Commodity Price Shocks and Illicit Supply Chains (new version coming soon)
This paper studies how informal and illegal supply chains of raw materials respond to global demand shocks, by exploring the case of the small-scale gold mining during the gold rush in the Peruvian Amazon. For this purpose, this paper estimates the heterogeneous responses of small-scale gold mining to variations in the international price of gold. Using a combination of medium-resolution satellite images and official geographical information of mining sites, this paper provides evidence that differences in mining activity between illegal and non-illegal producers disappear in the wake of high prices. The results suggest that price booms induced a more than proportional proliferation of illegal mining activity in relation to non-illegal gold mining, which might be associated with a rise in the relative profitability of these producers. This might lead to a reconsideration of the current policy approach to limit the profitability of illegal gold producers in the area studied that underestimates the importance of price shocks.