Quantitative analysis of farm-gate opium prices, which makes use of several instruments ranging from simple correlation coefficients to linear regression and more sophisticated co-integration techniques (see Byrd and Jonglez, 2006), indicates that:

- Opium markets are flexible and mobile; while actions against the opium economy can be effective locally and in the short run, they encourage shifts of production and trade to other areas.

- Regional and, in particular, cross-border price differentials suggest that interdiction of opium trade, particularly at borders, can have a significant impact.

- Available price data indicates that internal opium markets appear to have been more “integrated” (based on a technical definition of the term) during the 1990s than in recent years, perhaps reflecting the disruptive effects of counter-narcotics actions on opium markets.

- Price data for recent years suggest that Helmand/Kandahar in the south is functioning as a “central market” for opium in Afghanistan.

# **Drug-related Financial Flows**

The bulk of drug-related financial flows within Afghanistan, and also to and from neighboring countries (primarily Pakistan), occur through the ubiquitous _hawala_ (informal financial transfer) system. _Hawala_ is based on informal yet very solid networks of trust and business relationships, under which money transfers in opposite directions are offset against each other, and any remaining imbalances are settled through transfers between dealers (see Maimbo, 2003). Very little physical transfer of money needs to occur, _hawala_ dealers can operate effectively with small cash reserves, and the system is remarkably efficient (as evidenced by small spreads in exchange rates quoted).

Recent analysis based on extensive interviews with _hawala_ dealers (Thompson, 2006) provides insights into the nexus between the drug industry and _hawala,_ and the considerable variation across different parts of the country. In the economically less developed province of Badakhshan, for example, field research indicates that at certain times of the year close to 100% of the liquidity in the _hawala_ system is derived from drugs. On the other hand, in a much more developed province like Herat, only 30% of the _hawala_ market’s overall transaction volume appears to be linked to drugs, although the analysis of such linkages is complicated by use of drug money in the legitimate import business. In addition to being a center of opium production and trade, the southern region (Helmand and Kandahar provinces) is a focal point for money laundering: apparently about 60% of _hawala_ flows are drug-related, and 80-90% of _hawala_ dealers are involved in drug-related money transfers.

Beyond Afghanistan’s borders, Dubai appears to be a central clearing point for international _hawala_ activities, and various cities in Pakistan also are major transaction centers. Even payments for drug shipments to Iran enter Afghanistan from Pakistan. Transfers of funds from major drug consuming countries to regional countries like Dubai and Pakistan appear to occur largely through the formal banking system; _hawala_ becomes dominant in the onward transfers of funds into and within Afghanistan.

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