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Peru Table of Contents


Economic Implications of Coca

Production and exports of coca and its derivatives have many different effects on the Peruvian economy, all of them difficult to quantify because basic information cannot be checked in any dependable way. On the positive side, coca adds to the incomes of otherwise extremely poor peasant producers and also adds foreign exchange earnings that, at least in part, flow through to the legal economy and help finance imports. On the negative side, coca pulls human effort and land into production at the expense of possible alternative food production; holds down the price of foreign currency and therefore the incentives for legal exports; causes ecological damage from the chemical residues used to process cocaine; increases violence and the costs to the society of trying to restrain it; and aggravates corruption in the military, police, and civilian government. If coca production were to fall back to traditional levels of consumption by Andean peasants themselves, many Peruvians would lose income; if it continued at 1990-91 levels or grew, the society as a whole would be the poorer in terms of competitive strength in legal markets and in terms of civil order.

Neither Peru's national accounts nor its export data include any estimates for the value of coca leaf and its derivatives. A private statistical service, Cuánto S.A., estimates that income from coca added 7 percent to the officially calculated value of GDP in 1979 and 4 percent in 1989. Estimated drug exports averaged US$1.4 billion in the years 1979-82 and US$1.6 billion in 1986-89. Without counting coca, commodity exports in 1989 were US$3.7 billion. Counting coca, they were US$5.6 billion.

Considering the agricultural sector separately, these estimates suggest a strong impact, raising value added by about 11 percent as of 1989. That extra income goes in unknown proportions to dealers and processors (mostly Colombians); to third parties providing protection, including the Shining Path; and to peasant producers. Even though the share going to peasant producers may not be high, their incomes from coca can be more than seven times as high per hectare of land than could be earned in the next most profitable (legal) crop, coffee. Growers in the main producing region, the Upper Huallaga Valley, are estimated to earn about US$4,500 per year for each hectare in coca, compared with about US$600 in coffee. Such differentials are mainly a matter of the high market value of coca, but they also reflect the fact that this particular region of Peru is singularly well adapted to growth of coca and poorly suited to most alternative crops. Coca would be an ideal crop here, with low opportunity costs, if it were not for all its negative human and economic implications.

Government policies to restrain coca production and marketing have been more in the realm of police and military action than that of economics. One of the most appealing proposals within the range of economic policies has been to promote alternative crops through credit and technical assistance plus guaranteed purchasing at favorable prices. The two main drawbacks to developing such a program have been the government's own lack of financial resources and the enormous differentials between earnings from coca and those possible from alternatives. The approach would have much more of a chance for success if cocaine demand in the United States could be reduced significantly, allowing the value of coca to fall. Absent such a change on the demand side, economic incentives in Peru work powerfully to keep up supply.

Data as of September 1992