Would cocaine legalization help Colombia?

Alvaro Vargas Llosa says yes:

In a country that has made admirable progress on other fronts, the drug war is preventing the government from finishing off the narco-terrorist organizations.  Between 2002 and 2005, Uribe’s “democratic security” policy successfully pushed those organizations, especially the Marxist empire known as FARC, away from many cities.  There was a one-third drop in the number of murders and a two-thirds drop in the number of terrorist attacks.  The economy picked up handsomely.  But then a stalemate ensued in the campaign against the terrorists that cannot be attributed only to the country’s jungles.  The mafias that owe their existence to the criminalization of cocaine continue to generate enough funds to match every attempt by the government to beef up its military capability.

Legalizing or decriminalizing cocaine would do much to improve America's inner cities and it ought to be seriously considered, even if it means more doped-up middle-class white teenagers.  But legalization -- whether in Colombia or the United States -- is not obviously the way out for Colombia. 

The positive scenario is that legalization eliminates the profits from the drug trade and the Colombian nasties pack up shop and go away.  In a legal market, Merck would outcompete the drug barons.  Maybe they would grow more coffee.

I see two negative scenarios.  First, cocaine production has been a boon to the Colombian economy.  It is no accident that Colombia experienced no currency crisis, unlike most other Latin countries.  (For contrast, here are some arguments that cocaine has hurt the Colombian economy; I don't believe it.)  The rural Colombian economy might well collapse, taking civil order with it.

Second, the Colombian civil war is 40 years old and it predates the importance of cocaine.  Narco-traffickers set up processing labs in Colombia because the government did not control the country in the first place.  Legalizing cocaine would devastate their incomes, and probably bring political assassinations and military conflicts into the capitol.  It is not clear Colombia can handle it.  Keep in mind these same groups once, when threatened with more extraditions, stormed the Supreme Court and almost got away with it.  Cocaine profits, however evil they may be, give the guerrilla groups some stake in the status quo. 

That said, cocaine legalization probably would have helped Colombia in the late 1970s, before the paramilitaries became so rich.  That doesn't mean the same idea will work today.

The bottom line: There is no simple way out of the Colombian mess.  Slow evolution away from cocaine production, combined with increasing economic diversification, is probably the best hope.  Chemical substitutes, such as Ecstasy, mean that the cocaine market will slowly dry up anyway.  This slower change, which can't be pinned on any government, is a better way out of the current mess than a drastic and more sudden legalization.  In the meantime, Uribe's policy of getting tough has paid some dividends, and there is no reason to think these gains cannot be extended.

Addendum: Anne Applebaum argues for opium legalization in the context of Afghanistan.  But note that opium production may account for as much as 2/3 of Afghani gdp.  It is unclear that Afghanistan would keep these markets in a purely legal setting, so how would the country survive the shock to its real income?  Or should we give them a monopoly and cartelize their industry to boost profits but limit consumption?