The Spillover Effects of Cocaine Labor Markets: Child Labor and Human Capital in Peru

Researcher: Maria Micaela Sviatschi, CDEP Fellow and PhD Student in Economics

In the mid-1990s Colombia was the world's largest producer of cocaine, however, with the support of the United States, the Colombian government implemented a coca eradication program that reduced coca production by 60 percent during 2001 to 2010. This study examines the unexpected spillover effects from this program, namely the increase in coca production in Peru. Peru is now the world's largest producer of cocaine, with important implications for children’s welfare.

Using a novel geocoded data on coca production, suitability and schooling outcomes between 1997 and 2014, the study provides first evidence that a plausible exogenous increase in Peruvian coca production has detrimental effects on children’s welfare even in absence of violence and conflict. This is because children and teenagers are an important input in every step of the cocaine chain production. Coca plants are low to the ground, and collecting the leaves requires very little skill, making children an attractive input. Children and teenagers are also commonly put to work transforming the leaves into cocaine and smuggling drugs out of the country since using family networks reduces the risks of being caught by the police, and minors cannot be legally prosecuted.

In particular, the results indicate that the increase in coca prices induced by Colombia’s anti-drug policy led to a large and significant increase in child labor. In high intensity coca areas, the increase in coca prices led to a 40 percent increase in child labor. As a consequence, test scores declined and the probability of failing a grade for primary school children increased. In addition, the relatively high earnings in the cocaine industry induce some secondary school-age children to drop out of school.

Not only does working in coca fields reduce children’s education levels, it also increases the chance that they will work in the cocaine industry (e.g. processing coca into cocaine or transporting drugs) when they are teenagers. This has important long-term consequences: children affected by the coca price shock experience lower earnings as young adults and less human capital accumulation. The study finds that in high coca intensity areas, children who were exposed to more coca boom years have 30 percent less earnings as adults.

As a second part of the analysis, the project analyzes the role of social policy in these areas. During the period of study, Peru implemented a conditional cash transfer program (CCT) meant to incentivize schooling by paying parents if their children were enrolled in school. Given that children are an important input for the production of cocaine, CCTs may increase the costs of labor inputs by increasing the opportunity cost of child labor. The study finds that coca areas that implemented the program experienced a significant reduction in coca production and child labor.