Narconomics

There is a long tradition of economists engaging with the workings of the illegal drugs trade. I am a big fan of popular economics books. And in this area they can provide some real insights into the trade for the layman. In Naked Economics Charlie Whelan talked about the constant Apple-like innovation of the drug traffickers. Faced with their product literally being sniffed out at customs, they decided to bypass border controls altogether, using small boats to transport their illicit export across the sea and into the United States. After the U.S. Coast Guard began tracking fishing boats, the drug traffickers, just as the “rum-runners” had done during the era of Prohibition, invested in go-fast boats, small, fast boats designed with a long narrow platform and a planing hull to enable them to reach high speeds. And when U.S. law enforcement brought in radar and helicopters to hunt down the go-fast boats, the drug cartels innovated yet again developing less easily detected semi-submersibles from the 1990s. When the U.S. Coast Guard first seized a narco-submarine 145 km southwest of Costa Rica carrying several metric tonnes of cocaine in late 2006, they dubbed it “Bigfoot”, because they had heard rumours that such things existed, but none had actually been seen.

In False Economy Alan Beattie asks why Africans do not grow coca and make cocaine, which, like coffee, grows well at high altitude. Cocaine has had terrible effects on the places where it is grown. But Beattie is asking the question from a purely an economic perspective. And the conclusion is pessimistic. The larger coffee-growing regions such as Uganda, Ethiopia, and Rwanda could participate in growing this higher-value crop. At the moment Africans are not doing the production and the intermediate transport of the crop, but are stuck in the relatively low-paid and high-risk part of the supply chain, the final cross-border smuggling. The climatic conditions may be somewhat worse, and there is a relative shortage of large plateaus useful for growing coca. But the main explanation is the lack of infrastructure – transport and logistics in Africa are so poor, and the politics so unstable, that it is simply more efficient to make it in South America and transport it to Africa from there. As it is grown on plantations that take several years to reach productive maturity, coca does not result in quick profits: According to Beattie, given the way that illegality multiplies the financial, logistical, and human-resource management challenges of production and transport, an absence of trust and reliability is even more crippling for an illicit crop than a legitimate one.

In the first Freakonomics book Steven Dubner and Steven Leavit looked at the ethnographic work of a sociology student Sudhir Venkatesh about the Black Disciples, a criminal gang in Chicago involved in the distribution of crack cocaine. The leader of the gang, JT, was a college graduate himself, a business major. The top 120 men on the Black Disciples’ pyramid were paid very well. But the pyramid they were on top of was massive. The 120 represented just 2.2% of the gang membership but they took home well over half the money. It sounds like a standard capitalist enterprise. The foot soldiers, who earned just $3.30 an hour, less than the minimum wage, had a lot in common with a McDonald’s burger flipper or a Wal-Mart shelf stocker. That is why they were still living with their mothers. You also need to factor in the danger of the job. If you were a member of J. T.’s gang for all four years, your chances of dying were one in four. A timber cutter, which according to the Bureau of Labor Statistics is the most dangerous job in the United States, would stand a 1-in-200 chance of being killed over the same period. Even a death row prisoner in Texas, a precarious position if ever there was one, would have a lower chance of death. Why do people do it? Like budding sports stars or Hollywood actors they were motivated by the idea of succeeding in an extremely competitive field in which as well as glory and power, you will be paid a fortune. As Leavitt and Dubner point out, to the kids growing up in a housing project on Chicago’s south side, crack dealing seemed like a glamour profession. The highly visible and highly lucrative job of gang boss was what they aspired to.

Now there is a new book out. As opposed to the ones I have already cited this is a book exclusively about the $300 billion global drug trade. The title, Narconomics: How to Run a Drug Cartel, may be provocative, but I think the book is just common sense. The conceit of the book, written by the Economist’s Tom Wainwright, is how drug cartels mimic the strategies of the big corporations. To anyone with a basic understanding of economics this is perfectly obvious. The tactics of a Coca-Cola or Wal-Mart, brand value, mergers, human resources, franchising, logistics, offshoring and even corporate social responsibility, are dome of the topics that Wainwright looks at in this work. I haven’t read the book yet, but I did hear the author interviewed on NPR’s Fresh Air programme. It was a fascinating conversation.

For example, he shows why attempts to disrupt the cocaine supply line have had precious little impact on the price, which has remained at around $100 per pure gram for decades. There have been massive programmes of crop eradication with airplanes and helicopters dumping tons of weed-killer on these Andean terraces in Colombia. An economist would assume that if you cut supply, then the price will go up, ceteris paribus – other things being equal. Comparing areas in Colombia where crop eradication has gone on with areas where it hasn’t, you see the price of coca leaf – the wholesale price of coca leaf doesn’t really change. The theory is that the cartels in the area have what economists call a monopsony, a monopoly on buying in the area. In other words, they’re the only ones who buy the products so they are not forced to pay higher prices. This is, incidentally, the same criticism that is made against the big supermarket chains here

There is another factor undermining the effectiveness of the crop eradication programmes. The economics of the supply chain mean that even if you could increase the price of that coca leaf, it’s unlikely to have very much impact on the final price of cocaine in the U.S. or European markets. Why not? Wainwright explains that you need about a ton of coca leaf, which once it’s all dried out will fetch perhaps $400, in a country like Colombia. Say the price doubles, then it will be $800. But in the United States a kilo is worth $100,000. If you double the price of the source material, the impact on the consumer price will be less than 1% – $100,400. All this effort is being expended into raising the price of coca leaf, when in fact that’s only a small part of the cost of the final product.

Wainwright looks at the Zetas “franchise”. This was the cartel which expanded most rapidly while he was based in Mexico. The Zetas are a pretty brutal bunch – they are the ones who around beheading people or hanging them off bridges. What is the secret behind their rapid expansion? Starting from the northeast of Mexico they have now spread all over Mexico, and now into Central America. What they do is go to local areas and they find out who the local criminals are, people who do the drug dealing and extortion and all the other kinds of crime. Then they make them an offer: “OK, you can use our brand; you can call yourself the Zetas, just like us.” They may train them in how to use weapons, and they supply them baseball caps with embroidered logos and they give them T-shirts with their logo on. In return for this the Zetas receive a share of all of the money that their “franchisees” get from their criminal activity. Los Zetas franchisees typically diversify into activities such as extortion or kidnapping to earn additional profits.

I don’t know why I’m using quotation marks. The Zetas franchise is exactly like the kind of franchising model that many well-known companies, such as McDonald’s or KFC, use. And it comes with all the same advantages and disadvantages of franchising. In particular, the interests of the franchisers and the franchisees are not always well aligned. The interest of headquarters, whether it be KFC, or the Zetas, is to have as many branches in a local area as possible, because they take their money as a slice of the income of the local franchisees. The latter on the other do not want stiff competition eating into their profits. Unlike the Sicilian Mafia, which is a strong monopoly, the Los Zetas “brand” can easily be falsified.  Given the chaos of criminal competition, virtually anyone can claim to be a Zeta without taking many risks. Extortionists can, at a relatively low risk claim to be affiliated with Los Zetas to gain extra leverage over their victims

In the end Wainwright is sceptical about the War on Drugs. He is rightly contemptuous of such initiatives as a major UN conference on drugs held in 1998, whose title was ” A drug free world: we can do it.” What planet do they live on? This futile war has failed at a cost of hundreds of thousands of lives and billions of dollars. The author does make the point that while remain illegal , anyone who buys them have blood on their hands; when consumers  in New York or London buy a gram of cocaine for a hundred dollars they are paying the salaries of Mexican hitmen. But we need a change – the best way (or maybe the least bad way) to deal with drugs, is by legalizing them:

I think the choice we face really is between a world where drugs are controlled by governments and prescribed by pharmacists and doctors, and a world where they’re dealt by the mafia, and given that choice, I think the former sounds more appealing

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