Alternatives to coca production in Bolivia: A computable general equilibrium approach

Abstract

Pressured and aided by the United States, Bolivia has reembarked on a program to eradicate the cultivation of coca used for cocaine production. Over the next three years the United States plans to inject US$SOO million into Bolivia to wean the country from producing drugs and replace the cultivation of coca with other crops and agricultural activities. Previous research has shown that coca cultivation and cocaine production benefits the Bolivian economy (De Franc0 and Godoy, 1992) by raising income, creating employment, and increasing the availability of credit, particularly for smallholders and the informal sector (Melvin and Ladman, 1991). Given that the macroeconomic impact of a reduction in coca leaf production could devastate the economy, the Bolivian government has little economic or political incentive to eradicate coca. A solution could be to find substitute crops and agricultural activities which would provide comparable levels and distribution of income. We use a computable general equilibrium (CGE) model to study the effects of alternatives to coca production. The model contains 38 sectors’ and four social classes. The model allows for a detailed assessment of the economic feasibility of switching from coca to other crops. In the simulations we reduce coca production and allow each substitute to adjust to restore the real income of smallholders which existed before eradication. Twenty-one crops are then ranked by the feasibility of the needed price and output change, the effect on Gross Domestic Product (GDP), inflation, and workers’ real incomes. The results of the simulations suggest that sugar, cattle, forestry,’ and maize are the strongest candidates for a coca substitution program, but there are practical complications in implementing each of the substitutes, as will be discussed below. Indeed, the results of this study justify the reluctance on the part of the Bolivian authorities to fully cooperate with US efforts to eradicate coca. Section 2 provides the background to Bolivia’s coca dependence. In section 3 we develop the model and in section 4 we present the equations and an explicit closure statement for the model. The results of the simulations are discussed in section 5. The conclusion (section 6) contains a discussion of the problems likely to surface in implementing alternatives to coca cultivation.