that industry itself, independent of the drug trade (Rocha 2000). The repatriation of earnings has not affected agriculture or grazing, notwithstanding investments in rural properties, due to the fact that such investments had more to do with real estate speculation than with agricultural production. In fact, illegal crops have had negative effects on certain regional economies, especially where the planting of primary products had formerly predominated. This is the case in frontier areas that enjoy few institutional benefits or dependable infrastructures, and suffer from low levels of social capital as well as a high rate of violence. In the year 2000, the production of illegal crops was valued at US$350 million, equivalent to 5% of Colombia’s GDP in the agricultural sector and representing 8% of employment in agriculture, that is, 69,000 people employed directly in production (see Figure 12). However, the effects of the drug trade were felt neither in regions where export organizations operate nor in regions where traffickers prefer to invest. The reason for this appears to be that money laundering has been used to finance capital flight and contraband. Estimates of earnings from the drug trade can give some idea of the trade’s economic dimensions in the hemisphere. In the Andean region
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and in Mexico, the share of drug-related income can represent up to 1% of GDP, though this differs greatly from one country to another. In Bolivia the drug economy represents 7% of GDP, while in Peru and Mexico indicators drop below 0.5%; in other words, the relative importance of the trade in those countries is similar to that of earnings from drug sales in the United States, namely 0.6% of GDP. In the United States, the major part of the drug trade’s added value is generated at the retail level, where the business is controlled by local crime rings (see Figures 13 and 14). In fact, the consumption of 301 tons of cocaine in the United States in 1998 not only led to sales worth US$39 million, but the drug market also afforded a lot of people a source of employment.7
14%
77
66
38
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GDP PIB Empleo Employment
8% 6% 4% 2%
Source: DNP, Rocha (2000), and author’s calculations. Figure 13. Relative importance of the cocaine economy
Share of GDP
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* G4 are Bolivia, Peru, Mexico, and Colombia. Source: Rocha (2000), World Bank, and author’s calculations.
Magdalena
Antioquia
Meta
Arauca
Tolima
Nariño
Total Nacional
Bolivar
Guaviare
Caquetá
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Putumayo
Share of regional agriculture
Figure 12. Illegal crops per region in 2000, GDP and employment, percentage of agriculture regionally
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Socio-political Repercussions As was pointed out in the opening section of this article, transformations in the international drug market and in its structure in Colombia have led to a tendency to reduce the amount of earnings being brought back into the country.8 And, as noted in the second section, this repatriation has not been of special benefit to the rest of the economy.9 Moreover, the drug traffic has had negative effects in other ways: it has led, among other things, to increasing corruption and violence, distortions in the allocation of public funds and in processes of savings and investment, and environmental harm. This section will look at these effects and at the efforts (modest as they have been) that have been made to quantify them. In general terms one can say that the drug trade has had a catalytic effect, either precipitating or aggravating various socio-political problems that affect Colombia (Thoumi 1994). However, for a long time the dominant public perception was quite the opposite: Colombians thought that a growing international market existed that was bringing economic benefits while the socio-political effects were ambiguous. This misapprehension led to a problem of collective action that, in the past, impeded a proper diagnosis of the problem and tended to undermine the legitimacy of anti-drug policies. One of the main negative effects of the drug trade has been the violence associated with it. Studies that analyze the repercussions of Figure 14. World cocaine market shares G4 6% Europe 28%
USA 66%
* G4 are Bolivia, Peru, Mexico, and Colombia. Source: Rocha (2000), ONDCP, UNDCP, and author’s calculations.
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criminal activity on economic growth, and on rates of productivity and investment, all reveal that, at an international level, an unquestionable relationship exists between rates of homicide and the production of narcotics (Fajnzylber, Lederman, and Loayza 1999). These studies also show a close relationship between Colombia’s incursions into the drug trade and the growing rate of violence in general (Rubio 1995). For Colombia’s seven principal cities and their metropolitan areas, a close connection has been observed between income from drug trafficking and crime levels: an increase of 1% in drug-related income raised the homicide rate by 0.2% (Sánchez and Núñez 2000). This connection is explained by the drug traffickers’ use of armed security guards and hit-men to protect their de facto properties, to guarantee the fulfillment of their criminal contracts, and to intimidate and corrupt the lawful authorities. Drug traffickers have made an impact on the rural sector by investing in properties and by controlling crops by use of force. As mentioned in the previous section, the structure of rural property in Colombia has been a factor in the drug traffickers’ evident preference for this kind of investment. They have created private armies to protect them from extortion by guerrilla groups and common criminals, imposing themselves on the traditional landowners and local populations in general. In departments (provinces) such as Antioquia, Caquetá, Meta, and Guajira, where the drug barons have bought up particularly large amounts of land, there has been a noticeable increase in the number of paramilitaries and many civilians have been massacred. The buying up of properties has led to a counter-agrarian reform, as is revealed in a municipal enquiry on land acquisitions by drug traffickers (Reyes 1997). Assuming purchases of 10% or 20% of the area of municipios (rural counties) that report land acquired by drug traffickers (Reyes 1997), one can estimate the acquisitions as somewhere between 2.2 million hectares (worth US$1.2 billion) and 4.4 million hectares (worth US$2.4 billion), that is, between 5% and 11% of the total area of rural properties in Colombia (Rocha 2000). Areas in which illegal crops have been developed are the places favored by lawless armed groups. Guerrilla organizations such as FARC and the ELN are 155% more likely to be found in municipalities where there are illegal crops (Vélez 2000). And their presence generates violence. In a survey of 700 municipalities, 90% of the dif-
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ference between those that suffer greater violence than others was due to the presence of paramilitary groups, guerrilla armies, and drug traffickers (Sánchez and Núñez 2000). During the period 1991–94, it was estimated that 40% of the guerrillas’ income was obtained from drug trafficking, and that violent actions on the part of these groups reduced the amount of Colombia’s GDP by 4% (Granada and Rojas 1995). During the second half of the 1990s, when illegal crops expanded at a greater rate than before, the coca farms and the production of coca paste generated 40,000 jobs every year (Uribe 1997). The negative influence of drug trafficking and the terrorism associated with it have impacted on the efficiency of the administration of justice in Colombia (Montenegro, Posada, and Piraquive 1997; Echeverri and Partow 1997). And all of this has profoundly challenged Colombia’s legal institutions, leading the country to divert growing amounts of money and resources away from the financing of economic development and the population’s well-being, investing rather in the administration of justice and in security measures. While in the 1960s the average amount destined for this purpose represented 2.5% of GDP, these costs have risen gradually until reaching an average of 4.5% of GDP in the second half of the 1990s (Rocha 2000). Economic and social repercussions are also seen in the consumer countries. In the United States, drug trafficking is directly related to a rise in the crime rate. Basing their estimates on information from 27 US metropolitan areas, Grogger and Willis have shown that if it had not been for the introduction of “crack” (a derivative of cocaine), the urban crime rate in 1991 would probably have been 10% less than it actually was (Grogger and Willis 2000). Given that drug trafficking is illegal, property rights on distribution networks are exerted by means of intimidation. In fact, the finances of gangs belonging to organized crime rings in the United States are the result of the effectiveness of violent means used to gain and maintain territorial control over these networks (Levitt and Venkatesh 1998). As yet Colombia has not produced equivalent studies. Nevertheless, it is a well-known fact that the production, export, and distribution of drugs for the wholesale market, coupled with money laundering, have generated violence that aims to reduce to a minimum the risk of non-fulfillment of contracts and of police interdiction. At present, we do not have a comprehensive estimate of drug-
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related costs. However, by viewing Table 2 (below), one can appreciate the magnitude of some of the effects of drug trafficking on the process of savings and investment, the loss of human capital, the supplanting of legal with illegal economic activity, and damage to the environment. TABLE 2 Estimates of the Effect of Drug Trafficking in the 1990s % of GDP Savings/Investment Private investment reduction (Parra 1998) Savings reduction Capital flight (earnings minus undercover capital flows) Public spending on justice and security Tax dodging Infrastructure (Castro, Arabia, and Celis 1999) Losses of Human Capital (Castro, Arabia, and Celis 1999) Land mines (Celis 1999) Deaths Population displacement Kidnapping payments Displacement of the Legal Economy Undercover capital flows Contraband (Steiner 1997) Transfers Others Crop cultivation The Environment (Castro, Aristizabal, and Palou, 1999) Loss of rain forest (4 hectares per 1 hectare of coca planted) Loss of tropical forest (2.5 hectares per 1 hectare of poppies) Losses due to fumigation (1.5 hectares of rain forest per 1 hectare of coca sprayed)
4.0 1.2 2.0 0.8 0.1 0.7 0.1 0.1 0.0 0.5 2.6 1.4 1.0 0.2 0.5 Thousands of hectares 2,281 1,619
448
Sources: Castro, Arabia, and Celis (1999), Castro, Aristizabal, and Palou (1999), Celis (1999), Parra (1998), Steiner (1997).
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Private investment could rise higher than 4% of Colombia’s GDP if there were greater socio-political stability (Parra 1998). Drug money has had an adverse effect by reducing internal sources of finance due to excessive government spending on security and justice, not to mention tax dodging and capital flight. The extra investment costs generated by the conflict remain unknown, as can be seen by looking at the results of international studies on the subject. Estimates of the cost of investment required to substitute for the foreign currency generated by the drug trade are not available. As for human losses and material losses due to the armed conflict between guerrillas and paramilitary groups (victims of anti-personnel mines, refugees, combats, kidnappings, assassinations, extortion, and so forth), the amount involved has been estimated at 0.7% of Colombia’s GDP (Castro, Arabia, and Celis 1999, 30.3). There are no reliable estimates of damage done to towns that have been attacked (and often destroyed), children who have dropped out of school, emigration to other countries, the cost of physical and mental rehabilitation of victims, and other aspects. Neither do we know what the impact has been on transaction costs brought about by changes in institutionality due to the influence of drug traffickers. Environmental damage includes the destruction of 2.3 million hectares of tropical rain forest affected by the planting and the fumigation of coca and poppies. The cost of this has not been estimated, and neither has that of the damage caused to rivers and streams by chemical substances flowing into them as waste matter after cocaine processing, for example. Nor has damage to health due to the use of contraband agro-chemicals been properly assessed. A glance at the studies on the links between Colombia’s economy and drug trafficking would seem to indicate that public opinion has overestimated the real amount of repatriation of earnings and the positive economic effects of such repatriation, while underestimating the price the country has had to pay. The fact that the drug traffic is illegal has meant that a lot of the information available is unreliable, and this has led to a good deal of myth-making. Fortunately, economic studies have become more exhaustive and increasingly better informed, although as yet they are far from conclusive. They all agree, however, that the price being paid by Colombia far outweighs any eventual benefits, and they permit us to conclude that the emergence of drug traf-
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ficking has meant a serious setback to the country’s possibilities as far as general welfare and economic development are concerned.
Final Considerations From 1980 on, drug earnings liable for repatriation back into Colombia oscillated around 4.4% of the country’s GDP, but dropped over recent years to a mere 2%. Three-fourths of these sums came into the country as transfers through contraband imports and fiddled accounts; the rest of the drug traffickers’ earnings remained outside the country, circulating within the international financial system. The repatriation of this money did not affect Colombia’s macroeconomy or its sectoral composition. But illegal crops and the concentration of land have had important regional consequences. Drug trafficking has caused socio-political instability, and has had adverse effects on processes of savings and investment, as well as on the formation of human capital. It has also replaced legal economic activity and severely damaged the environment. Private investment might have been much greater, and better financed, were it not for excessive governmental expenditure on security and justice, coupled with tax dodging and capital flight. Throughout the 1990s, the price of cocaine fell due to a decline in demand in the United States. The supply was likewise reduced because of large-scale confiscations and the decrease in areas under cultivation in Peru and Bolivia. Colombia became the world’s main supplier, no longer importing coca leaf or coca paste. Once the industry became fragmented, it began to build up its profit in the basic stages of the production and marketing chain; that is to say, in the cultivation of coca, with production areas increasingly linked to the main actors in Colombia’s armed conflict. Until 1998, the anti-drug strategy of the Colombian government consisted mainly of eradicating crops—either by fumigating or by the alternative development program known as PLANTE (Plan Nacional de Desarrollo Alternativo)—as well as confiscating drugs being exported and chemicals used for processing them. Laboratories have been destroyed, and exporters have been arrested and their organizations dismantled. International legislation on drugs and drug-related crime has become more unified and coherent, while in Colombia laws have
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been passed to expropriate properties acquired with illegally earned money. In addition, the country has established special courts to deal with drug trafficking, and programs to combat drug addiction have been introduced. All of the above have been accompanied by an escalation of public spending on security and the judicial system.10 Nevertheless, Colombia did become the world’s number one supplier of cocaine, despite having eradicated 220,000 hectares of crops over the past decade, an area twice the size of that planted in coca in 1999. The country has also paid such an enormous price, both economically and socially, that Colombian governments have been obliged to rethink the whole anti-drug strategy. The country’s most recent policy is contained in Plan Colombia, which proposes the integration of efforts such as interdiction with the country’s economic recovery, strengthening institutions and development, aiding the more vulnerable sections of the population, and endeavouring to reach peaceful agreements with groups that have taken up arms. The Plan, as initially conceived by the government, has the advantage of looking at Colombia’s problems as a whole, acknowledging the links that exist between the drug traffic and other aspects of national life. If a solution to the drug problem is to be found in the future, it will have to be an integral one. It is evident that the search for peace and the control of drug trafficking are the two sides of one coin. Bearing this in mind, I will conclude by imagining possible scenarios for the future. If the country manages to reduce the area of illegal crops by 50%, there will be a supply deficit of 270 tons on the world cocaine market and the price will therefore go up, giving Peru and Bolivia a new incentive for exporting the product. In addition, a reduction in the amount of earnings liable for repatriation to Colombia to the value of US$900 million — that is, 6% of Colombia’s GDP—will ensue, and both the regions where coca farms thrive and the so-called “informal” sector of the economy will suffer a decline. A negotiated peace agreement and a reduction in the area where coca is grown should mean a more rapid return to socio-political stability. If the population does not consent to the government’s policies of drug eradication and crop substitution, one can foresee a more intense clash pitting popular groups against the government in peasant protest marches and civic strikes (paros civicos). This unrest will have an adverse effect on socio-political stability. If a peace agreement is not
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reached, there will not only be protests but also an escalation of the armed conflict and international debate. If the world cocaine market continues the trend it has shown in recent times, income from the drug trade will decrease, while coca cultivation will expand and the industry will move into an agro-industrial phase with the participation of the protagonists in the armed conflict. Depleted income from drugs will not affect the country’s macro-economy, either by region or by sector. Reduction of income should lead to a reduction in the crime rate. However, processes of savings and investment will be affected by growing socio-political instability as a result of the endogenous nature of the armed conflict and the drug trade. In sum, when it comes to policy making, Colombian society faces the challenge of breaking the vicious circle that links drug traffic to the country’s ongoing armed conflict.
Notes 1. This article is a revised version of a study entitled Nacotráfico y la economía colombiana : Una mirada a las políticas, which was sponsored by the Interamerican Development Bank (IDB). Valuable commentaries and suggestions were received from Javier León, Carolina Méndez, Moritz Kraemer, Manuel Fernando Castro, Gianpiero Renzoni, Sergio Uribe, and those who attended a seminar organized by Colombia’s National Planning Department. All opinions, errors, or limitations are the exclusive responsibility of the author. 2. These differ from earnings that potentially could have been repatriated, as will be seen in the following section. In this article we are talking in relative terms (percentages of GDP) and not in absolute terms (value in US dollars), since what we want to highlight is the relative importance of drug traffic in Colombia’s economy. 3. The methodology of Ricardo Rocha (2000) used in the estimation and analysis of the national accounts looks at information related to the control of the market by Colombians, transport costs, the productivity of coca farms, transformation coefficients, the eradication of crops, consumption, and Peruvian and Bolivian exports of coca paste to Colombia. Exports are valued at wholesale prices. We consulted statistics in the International Narcotics Strategy Control Report (INSCR), US Department of State (ONDCP), Colombia’s National Police Force, the Dirección Nacional de Estupefacientes (DNE) in Colombia, and the United Nations Drugs Control Program (UNDCP).
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4. The arrest of a Brazilian drug trafficker in 2001 revealed that a FARC guerrilla front controlled all cocaine exports from Colombia’s Guaviare region, receiving income valued at between US$10 million and US$12 million (Semana 2001, 991). 5. According to the new satellite methodology of the Sistema Integral de Monitoreo de Cultivos Ilícitos of the Colombian government and the United Nations, 162,000 hectares were reported in the year 2000 (Cambio 2001). This information has not been included in the estimates and analysis of the present essay. 6. An investigatory subcommittee of the US Senate, based on a study in 2000 on money laundering, concluded that an important US bank was not quite on the right side of the law since it was allowing its corresponding banks in Colombia to filter earnings from drug trafficking into the country uncontrolled (El Tiempo 2001). 7. A typical organized street gang in the United States (a country that consumes 300 tons of cocaine per year) may sell from 2 to 10 kilos on the retail market annually. Such a gang is generally made up of 30 to 60 “hoods” and “pushers” (Levitt and Venkatesh 1998). 8. The contribution made by repatriation and the agro-industrial phase to GDP (3%) can also be considered as a step toward replacing the formal economy. 9. It is also argued that by contributing to the financing of contraband and by increasingly fanning the so-called “informal” economy (that is, the black market), the drug trade has eroded the economy’s institutionalized and administrative controls, thus facilitating a consensus on adopting reforms to the program of economic liberalization (Molina 1995). 10. In Colombia, over US$ 1,000 million is spent annually on the anti-drug war, that is, 1.1% of GDP. In the United States the equivalent is 0.2% of GNP (Office of National Drug Control Policy 2000). Since Colombia became involved in drug trafficking, the amount of public spending on justice and defense rose by the equivalent of 2% of GDP (Rocha 2000).
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