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The economics of the Duterte drug war

Good Luck Pinoys September 02, 2020
I read somewhere that the Duterte drug war is focused only on the Supply side and that this one sided focus is wrong and bound to fail. This estimation is wrong in all levels and is just a product of the media spin and focus on sensational headlines. Critics claim that Dutert’s drug war is focused on cutting only the supply of drugs and does not do anything about the structural poverty that creates the demand for drugs. Critics raise two main arguments: 1. Duterte’s drug war is not responsive to the socio-political reality of the drug problem and 2. Duterte’s drug war misses the basic economic idea of supply and demand. Let me address these concerns. 
Structural poverty contributed to the drug problem. 
I agree that wide-spread poverty in the Philippines contributes to the drug problem. It is true that extreme poverty creates a sense of helplessness which makes the short-term pleasure of drugs very attractive to a lot of people. I do not agree however that the Duterte administration is not addressing this. Have they forgotten the fact that Duterte’s first Executive Order 
EO1 (link – http://www.gov.ph/2016/06/30/executive-order-no-01-s-2016/) was focused on ensuring the Executive branch is more efficient in addressing poverty and meeting the government’s development goals. The Duterte administration has also continued and expanded 4P’s, a program hailed by the previous administration (and now Duterte critic) as an effective tool to address poverty. 
The Duterte administration has also empowered other government agencies to respond to families who are affected by the war on drugs. 
Why then do some people think that the Duterte administration is not responsive to the structural poverty that contributes to the drug problem? Have they been blinded by the media blitz focused on the police enforcement side of the drug war? Are they just psychologically incapable of objectively evaluating the current administration? 
Duterte’s Supply side focus does not make economic sense. 
Some people have said that a drug war focused on destroying the supply of drugs will not work because of the law of supply and demand. People say that Duterte and his supporters do not have a good understanding of this basic economic concept. They say that by cutting supply, Duterte is only driving the price of drugs up and therefore making the drug lords even wealthier and more powerful. One example of this criticism came from Dino De Leon where he said in this post (https://www.facebook.com/dino.deleon1/posts/10154525590379304)

“It will only drive the prices up if there’s a shortage of supply in the long term. What does that mean? It means that it will only make the production of drugs more lucrative in the long term. It will make manufacturing of drugs more profitable because it will drive the price up (basic law of supply and demand in economics). Our drug problem will worsen because of the policy of this administration, since the market will respond and produce more drugs.The real answer is to focus on the demand side (strengthening of institutions, war against poverty, better education, and strengthening of the family as the basic unit of society, improvement of the justice system, and most importantly, treating drugs as a social and health problem pretty than just a police matter).I tell you, with the campaign focused on the supply side, our drug problem will just worsen in a few years and until then, don’t blame the next admin. Instead, you only have Duterte to blame for not listening to empirical evidence.”

Their elementary understanding of the supply and demand curve leads them to the conclusion that all Duterte is doing is allowing the drug lords to gain more economic power by raising prices. This criticism is interesting in its simplicity and incompetence. 
First let us re-visit the concept of Supply and Demand in Economics. According to this concept, the demand for a product increases as the price drops while the supply for a product increases as the price increases. The point at which the two curves (supply curve and demand curve) meet is called the equilibrium and is where the market will be most efficient. It can be represented by the graph below: 
According to their criticism, what the Duterte drug war is doing is only shifting the Supply curve to the left which would result in an increase in price. (see image below) 
However their description of the Duterte drug war is not consistent with what is actually happening in the narcotics market. According to the latest PNP statistics, there have been over 700,000 people involved in drugs who surrendered. Over 600,000 of this were drug users while just a little over 50,000 were drug pushers. Looking at this statistics, I cannot help but wonder what kind of impact 600,000 surrendered drug users will have on the demand for drugs. Let me put it in economic terms since this is the language used by the critics. 
The rate of voluntary surrender of drug users, the increase in demand for drug rehabilitation centres represents not only a movement along the demand curve through a shift in the Supply curve but a shift in the demand curve as well (if there is a long term drop in the population of consumers, the demand curve shifts to the left). Let us look at what it looks like in a graph. 
The graph above shows a shift in both curves which results in a reduction in the quantity of drugs sold in the market and a slight increase in the price. This is a more accurate representation of what is happening to the narcotics market as a result of the Duterte drug war. Yes prices are going up but demand is also going down significantly. The idea that drug suppliers in the Duterte drug war are better off is ridiculous. Yes prices will go up, but since demand is also going down, the quantity sold in the market overall will go down which puts a downward pressure on profits. 
The only scenario where the critics conclusion makes sense is when there is a shift in the Supply curve to the left while the demand curve remains the same. Let us give them the benefit of the doubt that the rate of voluntary surrender of drug users will not cause a shift in the demand curve. It is true that this scenario will cause an increase in price (less supply with constant demand creates an upward pressure in prices). The problem with this argument is that it does not recognize the unique nature of narcotics as a product. The price of shabu is not mainly determined by demand but by cost and the cost of producing narcotics is driven mainly by the risk involved in manufacturing and distributing the product. When there is an increase in drug enforcement, the increase in price of narcotics is not solely driven by the constant quantity demanded by the consumer but by the risk inserted in the market by increased law enforcement. As the risk gets higer, the less people are willing to supply the product unless the market offers a price commensurate to the risk. This causes the supply curve to keep shifting to the left until the market collapses (no equilibrium – see graph below). 
The graph shows when the minimum price offered by the market is higher than the maximum price the market is willing to pay (P5 in the graph). The tougher and more aggressive law enforcement gets, the riskier narcotics trade becomes for the supplier. As the risk grows, the supplier will only enter the market when the offered price for their product reaches a certain threshold. Since the critics assume the demand curve remains constant, this means there will come a point where the maximum price a consumer is willing to pay for the narcotic becomes too low for the supplier to enter the marker. This situation is a win for the drug war and is theoretically how the Supply-side war on drugs works. We have to remember though that the Duterte war on drugs is not only a Supply side focus. The tough law enforcement side is not only crippling the supply of drugs but it is creating a spill-over effect where an unprecedented number of people are voluntarily submitting themselves to rehab. We have also shown that the idea that the Duterte administration is not addressing the structural poverty in the Philippines is factually wrong. 
My only criticism of the Duterte drug war is the administrations inability to foresee the amount of drug users surrendering. The administration was not prepared for the number of people who willingly submitted themselves to rehabilitation. The administration is aware of this problem and I hope that Duterte will pressure his coalition in Congress and Senate to pass HB No. 9 (http://www.philstar.com:8080/headlines/2016/09/26/1627586/bill-seeks-more-rehab-centers-tokhang-surrenderees). The administration has tried to find quick solutions to address a problem they did not foresee and their efforts should be applauded. Here are a few examples: 
To summarize, the Duterte drug war is not only Supply side driven, it is a holistic approach to combating the narcotics market in the Philippines that addresses both the supply and demand of drugs. Anyone who says otherwise is simply blinded by the media spin and focus on the sensational and unprecedented police operation. If they still do not believe in the holistic approach of the administration even after you show them the data, then there is something wrong with them. 

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