From the archives: Colombia Likely to Survive Loss of Drug Money

BOGOTA, Colombia -- It is an easy picture to paint: Colombia, a country with billions of dollars in cocaine wealth; massive, opulently furnished houses; huge cattle ranches; overdressed men and women draped in gold and emeralds; everyone driving a Mercedes-Benz or a BMW.

And it is a picture that leads some to think that Colombia deserves its reputation as a corrupt society living high off the misery of foreign--mostly American--drug addicts, a society that deserves whatever punishment befalls it if its drug business is destroyed.

Some of the image is even real--there are indeed luxury homes and fancy cars and satellite TV dishes here beyond the norm in Latin America. This, in turn, has led to the perception among some U.S. officials that Colombia has winked at the multibillion-dollar cocaine business because it has been a positive force in the national economy.

But the reality is that with the region’s healthiest and best-managed economy, most of Colombia’s wealth is its own. And despite more than $1.2 billion the cocaine traffickers are estimated to be circulating through Colombia’s economy as a result of supplying the huge U.S. market, the government has managed to restrict the overall impact of the narcotics business.

This is not to say that the immediate destruction of the cocaine cartels would not have a negative impact--$1.2 billion is a lot of money, and economists say there would be at least a short-term recession.

But with cautious and proper management, the experts say, Colombia would emerge economically intact--probably even better off--because there would be a savings of the cost expended to fight the drug war and a new efficiency and productivity forced on both the government and private sectors to offset the loss of the cocaine money.

Nonetheless, government officials and private Colombian economists emphasize that the management they talk about requires that the United States help ease the pain.

“It is the demand in the United States that keeps the traffickers in business, not what we do,” one Colombian economist said. “Americans should have to help offset whatever costs we have to pay.”

On the other side, U.S. officials try to minimize even the possibility of a negative impact on Colombia’s economy if the cartels are put out of business.

“Shut it down tomorrow,” one American expert said, “and you would lose some spending, but the overall effect would be positive, not negative.”

But interviews with both Colombian and U.S. officials indicate that neither side is focusing on the question of the loss to the economy of the $1.2 billion from cocaine.

“I suppose that is a legitimate position,” a U.S. official here said, “but I haven’t heard that from the Colombian government.”

In the Planning Ministry, one official said that “I don’t think we have come to that point” of talking with the United States about what kind of help and how much Washington should provide. Actually, he said--because no one had seriously thought the drug business could be shut down immediately or completely--no one has seriously thought about how to deal with such a scenario.

Experts say the lack of contingency planning raises questions about how serious either country is in publicly stated expectations that the war against the Colombian drug cartels can be won, at least in the near future.

$35-Billion GNP

In any case, what would be at stake if Colombia’s drug trafficking were shut down now?

Colombia’s gross national product is $35 billion to $40 billion a year, with coffee providing 30% of the total, oil 30% and minor exports (other agricultural products and light industrial products) 30%. The remaining 10% is provided by what an economist at the University of the Andes calls “imagination”--that is, contraband, including drugs.

Altogether, the experts agree, no more than 2% to 3% of the GNP comes from narcotics trafficking, and nearly all of that is in the form of foreign exchange--that is, foreign currency brought into the country from the sale of exports, plus foreign investment and money sent back into the country by Colombians living abroad.

According to the best estimates, Colombia’s foreign exchange holdings total about $6 billion, of which $1.2 billion is from drugs.

Most of the economists interviewed, and studies carried out by Colombia’s leading expert on the economics of the drug trade, Hernando Jose Gomez, agree that the country’s cocaine traffickers gross about $4 billion a year, with a net profit of 40% to 70%, depending on supply and interference from governments. Right now oversupply and the crackdown here have forced profits to the low end of the scale.

Much Loot Stays Abroad

But whatever the profit level, most of the traffickers’ gains are not brought into Colombia.

On the surface, a U.S. official said, “coke brings in enormous sums of money,” and he added: “It is all true, the image of money-dripping narcos. But the impact on the economy is questionable. Of the $4 billion grossed, (less than half) is brought back into Colombia, and of that 70% to 80% is spent on imports, from paintings to cars. So most of Colombia won’t suffer economically from the drug war. Most of the money flows out, with only $100 million to $200 million left over.”

Even the money that stays has a limited effect, he said.

A Colombian banking expert explained: “It goes into real estate, luxury houses and apartments, rural property, cattle ranches that are more for show than production.”

On the other hand, there are experts who simultaneously argue that spending by traffickers is not a serious long-term issue and that large numbers of people are working because of the narcotics trade and what economists call the “multiplier effect.”

These are the economic ripples from the construction of luxury houses or the purchase of expensive imports such as cars, computers and stereo systems. This increases the value of the drug dealers’ spending by 10%, according to economist Eduardo Sarmiento Palacio.

Thousands Employed

But even before the multiplier effect, there is the direct impact of the cocaine business. An estimated 20,000 to 30,000 people are employed in the business, according to the economists. These include people who run the processing laboratories, those who bring in the raw product from Bolivia and Peru and ship the finished goods to the United States and Europe.

The multiplier means that 200,000 to 300,000 more people are affected by the drug business in terms of jobs--everyone from cooks and cleaners in the drug barons’ homes, to the construction workers and electricians who put up the apartment houses and office buildings financed by the traffickers, to the real estate agents who sell them.

“The costs would be tremendous” if this were lost suddenly, an American-trained financial expert said. “It would destroy five or six years of work,” about what it took to recover from the country’s last recession in 1984-85, he said.

And while this expert says that the overall drug income figure is low compared to the economy’s total worth, he counters that “this view is very naive.”

“You have to think about the regional effects” where the drug business is concentrated, he said, adding that there would be increased unemployment in an area where 12% to 16% of the work force is already out of work.

Further, by withdrawing the $1.2 billion in foreign exchange, the cost of imports would go up, thus increasing the price not only of consumer goods but also of products needed for domestic industries. And that, he said, means inflation.

Moreover, he continued, any reduction in the drug business now would coincide with an expected decline in coffee income, ranging from $200 million to $500 million, as the result of the collapse of an international coffee price fixing agreement.

The economist said that Colombia’s oil income could be off by about $200 million this year because of attacks by leftist guerrillas on the major petroleum pipeline.

“It would be myopic to ignore the impact on the economy of both the drug loss and the coffee-oil problems,” he said.

He said he was sure that the government has held back on prosecuting traffickers because of the potential danger facing the economy.

Up until now, he contended, “it was a well-established position that (drug trafficking) was not our problem,” he said.

Now, he said, this reluctance is past, not because of economic factors but because the traffickers have gone too far in terms of violence and lawlessness.

Negative Cost Factor

Jorge Enrique Vargas, deputy chief of national planning, said that perhaps all this is true, or was. But even so, he said, whatever value derived from all sources--including the multiplier effect in all its forms--is offset by the negative costs of the drug business.

He mentioned as most important the detrimental impact on foreign and domestic investment because of the negative image caused by the drug trafficking.

In addition, he ticked off the growth of illegal importing to meet the demand caused by the drug money and the depressed effect on the price of exported goods caused by the excess in black-market dollars brought in as payments for drugs.

“All this brings instability,” Vargas said, “and a government can’t plan when faced with instability, and investors won’t take the necessary risks when faced with instability.”

He said even the argument that cutting off the drug business would hurt local economies is false, adding: “Drug profits led to artificially high salaries and real estate prices. Real producers couldn’t afford to pay the prices for either labor or land, so production fell.”

An aide to Vargas produced statistics to show that the drug lords had driven up the price of upper-middle and high-income houses to the point that developers overbuilt, leaving a huge deficit in lower- and middle-income housing.

“There is now a glut of luxury housing that no one can afford because of the inflated prices, and a 550,000-unit shortage in housing for everyone else,” he said.

Need for Help Seen

Yet with all the talk by government officials of the benefits from eliminating the drug trade, they acknowledge that help will be needed to soften the impact of losing the $1.2 billion in drug money.

They would not be specific, but other economists spoke of about $250 million a year in direct U.S. aid for two to six years.

Some have proposed relaxing U.S. restrictions on Colombian exports, particularly in such non-traditional goods as cut flowers and fruits and vegetables. Another area where Colombia could be helped, they said, would be in easing its foreign debt payments.

And there is coffee: There was general agreement that the United States should modify its opposition to drawing up a new agreement that would fix the price of coffee. The United States withdrew from--and essentially wrecked--an earlier agreement on grounds that it led to excessively high prices and restricted access to good-quality beans for American coffee roasters.

Some U.S. officials say the Colombians are crying wolf about the potential impact of the anti-drug effort to force Washington to modify its stand on the coffee agreement.

“On one hand, they talk about how marginal drug profits are to their economy,” one said. “On the other, they cry about a recession coming if we win the drug war and the need to compensate them. We might see a need to compensate, but that talk about easing up on coffee doesn’t work. There is no connection, and they know it.”

For their part, Colombian officials say the Americans are playing down the impact of the potential destruction of the drug trade in order to avoid having to pay compensation for the ravages on the Colombian economy of what is essentially a U.S. problem.