27 July 2018

The surprising link between cocaine prices and economic growth


One of the joys of studying economics is that it lets you look at the basic, underlying causes of all sorts of things.

Using the economist’s toolkit we can link – and indeed insist upon the absolute sameness of – the fall in the price of cocaine in England and Wales and the burst of economic growth in poor countries. It turns out that both phenomena are happening because the mobile phone allows markets to become more complete.

Certainly the effects are rather different. One means poor children no longer starving, the other means an uptick in interminable droning at a certain kind of dinner party — but both are driven by the same cause.

Such has been the decline in the price of cocaine, even the United Nations is now warning about it. Prices are suspiciously correlated with exchange rate changes but still, a gram is currently £41, down from £97 in 1998 and the lowest since we began measuring in 1990. Nor should we be surprised to find out that a fall in price has led to an increase in consumption and the number of consumers. Those supply and demand charts at the beginning of every economic textbook explain that quite nicely.

What’s more interesting is the manner in which at least some of this is being blamed upon the mobile phone. Instead of Waiting for the Man on some grubby street corner it’s possible to have one’s favourite dealer on speed dial, just like the local pizza joint. The price has declined in more than just financial terms, so more of this particular economic activity is going on.

The link to economic growth in poor countries is that we see precisely the same process going on, with the presence of mobile phones leading to increased prosperity. The standard finding is that 10 per cent of the population having a mobile phone leads to a 0.5 per cent increase in GDP. This may sound relatively trivial but, by the standards of these kind of numbers is pretty massive – and it’s an increase not in the growth rate, but in the overall size of the economy. What’s more, it’s each and every year.

The underlying explanation is that, in a country without a decent landline network – that is, most of the world – it’s a lot harder for people to communicate, including for businesses and their potential customers.

By way of example, let’s say the owner of a pasture here doesn’t even know of the existence of a goat herder three miles away, nor that he needs fodder for his animals. The arrival of mobile phones allows buyer and seller to interact and complete the transaction – information flows, the goats get fed, economic activity has just gone up, simply because there is more knowledge about which goods are on the market.

This is what we mean by completing markets – enabling transactions to take place just because people know that they are available. It’s a vast boon for the poor, particularly in rural areas and one of the main explanations for the impressive recent growth numbers in some of the world’s worst-off countries.

While buying cheaper cocaine and feeding goats might not seem especially connected, the underlying economics is the same — mobile phones make economic activity and consumers can get more of they want at a lower cost.

Which makes one wonder — how much richer would we all be if we didn’t have a vast bureaucracy coming up with regulations that stop such transactions taking place?

Tim Worstall works at the Adam Smith Institute and Continental Telegraph.