The economic buzz on coffee and cocaine

No products are more symptomatic of the complex webs in which our high-tech, competitive, globalized economy entangles us than coffee and cocaine. The one keeps most of us going amid increasing demands for our time and attention. The other provides at least transitory release for the overly stressed and escape for many left behind in the global race. The one is legal and presumed safe, the other is widely seen as dangerous and is the subject of vast domestic and international police efforts.

Yet both products are locked in a symbiotic embrace. Efforts to keep coffee cheap and accessible make its cultivation, like much Third World agriculture, economically precarious.

The attempted eradication and criminalization of cocaine keep supply chains risky and fragile, but in the process they create a risk premium for suppliers.

As any good Chicago school economist will tell you, the potential for profits drives and motivates entrepreneurial initiative. Not surprisingly, cocaine and other illicit recreational drugs have become lucrative source of foreign exchange for governments from Afghanistan to Colombia.

Coffee and cocaine prices are the result of markets, but those markets are vastly different. The price of imported coffee beans has fallen 70 percent since 1997 and stands at a 30-year low. Peasant coffee producers are going bankrupt.

The World Bank, certainly no bleeding heart, compares the coffee collapse in Central America to the economic effects of Hurricane Mitch in 1998.

Coffee is second only to oil as the world’s most heavily traded commodity. The number of nations producing coffee has grown along with the supply, but the quality varies considerably. Nonetheless, coffee has no OPEC equivalent to limit supply or ensure quality and thereby keep prices relatively stable.

The International Coffee Organization, a loose association of most coffee producing and consuming countries, has recently moved to fill this void. It proposed reducing the surplus by increasing quality requirements. The plan aims to prevent the export of green coffee beans that fall below an acceptable quality standard. Neither the U.S. government nor most of the tiny coterie of elite multinational firms (with the exception of Nestle) that buy most raw coffee have expressed support for this plan.

Although the U.S. government – and most major multinationals – oppose cartels or other supply limitations for coffee, it does regulate cocaine supply with a vengeance. In an effort the stated purpose of which is to enhance U.S. health by making cocaine harder to obtain, the U.S. government funds aerial spraying of Colombian cocoa plants.

That there is some effect on supply of cocaine from Colombia is clear, but few commentators address the effect on the Colombian peasants. The press has reported numerous instances where the spray is carried by wind currents well beyond targeted fields.

It is a safe bet that many peasants in the so-called developing world are not the sort of “profit maximizers” beloved by the Chicago school. Even so, they have an interest in physical health and economic survival.

The sins of omission and commission by the Western powers, including economic strategies that keep raw agricultural products cheap, World Bank restrictions on assistance for health, food, and education, and the high cost of Western technologies exported to these states, have all worked to make peasant agriculture unsustainable.

At the same time U.S. drug interdiction efforts do keep some commodity prices relatively high – especially cocaine and opium.

In lands where cocaine and opium production and consumption are not as morally freighted as the United States, it is not surprising that some peasants who can do so turn to this avenue.

In tacit recognition of the role that illicit drug crops play in sustaining some developing economies, the U.S. government itself now turns a blind eye toward opium production in Afghanistan. Opium provides the only export sufficiently profitable to sustain the peasantry and forestall revolt against the weak Karzai government.

The drug war is based on many fallacies and contradictions, but coffee and cocaine point to some of its most glaring ones. The tensions of a go-go world, supported by coffee, surely increase demands for releases posing varying degrees of risk. And efforts to keep coffee cheap only add to the numbers of foreign producers willing to supply the market for illegal drugs.

John Buell is a political economist who lives in Southwest Harbor. Readers wishing to contact him may e-mail messages to jbuell@acadia.net.