Rafi Mohammed

The Key to Solving the War in Afghanistan...the Right Price Strategy

Posted on April 3th, 2007 (0 Comments)

I thought I’d change things up a bit today. In addition to its key role in business profit maximization, price plays a fundamental role in social policy (e.g., Nixon’s price controls, milk regulation, etc.). I believe price can play an important role in ending the war in Afghanistan.

Our opposition, the Taliban, is reportedly the key benefactor from growing opium in Afghanistan (which supplies 90% of the world’s opium and most of the heroin sold in Europe). According to the Washington Post, opium production broke all records in 2006: production increased by 26% and the amount of land devoted to growing opium increased by 61%. Narcotics is a $2.6 billion a year industry, accounting for 1/3 of Afghanistan’s gross domestic product. As opium profits grow, so does the Taliban’s budget to battle American military forces.

While growing opium is illegal, corruption seems to be the key reason why the trade thrives. According to a 2006 report by the World Bank and the U.N. Office of Drugs and Crime, the Afghani drug industry “works closely with sponsors in top government and political positions.” And while the U.S. Government has tried to eradicate drug fields by using aerial herbicide spraying, the Afghanistan government prohibits this practice. The only approved way to eradicate opium fields is by using tractors to drag heavy bars. Oh, and by the way, this eradication must be done by Afghani police...who reportedly are not exactly Boy Scouts.

In yesterday’s Boston Globe, Robert Rotberg (director of Harvard’s Program on Intrastate Conflict and president of the World Peace Foundation) wrote an editorial which he intones is a “radically new, incentive-based method to provide better incomes to farmers with substitute crops.” So what’s Professor Rotberg’s radical answer…focus on price! He proposes the West guarantee “above market” prices for wheat and pledge to buy unlimited quantities of wheat from Afghani farmers for the next 10 years. His thinking is that if it’s more profitable to grow wheat (courtesy of price subsidies), farmers will stop growing opium.

While I’m no expert on international politics, I do know a bit about pricing. An Afghani farmer currently earns between 12 – 25 times (estimates vary) more growing opium than wheat – so this subsidy program would be expensive. And let’s face it, if the government ups wheat prices, do you really think the Taliban is going to throw in the towel and walk away in defeat? With large operating profits and customers that are insensitive to price, I can assure you the Taliban will up opium prices. Thus, I doubt this subsidy pricing program is implementable.

While I’m not on board with Professor Rotberg’s pricing idea…I do believe price can play an important part in reducing the drug trade and defeating the Taliban. Today, an Afghani farmer evaluates what crop s/he should plant based on the price they’ll receive at harvest time. But when evaluating opium crop prices, it’s not correct to evaluate the price a farmer receives at face value, because s/he faces the possibility of loss (crop destroyed) or imprisonment. Fair point, right?

The right way to evaluate a farmer’s opium income was articulated in 1944 by John von Neuman and Oskar Morgenstern, two Princeton University economists. In a nut shell, farmers need to look at the expected value of growing opium which is equal to: [(probability of a successful harvest) x (market price)] + [(probability of harvest being destroyed by drug enforcement/imprisonment) x (cost of losing crop)]. Consider the following example: suppose a farmer can earn 150,000 Afghanis ($4,000) per acre of opium vs. 6,000 Afghanis ($160) for wheat. Assume there is a 90% chance the crop will be successfully harvested and a 10% chance it will be destroyed (but no imprisonment). The expected value would be (90% x 150,000) + [10% x (-6,000: the loss from not lawfully growing wheat)] = 134,400 Afghanis. Even accounting for the risk of losing the crop, the expected value is still quite lucrative.

The U.S. needs to focus its efforts on lowering the expected value of opium prices. Step one, lean on American-backed president of Afghanistan Hamid Karzai (whose sister coincidentally owns the popular Helmand restaurant which is located across the street from where I live) to focus on the negative side of expected value equation: let the U.S. spray herbicides and up the penalties/enforcement for growing opium. By lowering this expected value, opium harvests will decline leaving lower profits to fund the Taliban.

Add Comment
Send to Friend
Email Signup
RSS Feed