Opium Economics in Afghanistan

If you are troubled by opium production in Afghanistan, Jeff Clemens at Harvard has some bad news for you: eradication efforts are doing little to reduce opiate production. (ht: Tyler Cowen at Marginal Revolution). Moreover, to the extent they are having an effect, it’s to drive up prices and thus enrich the farmers who illicitly grow poppies.

I mention this not only because I find it interesting, but also because it nicely illustrates one of the ideas that I teach my microeconomics students. When you think about policy interventions – in this case poppy eradication efforts – it’s important to understand both the qualitative impacts of the intervention and the magnitude of those impacts.

Your basic supply and demand model will tell you, for example, that eradication efforts will shift the supply curve left (up), resulting in higher prices and lower production. To gauge the relative importance of those two changes, you need to know something about demand. And in this case, the key fact is that demand (from other countries, not Afghan consumers) responds very little to price. In the lingo, opium demand is very price-inelastic (Jeff estimates the elasticity at about -0.09). As a result, efforts to restrict supply translate primarily into price increases, rather than production declines.

The same problem has bedeviled U.S. efforts to restrict illicit drugs. (For example, see this old New York Times editorial about cocaine, which I use in my class – the editorial that is, not cocaine itself.) I haven’t followed the debate in recent years, but my sense is that many observers concluded that demand-side policies (i.e., discouraging consumption) were often a better strategy than supply-side policies. After all, successful demand-side policies would lower both consumption and price, thus lowering profits from drug production.

Given Jeff’s results, I suspect the same may be true in the world of opium production. If policymakers want to reduce consumption, they may want to turn to demand-side policies (assuming, of course, they can design demand-side policies that would have a substantive effect).

6 thoughts on “Opium Economics in Afghanistan”

  1. Very interesting post as always. I think you are slightly off on what the price elasticity means though. You said that “efforts to restrict supply translate primarily into price increases, rather than production declines”. The extent to which production declines has to do with the efficacy of the programs, not the price elasticity of heroin. However, the price elasticity implies that even a “successful” program that reduces supply will actually increase the income to heroin producers/trafficers because price will rise more than supply declines.

    1. Hi Andrew — The thing left unsaid in my characterization is that there is a noticeable supply response; Jeff’s best guess of the supply elasticity is about 1.0. So visualizing the demand and supply curves in our heads, I would characterize the magnitude of the eradication effort as the extent to which the supply curve shifts left. Inelastic demand then pressures prices upward, and induces suppliers to increase their production. So you end up in a place where most of the effort translates into higher prices, not lower production.

      Walking through that logic, I think the difference in our phrasings in the difference between effort and efficacy. My framing is focused on the effort (e.g., the destruction of X hectares of poppy fields), yours is focused on the net efficacy (e.g., the resulting decline in production). And the implication of inelastic demand and relatively elastic supply is that you can have effort without efficacy.

  2. Several points.

    1. It is possible to eliminate (nearly) opium production in Afghanistan. The Taliban did it in 2000. Paper about the global supply/demand impact here:

    2. There are substantial external policy benefits to moving global opium production out of Afghanistan to other countries, even if global supply, demand, and price remain constant. A dollar spent on opium produced in Afghanistan is disproportionately likely to be be spent killing Americans than a dollar spent on opium produced elsewhere.

    3. No amount of foreseeable demand-side policy will address the policy concerns of point 2.

    4. Probably the most cost-effective policy to eradicate poppies (given the policy concerns of point 2), would be to create an artificial market in an otherwise useless agricultural substitute for poppies–dandelions, say–in Afghanistan, in which the U.S. government would purchase the agricultural output at a pre-determined price that would result in greater profits to the farmers than growing opium. Creating artificial markets for agricultural products through such subsidized purchases is an area where the U.S. government has developed decades of expertise and a mature policy infrastructure with proven success.

  3. About policy intervention : it’s important to understand qualitative and magnitude impacto of the intevention.
    Eradication –> supply shift left –> higher price.
    The opium – Price inelastic product –> maintain high price.
    Strategy – Demand side policies – lower consumption and price and profit for drug production.
    So we should do the campaign of reducing consumption rather than reducing production while the demand is still high.

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