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The Dynamics of the Farmgate Opium Trade and the Coping Strategies of Opium Traders

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STRATEGIC STUDY #2

Final Report October 1998

The Strategic Studies Series

One of UNDCP's principal objectives is to strengthen international action against illicit drug production. In Afghanistan, its principal objective is to reduce and eventually eliminate existing and potential sources of opium cultivation. It is recognised that in order to achieve this there is a need to further the understanding of the diversity of conditions and priorities that different socio-economic and spatial groups take into account when making decisions about their involvement in opium cultivation.

The Strategic Study Series is one of the tools by which UNDCP intends to document the process of lesson learning within the ongoing Afghanistan Programme. Studies in this series will focus on issues that are considered to be of strategic importance to improving the design of current and future alternative development initiatives in Afghanistan. Information collection for these studies is undertaken by the UNDCP Drug Control Monitoring System (AFG/C27) in close coordination with the ongoing presence and project activities of UNDCP's Poppy Reduction project (AFG/C28). Recognising the inherent problems associated with undertaking research into the drugs issue in Afghanistan, emphasis is given to verifying findings through systematic information-gathering techniques and methodological pluralism. As such, the Studies will be undertaken in an iterative manner, seeking to consolidate preliminary findings with further fieldwork. It is envisaged that this approach will allow panel or longitudinal studies to be undertaken which assess both the changes in opium cultivation and lives and livelihoods amongst different socio-economic, gender and spatial groups over the lifetime of the Afghanistan programme.

These Strategic Studies will be an integral part of the regional study, "The Dynamics of the Illicit Opiate Industry in South West Asia" due to be published and disseminated in early 2001. The purpose of this regional study will be to: (i) contextualise the illicit drugs situation in South West Asia for the donor community, addressing issues of interest to their development agendas, including poverty, health, gender and the environment (ii) and for UNDCP to identify ?best practice' in the design and implementation of alternative development, law enforcement and demand reduction initiatives.

Strategic Studies will include:

• An Analysis of the Process of Expansion of Opium Poppy Cultivation to New Districts in Afghanistan.
• The Dynamics of Farmgate Opium Trade and the Coping Strategies of Opium Traders.
• The Role of Opium as a Source of Informal Credit.
• The Role of Opium as a Livelihood Strategy for Returnees.
• Access to Labour: The dynamics of the labour market for opium poppy in Afghanistan.
• The Role of Women in Poppy Cultivation in Afghanistan and the Consequences Arising from its Replacement for Women's Economic and Social Standing.
• ?The Balloon Effect': An Analysis of the Process of Relocation of Opium Poppy Cultivation in Afghanistan.

Executive Summary

Currently, little is known about the structure of the farmgate trade in illicit drug crops. It is apparent from work in other drug crop producing areas that prices for coca and opium can be quite localised. However, it is unclear what influence traders have in determining the farmgate price of illicit crops and, consequently, the relative profitability of alternative sources of livelihood and the ultimate success of alternative development interventions.

The market power of traders to set opium and coca prices will largely depend on the degree of competition that exists in the illicit drugs trade in the local area at the different levels in the trading chain. Experience would certainly suggest that the illegal nature of the drug trade and associated violence and intimidation, limits the degree of competition at the wholesale level, resulting in a small number of large traders dominating the trade in bulk purchases of drug crops. However, at the level of the farmgate the degree of competition is less well known. Yet, it is at this point in the chain where household decision making over cropping patterns is informed.

This study explores the market structure of the farmgate opium trade, including the degree of competition, barriers to entry, profit margins, credit, the socio-economic profile of sellers, both pre and post-harvest, and the geographic mobility of traders. The strategies traders envisage undertaking in response to UNDCP?s Afghanistan Programme are also examined.

The Study seeks to follow-up on a number of interviews conducted by the Drug Monitoring & Evaluation Specialist in 1997 with opium traders in Khakrez. In total 38 interviews were conducted with opium traders in the provinces of Nangarhar, Qandahar, and Helmand between 14 June and 19 August 1998. Of these 38 interviews, 12 were undertaken in the districts of Shinwar and Achin, Nangarhar province, between 14 and 18 June 1998. To identify possible commonalities and differences between the opium trade in the eastern and southern regions, 26 interviews were conducted in the provinces of Helmand and Qandahar between 9 and 19 August 1998. Eighteen of these interviews were undertaken in Helmand in the districts of Kajaki, Musa Qala, Nowzad, Sarban Qala , with a further 8 interviews in the district of Maiwand in Qandahar. To verify the findings a number of key informants with in-depth knowledge of the opium trade were also interviewed in both the eastern and southern regions.

Interviews were semi-structured, focusing on a number of key issues in a conversational manner. A questionnaire was not used and notes were taken after the interview had been completed and the team had departed from the respondent.

The findings of this fieldwork would suggest that:

• The structure of the opium trade differs markedly between the eastern and southern regions. It would certainly appear that the process of centralisation in the east has led to short term price differentials with the lowest farmgate prices occurring in those areas located the furthest distance from the dominant opium market in the eastern region, Ghani Khel. These price differentials appear to have created a class of short term, speculative farmgate traders that during the opium harvest exploit their proximity to Ghani Khel to travel to outlying districts and provinces where the inhabitants are either not fully aware of any increase in the price of opium, or, are unwilling to travel to Ghani Khel due to travel costs rendering the sale of small amounts of opium unprofitable.

• The geographic location of Ghani Khel, would appear to be a determining factor in the dominance of Ghani Khel bazaar in the opium trade in the eastern region. Ghani Khel is located centrally, both logistically within the eastern region, and politically within the Shinwari tribe. Indeed, key informants report that prior to the war and Ghani Khel?s dominance, Kahi bazaar in Achin district was the centre of the opium trade in the eastern region. The significance of Kahi was a consequence of its central location in the loya woliswoli, or greater district, of Shinwar, consisting of Deh Bala, Achin, Nazian, Durbaba and Shinwar, all traditional opium growing districts. The regional centre for the greater district of Shinwar was in Ghani Khel, where a significant government presence was maintained. Within the greater Shinwar district, Kahi retained a degree of autonomy from the authorities, allowing the opium trade to exist without interference. With the conflict in Afghanistan and the breakdown in the rule of law and civil administration, the regional centre for the opium trade appears to have shifted to Ghani Khel. Moreover, when viewed within the context of the expansion to the north in the area cultivating opium poppy, it would appear that Ghani Khel is better placed both geographically and logistically than Kahi due to its proximity to the asphalt road.

• The influx of large traders to Ghani Khel, purchasing significant amounts of opium for processing within Afghanistan would appear to consolidate the centralisation process in the east. The commission system operating in Ghani Khel also strengthens the bazaars central role in the eastern opium trade, providing the necessary incentive to ensure that those purchasing opium trade and store their opium in Ghani Khel. As such the commission system ensures a steady supply of opium is maintained in Ghani Khel bazaar to meet the demands of large traders.

• In the south, the presence of numerous buyers and sellers have led to a more decentralised and ?free? market structure. Opium prices would appear to vary little between districts and provinces. Consequently there is little economic advantage in traveling between regions. The existence of a low mark-up on opium in the southern region is supported by the high incidence of mixing of the different qualities of opium, the addition of adulterants, and the increasing evidence of farmgate traders transporting opium to the southern and eastern borders. All this would tend to suggest that where possible opium traders, like traders in any business are continually pursuing strategies to increase the returns on their trade and offset the losses that they are incurring. Moreover, reports suggest that prior to the war Musa Qala played a central role in the opium trade in the southern region. However, insecurity in the area due to conflict within the mujaheddin movement prompted traders to relocate their operations to Sangin. With improved security and the demise of the factionalism of the commanders, Musa Qala has once gain emerged as an important opium bazaar in the southern region. However, in the south a number of other bazaars have also developed direct links with Baloch traders from both Pakistan and Iran, resulting in a more decentralised market structure.1/

• The opium trade in the eastern region shows evidence of vertical integration on the basis of tribe rather than a well organised formal institutional structure. Traditionally the cross border trade has been associated with particular tribal groups that span Afghanistan?s borders with its neighbours in the south and east. In the south, numerous Baloch tribes are reported to be heavily involved in the cross-border trade in opium, whilst Pashtoon tribes have traditionally focused on opium poppy cultivation and the trade within Afghanistan. In the east, Shinwari Pashtoons have not only traditionally cultivated and traded opium but through their links with Afridi Pashtoons on the other side of the border have developed a virtual monopoly on the processing and final transportation of heroin into Pakistan. This tribal dominance is reported to consolidate the importance of Ghani Khel within the opium trade in the eastern region. Whilst the sheer number of Baloch tribes in the cross border trade has facilitated a process of decentralisation, with numerous bazaars emerging as important international markets for opium within the southern region.

• The growing incidence of heroin processing within eastern Afghanistan is also reported to have exacerbated the process of centralisation in the eastern region. Respondents and key informants indicate that heroin processing requires access to the ?right people? with either the knowledge of the production process, or the influence to ensure processing and trading could be undertaken without restriction. In the eastern region, it is the Shinwari that have developed these links through their contacts across the borders. In the southern region, processing would appear to be limited, largely restricted to morphine base in the far south and far south east of the country and under the control of Baloch traders. Seizure records from Iran would tend to support the prevalence of the trade in opium in the south. For instance, between 1990 and 1997 there has been a considerable increase in the amounts of opium seized by the Iranian authorities, increasing from 20.8 mt in 1990 to 162.4 mt in 1997. Whilst morphine base has continued to increase from 4.5 mt to 19.0 mt between 1990 and 1997, seizures of heroin have remained relatively stable during the same period at approximately 2 mt per annum.

• The opium trade in Afghanistan would appear to be integral to the livelihood strategies of a variety of different stakeholders, not just opium cultivators. Fieldwork suggests that farmgate opium traders, like opium cultivators, are heterogenous, ranging from owner cultivators who use any surplus income they may have to engage in short term, speculative trading during the harvest period, to large scale specialist opium traders who purchase opium throughout the year and adopt a variety of strategies aimed at increasing their profit margins, including providing advance payments, mixing, and transporting dried opium to the border areas.

• The proportion of large traders interviewed who had performed Haj, and their claim that they believed the trade in opium to be un-Islamic, would suggest that economic needs and motivations are given priority over religious strictures. Indeed, fieldwork suggests that opium traders often have a number of sources of income but believe these to be insufficient to satisfy their needs and those of their families. Whilst those trading in larger amounts of opium over the full year are found to be relatively wealthier than most Afghans, high household dependency ratios continue to constrain improvement in family living conditions. Moreover, diminishing landholdings and the scarcity of viable legal employment opportunities for family members has created a dependency on the opium trade. Whilst there is an obvious need to develop advocacy initiatives aimed at increasing the social and religious stigma associated with the cultivation and trade in opium, it would appear that these will not be sufficient to influence individuals in their decision to abandon opium as a source of livelihood. Wider economic growth and social and political stability are essential pre-conditions to eliminating opium cultivation and trading in Afghanistan.

• The profit derived from the trade in opium does not appear to be substantial in absolute terms. Indeed, in the east the mark-up on the rapid turnover trade, where traders were found to purchase and sell opium quickly to take advantage of local price differentials, was found to range between $3.00 and $9.00 per kg. In the southern region the mark-up on this type of trade was even less at the equivalent of only $1.20 to $3.20 per kg. However, according to respondents the profit margins of the opium trade are attractive in relation to the alternative sources of income currently available in Afghanistan, particularly to individuals who have received an intermediate education.

• Whilst there would appear to be opportunities to increase the profit margins significantly through the provision of salaam, all those interviewed had adopted a cautious approach to providing advance payments on opium. Indeed, traders recognised that profits could be significantly increased by providing advance payments, known as salaam, for opium prior to the harvest. In the east, the mark up-on opium bought via salaam was between $21.80 to $55.20 per kg, compared to $41.30 to $49.50 in the southern region. However, the high risk nature of this approach due to crop failure, fluctuating prices, and debtors absconding, led traders to adopt a more cautious approach, where advances are only given to a limited number of ?trusted? individuals.

• Whilst individuals would appear to be relatively free to enter the opium trade, constrained only by surplus cash flow, trust would appear to be an important feature of business relationships. The uncertain socio-economic and political environment of Afghanistan combined with the illicit nature of the trade, expose traders to significant risk. Deception regarding the quality of opium and payment of debts, combined with volatile prices and exchange rates have resulted in all traders experiencing losses both during the initial years of trading and throughout their trading careers. Consequently, traders would appear to prefer to trade with those people that they have purchased opium from before. However, whilst working with trusted individuals is preferential, opium traders are willing to travel to new areas and conduct business with strangers if it is profitable enough.

• It is important to note that whilst all the traders interviewed associated an economic risk with trading in opium, few perceived any threat of arrest or punishment by the local authorities. Indeed, in the east and south respondents indicated that improvements in the security situation over the last few years had reduced the incidence of robbery and the amount of taxes opium traders traditionally had to pay under the mujahedin. Moreover, in the east, the improved security situation would appear to have led to an expansion in the number of individuals exploiting their privileged geographical position to enter into speculative, short term, opium trading.

• Whilst the trade in opium in Afghanistan would appear to be competitive it is on the whole peaceful. Individual opium traders are found to vary prices according to prevailing supply and demand. The small profit margins on the post-harvest trade result in traders seeking to maximise the amount of opium they buy and sell through commissioned trade and cooperative arrangements with other traders. Reports of violence and intimidation in either the eastern or southern region are rare.

• It is interesting to note that there are different qualities of opium in Afghanistan. The different quality of opium and its concomitant impact on price would suggest that there may be greater chance of achieving sustainable reductions in opium cultivation in areas irrigated by canals and rivers rather than those irrigated by karez. The reason for this assessment is not purely the availability of water and thereby the potential for the introduction of alternative cropping systems but also the competitiveness of alternative crops compared to the relatively low value of opium produced in these areas.

1/ The Baloch are a tribal group that traditionally occupy south west Pakistan, south east Iran and parts of southern Afghanistan.

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