How to Undercut Chávez Peacefully With Less Military, Not More

Imagine you’re selling a product and a large gang – call it Gang A – comes along and tells you to stop and threatens to kill you, or at least destroy your property, if you don’t. Gang A, though far way geographically, is very well-funded: I’ll tell you why in a minute, but I’ll give you a hint – it’s financed by taxes on the most prosperous economy in the world. Then along comes Gang B. Gang B has a ruthless leader whom you were never particularly fond of, but he’s willing to thumb his nose at Gang A and Gang A’s leader. Moreover, he has no particular problem with how you make your living. Gang B’s leader is also well-funded because the particular product he is selling is worth a lot on the world market. In other words, Gang B’s leader can at least put some real money where his mouth is. If you had to choose between supporting Gang A or supporting Gang B, which one would you support? I would bet that, given the way I’ve set it up, you would support Gang B. It would have nothing to do with Gang B’s other policies – you might hate his other policies. But you need to make a living, and Gang A’s leader and past leaders have vowed to end your stream of income whereas Gang B’s leader, for all his brutality, is relatively laissez-faire on protecting your right to sell your particular product.

This isn’t hypothetical. Let me fill in the blanks. The "you" in the above example is a coca producer in South America. Gang A is the U.S. government and Gang A’s leaders have been Ronald Reagan, George Bush I, Bill Clinton, and George Bush II. Gang B is the Venezuelan government, a major source of its revenue is oil, and its leader is Hugo Chávez

It’s true that Hugo Chávez is a brute angling to become a dictator. But it’s also true that Chávez is far more libertarian on one of the main issues affecting South America than his counterpart who heads the U.S. government, George Bush II. George Bush II has continued the policies of his predecessors by threatening to impose sanctions on South American countries, especially Colombia, that don’t go along with the U.S. government’s drug war. Under the Anti-Drug Abuse Acts of 1986 and 1988, which Bush supports and has made no attempt to repeal, not only U.S. foreign aid, but also "permission" to ship legal goods to the United States, is conditional on the adoption of narcotics-control initiatives in foreign countries. The U.S. government has set itself up as the "certifier" of whether these countries are doing enough to comply. How does a country get certified? Try eradicating your own citizens’ coca crops and, if that doesn’t work, try letting the U.S. government send in its own agents to try to wipe out their living. On this issue, George Bush II is far more brutish than Hugo Chávez. This one difference, though of minor importance to most Americans, is hugely important to South Americans who live in Peru and Colombia, countries whose societies have almost been destroyed by the U.S.-initiated drug war.

Take Colombia, one of the most tragic cases in South America because it has, at times, come so close to being a peaceful democracy. Because the U.S. government has been so hostile to peaceful people in Colombia trying to make an honest, albeit illegal, peso, many of those people looked around for protection. There to offer protection have been various domestic gangs, gangs such as the leftist Revolutionary Army of Colombia (FARC) and other terrorist groups. During his 2000 presidential campaign, Bush stated that because FARC and other terrorist groups get their money from the cocaine trade, fighting the drug war and fighting the terrorists are one and the same. But the ironic reason for that connection is the drug war itself. What makes it relatively attractive for coca producers to support FARC is that FARC protects them from the attempts of the Colombian government, egged on by the U.S. government, and from the direct attempts of the U.S. government, to destroy their livelihoods. (In 2004, for example, the U.S. government spent about $150 million of our tax money to eradicate coca.) By one estimate, the revenue to FARC from drug-related sources has been, at times, more than $600 million a year, which would make it the best-funded terrorist group in the world. Thus, the war against drugs actually strengthens the position of the leftist insurgents.

These insurgents have terrorized Colombian society. Between 1981 and 1986, for example, drug traffickers murdered more than 50 Colombian judges, including 12 Supreme Court justices. Average Colombians are so terrorized that, according to Cato Institute analyst Ted Carpenter [.pdf], writing in 2001, more than one million of them – about one-fortieth of the population – had emigrated in the previous five years. If a similar percent of Americans did the same, we would lose over 7 million citizens. It would be like losing the whole population of Virginia.

What do we get for all our tax money – an average of over $100 per American household every year – and for all the violence and terror the drug war has caused Colombians? More South American support for Fidel Castro’s Mini-Me and a negligible impact on the U.S. street price of cocaine.

Why a negligible impact on the price of cocaine? The economic reasoning is straightforward. The drug war has not succeeded in substantially cutting the supply of cocaine from Colombia to the United States. Even in the unlikely case that the drug war reduced the Colombian supply to zero, the effect would be similar to the effect of the successful U.S. action in the early 1970s against the drugs coming from Southeast Asia through the French connection in Marseilles. Just as that drug war pushed drug production from Southeast Asia into the next cheapest region, Colombia, suppressing Colombia’s production would push production into the next-best region for growing, which would probably be Brazil. Make the extreme assumption that growing coca and producing cocaine in Brazil is three times as expensive as in Colombia and that, therefore, the raw cocaine price is tripled. The raw cocaine price in Colombia is only about 1 percent of its street price in the United States, because of the risk premium added on to prices at each stage of the distribution. Therefore, tripling the raw price would cause the U.S. street price to rise by 2 percent.

There’s a better way to go. The U.S. government should stop pressuring Colombia’s government to destroy its cocaine industry, and we the people should demand it. Then Colombia’s government can decide whether to do that or not, and I predict that it won’t. If, in the extreme, Colombia’s government legalized the cocaine trade, production would increase and the price would fall. But even if the Colombian price fell to zero, clearly impossible, the U.S. price would fall by only 1 percent. Meanwhile, the leftist insurgent’s funds would dry up – why pay for protection when you don’t need it? – and Colombia’s odds of surviving as a peaceful democracy would improve dramatically. Moreover, Hugo Chávez would get less support from South Americans, not more, because he would have less of a case for railing against Uncle Sam. And we would get all this, not by having our government initiate more military force but, on the contrary, by reducing military force and reducing U.S. government spending. If you saw a $100 bill on the ground, and you knew that picking it up would have the bonus of undercutting a fledgling dictator (Chávez) and saving a fledgling democracy (Colombia), would you pick it up? I would.

Copyright © 2006 by David R. Henderson. Requests for permission to reprint should be directed to the author or

Author: David R. Henderson

David R. Henderson is a research fellow with the Hoover Institution and an emeritus professor of economics in the Graduate School of Business and Public Policy at the Naval Postgraduate School. He is author of The Joy of Freedom: An Economist’s Odyssey and co-author, with Charles L. Hooper, of Making Great Decisions in Business and Life(Chicago Park Press). His latest book is The Concise Encyclopedia of Economics (Liberty Fund, 2008). He has appeared on The O’Reilly Factor, the Jim Lehrer Newshour, CNN, MSNBC, RT, Fox Business Channel, and C-SPAN. He has had over 100 articles published in Fortune, the Wall Street Journal, Red Herring, Barron’s, National Review, Reason, the Los Angeles Times, USA Today, The Hill, and the Christian Science Monitor. He has also testified before the House Ways and Means Committee, the Senate Armed Services Committee, and the Senate Committee on Labor and Human Resources. He blogs at