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Bolivia has become a 'strategic hub' for cocaine trafficking

Paraguay buying blow

November 7, November 7, Recently, the U. However, are these potential arrests likely to move Paraguay into a path of being less corrupt? I think not. Like the rest of Latin America, the war on drugs affects Paraguay because of the economic incentives it creates. By making cocaine illegal, the international community seeks to limit the supply of cocaine. However, without reducing the demand for cocaine in international markets, a strong incentive to produce cocaine exists because high profits can be made albeit illegally. In fact, simple economic theory says that if one reduces supply without reducing demand, suppliers are able to charge higher prices for their products, generating more profit, which raises incentives for supply. Like in the rest of Latin America, the economic incentives created by the war on drugs affect Paraguay by generating a vicious cycle. That is, prohibition artificially limits supply, which artificially raises drug prices, which artificially creates higher incentives for illegal supply. If the production of drugs were legal, an idea which is gaining ground internationally, then supply would be able to naturally meet demand, prices would stabilize, and what today are called smuggling or trafficking-networks would tomorrow be simply called commerce and supply chains. Paraguay smuggles a large variety of products, including tomatoes, cigarettes, tires, eggs, wine, vegetable oil, and more. In a sense this wider smuggling trend is caused by something similar to what causes drug smuggling in Latin America. That is, international market interventions that attempt to limit the supply of certain products inadvertently create higher incentives for the illegal supply of those same products. The U. Pushing through this free trade agreement may have an epic effect in reducing illegal trade in the region because it would eliminate most price distortions mentioned in this articly. There are different reasons why Brazil and Argentina are more interventionist than Paraguay. Some are benign reasons. Take for example tobacco. For health reasons, several countries often highly tax or limit the sale of certain tobacco products. Brazil and Argentina follow this example. According to a WHO report on global tobacco use , in in Brazil, a piece cigarette box costed 42 cents to produce, but Brazil levied a 2. In Argentina, that same box would cost 0. In contrast, in Paraguay a box costs 66 cents to produce higher than Brazil , but after negligible taxes of 14 cents, the total cost of a box of cigarettes is 80 cents. It is therefore no mystery why Paraguay is such a large smuggler of cigarettes regionally and globally. By buying smuggled Paraguayan cigarettes, Argentinians can save 3. Furthermore, Paraguayan producers can easily add to their profit margins by raising prices, and they will still find eager consumers because even steep raises are likely to lead to lower overall prices than the regular market-price cigarettes in Brazil and Argentina. Other reasons for market interventions in Brazil and Argentina, however, are less benign. ISI argues that because developing country industries are not as strong as those of Western Industrialized nations, it is therefore necessary to protect local industries—substituting imports with homegrown production—so that local industries may eventually compete on par with those of Western Industrialized nations. This economic theory, while generally believed to be a failing economic strategy , still serves as the justification for protectionism in the region. Take for example a seemingly harmless product: tires. It is possible that the difficulty of importing tires to Brazil is a remnant of ISI, where local tire producers are protected to foment local industry at the expense of more efficient imports. Like cigarettes, Paraguayan smuggled tires are cheaper than Brazilian ones, and this creates a strong incentive to meet unmet Brazilian demand with illegal supply. What happens with cigarettes and tires, also takes place with a large variety of different products. Overall, this occurs because of the different levels of economic openness between Brazil, Argentina, and Paraguay. In terms of trade freedom, Paraguay ranks 3rd in the region, and Argentina and Brazil 7th and 11th respectively. In contrast to Uruguay, which is similarly contiguous to Brazil and Argentina, Paraguay has the disadvantage that it is landlocked. Therefore, while Paraguay is restricted to selling mostly to its neighbors—pushing Paraguay to engage in smuggling that exploits distorted prices—Uruguay has the luxury of turning its back on the region and selling to the world. So, what can be done to reduce illegality in international markets in Paraguay? As mentioned above, one positive thing would be to end the war on drugs, but this is unlikely to happen in the short term, and many people and governments have legitimate reasons to argue against a full-blown legalization of all drugs. Similarly, to reduce the smuggling of cigarettes, Brazil and Argentina would either have to lower their taxes on cigarette consumption, or Paraguay would have to raise them. Brazil and Argentina may have legitimate health-related reasons for not wanting to lower taxes on tobacco, and Paraguay has failed to raise taxes on tobacco several times—no less because its former president owned a tobacco company. Paraguay may continue to try to raise taxes to make its tobacco prices closer to that of its neighbors. However, where Brazil and Argentina hold most of the responsibility is in everything else that is smuggled into and out of Paraguay. Tires, tomatoes, eggs, electronic devices, clothing, shoes, meat, soy, and other day-to-day, harmless, and mundane products are smuggled into and out of Paraguay because of the protectionism of its neighbors. From a regional point of view, strengthening and deepening free trade relationships in the southern cone—perhaps through strengthening MERCOSUR trade agreements—would naturally reduce Paraguayan smuggling and convert much of it into regular commerce. Yet the U. The US would be smart to encourage progress on this agreement. Finally, if the US is really dedicated to reducing corruption and illegality in the region, it could also push for freer trade among MERCOSUR countries, perhaps even by proposing a free trade agreement of its own. 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Paraguay buying blow