Complexity: Drug Policy and Central American Coffee Farmers

It is widely understood that coffee trade is used to facilitate drug trafficking in Central America. The idea is that a drug trafficker suddenly has a large amount of dirty money they need cleaned. They do this by buying coffee from a large number of small farmers thereby exchanging money for coffee (with no tax or records). They then take the coffee in bulk to large exporters who give them money with a receipt thus allowing them to be properly taxed and finishing the cycle of turning dirty money into clean money. One interesting consequence of this might actually be that small farmers are paid above market prices. This would happen because the money launderers care more about bulk than prices because they need to make sure they are the highest bidder in any market to ensure they maximize volume.

A natural policy question arises from this: what is the effect of effective drug policy on the incomes of small farmers? Currently any effort that succeeded in stopping drug trafficking would also reduce the prices received by farmers as there would be less demand for their coffee and prices would revert to the normal market prices. This would imply that absolutely any policy aimed at limiting drug trade would also lower the incomes of small, poverty level farmers. This suggests any drug policy should be accompanied by an alternate subsidy for the farmers. An obvious response might be that this current setup acts as a subsidy; so eliminating it would simply stop the over-production of coffee. It could also be argued though that this arrangement incidentally corrects for the large inefficiencies of the coffee market as coffee export is usually controlled by an oligopoly and farmers information is substantially different from their buyers. Overall it would be hard to tell what the efficient production level really is. The bottom line is that a market as complex as coffee in a region with inefficiencies of communication and transportation abound all policy choices represent shots in the dark, where the target, the direction and the magnitude of changes of policy cannot always be divined.

-Mac