Coca-Based Local Growth and Its Socio-Economic Impact in Colombia

Abstract

This study investigates the socio-economic effects of Colombia’s recent coca cultivation boom, exploiting municipal variations in production incentives following the 2014 announcement of the coca crop substitution program. Using a difference-in-differences strategy with satellite-derived night-time light data as a proxy for economic activity, we find that a one standard deviation increase in coca crops resulted in a 2.5% to 3.1% increase in municipality-level GDP. We also estimate local GDP multipliers, showing that each additional dollar from coca leaf and coca base sales raises GDP by $1.17 to $2.30 and $0.86 to $1.63, respectively. Although the coca boom did not significantly affect local fiscal revenues, violence indicators, or land used for agricultural production, it had substantial environmental impacts, with deforestation rates increasing by 104% and a 302% rise in land conversion from coca cultivation to cattle pastures in the Colombian Amazon. Our findings underscore the significance of illicit economies in providing short-term economic gains and acting as catalysts for economic activity.