Can economic growth be at the expense of development?
IB Economics students need to analyse and cite real-world examples in order to gain the highest marks in their exams. Our Economics study guide author George Graves looks at a cascade of impacts caused by price signals transcending country boundaries.
According to a recent study by M. Sviatschi of Princeton University, the clampdown in Colombia on the growing of coca leaves (which are used to produce cocaine) at the turn of the century had far-reaching effects, and presents an interesting example of how the price mechanism operates to reallocate resources in response to government intervention.
In 2000, Colombia and the USA agreed the Plan Colombia initiative, one aspect of which was to counter drug cultivation with US finance being used for chemical spraying to destroy coca crops. This had its desired effect, but a sudden decrease in supply led to a corresponding increase in the price of coca leaves.
This price increase gave a signal and provided an incentive to farmers in neighbouring Peru to switch from coffee and cocoa production to the now more profitable coca production. Since coca production is illegal, however, the Peruvian farmers found a solution that involved employing children to participate in the growing and harvesting of the crop, because children cannot be prosecuted under Peruvian law.
In response to soaring coca prices, more and more children were employed leading to a reduction in secondary school enrolment by 26%. Although coca production both stimulated economic growth in the areas where it was cultivated and increased incomes for Peruvian farmers, these economic benefits were at the expense of economic development as school enrolment and education suffered. Furthermore, in the areas that were most affected by the transition from school to coca growing, the crime rate increased significantly with many child workers growing up to become heavily engaged in drug smuggling gangs and other criminal activities. These activities led to a further reduction in economic development as security and quality of life suffer.
In this case, rules and regulations regarding illegal drug production and activity were largely ineffective, but an experiment in some regions proved to be quite successful. This involved a cash transfer scheme whereby families were given $30 a month if their children complied with certain commitments such as attending school. In the areas where the scheme was introduced, coca production declined significantly, and school attendance rose correspondingly.
This real-world example identifies several aspects of economics that can be usefully applied in answering IB exam questions as it highlights the role of price signals and incentives in the function of the price mechanism in allocating resources, as well as providing a good example of how it is possible to have growth without development. It also throws light on which policies are more effective for securing growth and development, namely cash transfer schemes.
(See The Economist, 15 October 2022, for a more detailed analysis of this topic.)
