Cooling markets have also led to a reduction in the value of the coca leaf -- the raw ingredient in the production of cocaine -- causing some farmers to stop growing the crop.
The downturn was seen mostly in Colombia, the world's largest producer of cocaine, where production of the drug plummeted by 28 percent, the United Nations' annual report on drugs revealed.
"In terms of ... production, the 2008 results are the lowest in Colombia in a decade," said the U.N. Office on Drugs and Crime, which produced the report.
But increases in the cultivation of cocaine in the smaller producer nations Peru (by 4 percent) and Bolivia (by 9 percent) partially offset the drop in Colombia -- where half of the world's cocaine is produced, it said.
Narcotics experts say changes in the $320 billion global cocaine market partially explain recent drug-related violence in Central America, with cartels fighting for a shrinking market.
Aldo Lale-Demoz, U.N. agency representative for Colombia, said traffickers tend to migrate to countries where there is less police pressure and eradication.
"There's a shift from Colombia toward Peru and Bolivia," he said. Peru was more worrisome, he added, because of "the penetration of international cartels, above all Mexicans."
But in both Peru and Bolivia, local police authorities have given drug producers freer rein. Crop eradication was down by more than 10 percent in the two countries, U.S. anti-drug officials said. They complain that Bolivia, which expelled U.S. drug agents last year, is no longer a serious partner in combating drugs.
The UNODC's executive director, Antonio Maria Costa, also had a warning for Colombia's two Andean neighbors.
"The increases for Bolivia and Peru show a trend in the wrong direction," he said, adding, "Peru must guard against a return to the days when terrorists and insurgents, like the (guerrilla group) Shining Path, profited from drugs and crime."
The U.N. report warned that the production and consumption of synthetic drugs -- amphetamines, ecstasy and methamphetamine -- are making inroads in developing countries by going from a cottage industry to "big business."
The report acknowledged the difficulty of estimating the size of production of cannabis and synthetic drugs, as they can be made in laboratories anywhere. But the report said the production of amphetamine-type stimulants, like ecstasy, methamphetamine tablets, crystal meth and other substances, is worsening.
It also warned that criminal gangs may try to exploit the production of synthetic drugs in vulnerable, developing countries.