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Wednesday, 08 October 2003

WHAT HIGH OPIUM PRICES MEAN FOR AFGHANISTAN

Published in Analytical Articles

By R. Grant Smith (10/8/2003 issue of the CACI Analyst)

BACKGROUND: The Taliban ban on opium growing in 2000 followed several years of record production that had resulted in large unsold stocks. Farmgate prices before the ban were $35-50 per kilo. The ban effectively eliminated the 2001 crop in areas controlled by the Taliban, with country-wide production dropping to 185 tons of opium (UN estimate) from an estimated 3,300 tons in 2000 and 4,600 tons in 1999.
BACKGROUND: The Taliban ban on opium growing in 2000 followed several years of record production that had resulted in large unsold stocks. Farmgate prices before the ban were $35-50 per kilo. The ban effectively eliminated the 2001 crop in areas controlled by the Taliban, with country-wide production dropping to 185 tons of opium (UN estimate) from an estimated 3,300 tons in 2000 and 4,600 tons in 1999. Prices rose to as high as $700 per kilo just prior to September 11, 2001. Although they dipped with the beginning of Operation Enduring Freedom later that year, they subsequently stabilized in the range of $300-$500 per kilo – roughly 10 times what had been the going rate in the previous decade. Prices have remained at this level despite bumper crops in 2002 and 2003. The laws of supply and demand would argue that such large crops should drive the prices down towards their average levels in the past. However, this has not happened, apparently because traders anticipate strong international pressure on growers to shift to other crops.

IMPLICATIONS: Whatever the reason for the continued high price, its impact is substantial. On a short-term economic basis, no other crop can compete with opium. Crops that earlier pilot projects had shown to be as profitable or more profitable than opium when the price was $50 per kilo are no longer in the same league. Wheat, which was still attractive for survival reasons even if less profitable that opium in the past, has become even less of a viable alternative. The combination of high opium prices and low wheat prices after the bumper wheat crop of 2003 has resulted in some farmers saying they will shift from wheat to opium in the next growing season. For farmers who are sharecroppers, who must borrow from money lenders against their crop or who rely on outside labor, the situation is even worse, since all of these rates are pegged to opium production, forcing the farmer to grow opium if he wants access to these inputs. In areas of Afghanistan today the rate for labor in the opium fields is $10 per day. Paying such rates for other harvests makes those crops even less competitive. Moreover, it threatens to drive up the cost of all labor-intensive work, including internationally funded reconstruction work.. Income to Afghanistan as a whole from the higher opium prices has certainly risen, with the UN estimating that the total is now on the order of $1.2 billion a year. This has undoubtedly contributed to the visible signs of economic recovery in parts of the country. However, as in other narcotics-drive economies, the overall effect is negative, as domestic production of all types is driven down by imports funded by growing and trafficking. For narcotics control programs, the implications are even more serious. Alternative development or employment schemes which made sense at $50 per kilo for opium have no appeal to farmers or opium workers when the rate is upwards of $500 per kilo. While some “stick” or enforcement is usually necessary in connection with the “carrot” of alternative development, high prices mean that the “stick” has to be a proportionately larger part of the program. This is not possible in an Afghanistan where a national army and police force are only beginning to be built and power remains largely in the hands of local militias, at least some of whom are connected to traffickers. In the period until either the price drops or a larger “stick” is available, the only programs which may work will have to be based on appeals other than strictly short-term economic considerations. If growers can be convinced of the impermanence of high opium prices, perhaps they can be persuaded, with incentives, to re-establish Afghanistan’s orchard crops, which will take time to mature but will provide long-term income. Where communities or tribes are strong, it may be possible to provide infrastructure support in return for a guarantee not to grow opium. Of course, the simplest solution would be to find a way to drive prices down. The traditional economic process of high prices reducing demand and thus affecting prices does not operate in this case because the enormous profits involved in trafficking mean that intermediaries can absorb higher raw material prices without raising the street price of the finished product; even then, narcotics demand is inelastic. If traffickers could be convinced of the reality of a glut of raw opium, perhaps they would lower their purchase price, but it is not clear how such market manipulation might be accomplished.

CONCLUSIONS: As long as opium prices remain high, traditional alternative development programs will not reduce production. If no way can be found to drive the price down, through psychological operations for example, the only alternative is long-term program allowing time for the national government to build its enforcement capability and for the market to adjust to continued high production levels.

AUTHOR’S BIO: R. Grant Smith is a former U.S. State Department official who served as Ambassador to Tajikistan. He is now a Senior Fellow at the Central Asia-Caucasus Institute. He spent a month in Afghanistan this summer.

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