How to run a business - Drug Lord style
Why the billions of dollars spent by governments to reduce the supply of drugs doesn't work and why that must change.
Hi there,
I hope your year is off to a great start.
Over the Christmas and New Year break, I read the book Narconomics: How To Run a Drug Cartel by Tom Wainwright. The book offers an insightful and fascinating glimpse into the minds and decision-making processes of drug traffickers.
The author examines the operations of cartels through the lens of an economist.
He discovers that these illicit organizations operate in ways that are similar to those of multi-billion-dollar corporations like Walmart, McDonald's, and Amazon.
In today's piece, my goal is to share some of the understanding I've gained about the fundamentals of the drug trafficking industry, along with why merely banning these activities or labeling them as illegal does not stem the flow of drugs. Instead, such measures often end up empowering criminal organizations to take control.
Before we dive in, if you enjoy reading Filtered Kapi and would like to support it, why not consider sharing? Your support motivates me to continue writing!
The War on Drugs
Since its inception in 1971, the global 'War on Drugs'—led by the United States—has aimed to curtail heroin use. Over time, this initiative expanded to combat a variety of other addictive and harmful substances, including cocaine.
Despite these efforts, North America continues to be one of the largest markets for cocaine, with consumption also rising in other regions worldwide. The below graph shows a steady climb in cocaine users across the globe.
Given the drug's addictive properties and harmful effects, government agencies are working to limit its accessibility. To achieve this, they've bolstered security at known smuggling points in an attempt to choke off the routes utilized by cartels.
This strategy is coupled with international pressure on cocaine-producing countries to implement eradication programs, such as spraying pesticides on coca plants—the source of cocaine.
The aim is to drive up the cost of cocaine by limiting the supply of its raw ingredient, with the goal that higher prices will result in decreased consumption among users.
However, this raises a critical question: With global usage on the rise, has this approach truly been effective?
The price of cocaine remains steady
The short answer is no—current efforts don't seem to be effective.
In fact, as illustrated by the charts below, after a period of price increases, the price of cocaine declined, even as supply surged.
This contradicts what one might expect: if a relentless 'War on Drugs' were effectively cutting supply, prices should be soaring, especially as demand has continued to grow.
Why are prices steady? Irrespective of demand and supply factors and government efforts on controlling the drug
The cartels have a chokehold on the coca leaf market.
Cartels function as the sole buyers of the leaf in their territories, establishing a monopsony. Given the leaf’s illegality farmers can’t shop around and sell their goods for the highest price.
Cartels use this to their advantage dictating their terms and setting the price for coca leaves regardless of the supply of the leaves in the market. This means that if the cost of producing the leaf goes up— owing to eradication, disease, or anything else— it will be the farmers who bear the cost.
We see similar dynamics in our everyday consumer markets.
One of the best examples is Walmart. Many sellers vie for shelf space in Walmart stores because of the chain's extensive distribution network and ability to reach millions of customers. Walmart's dominant market share enables it to influence pricing, often pressuring suppliers to bear the brunt of raw material cost increases while maintaining stable prices for consumers.
Back home, the Board of Control for Cricket in India (BCCI) also exemplifies a monopsony due to its sway over the entire cricketing sphere within the country. Read this article to understand why.
You might now ask, "Why don't farmers just cultivate different crops?"
As is often the case, the answer boils down to economics. The stark reality is that cultivating coca bushes remains the most lucrative option for many farmers.
A paper published in 2014 revealed that when corn prices climbed, Mexican farmers planted more corn. However, as corn prices dipped during the 1990s, they shifted to cultivating more marijuana and opium.
It's not far-fetched to suggest that if alternative crops were more profitable, farmers would naturally transition away from growing coca leaves.
But shouldn't eradication efforts make cocaine more expensive?
You would think so, yet the outcome tells a different story.
The raw leaves required to produce a kilo of cocaine powder cost merely a few hundred dollars. Consequently, even if the cost of cultivating coca were to double, it would add less than 1% to the price of the final product, which retails for upwards of $100,000 per kilo.
This negligible impact on the end price is due to the vast disparity between the "farm gate" price of coca and the ultimate street price of cocaine.
Cartels can command such high prices because from their perspective, the cocaine production process must occur in hidden labs, well out of law enforcement's reach, adding substantial value to the product after procuring the coca leaves from farmers.
To extract cocaine from the plant's waxy leaves, the raw leaves have to be dried and then treated with chemicals including cement, fertilizer, and gasoline. This intensive processing in clandestine locations significantly inflates the drug's value by the time it reaches consumers.
The goods must then be smuggled into the country and transferred from wholesalers to retailers, and finally to consumers—all beyond the purview of law enforcement.
Due to the illicit nature of the product, buyers cannot simply browse Amazon to compare prices from various sellers. They are confined to purchasing from local dealers who control their specific area. Consequently, buyers are compelled to pay inflated prices and accept whatever is available, even if it's of inferior quality.
Cartels operate in a manner akin to large supermarkets—they purchase raw produce from farmers, process and package it, and then distribute it to the end consumer.
What are the governments doing?
Governments seem to be misinterpreting the dynamics of the drug market by focusing on the wrong levers for change.
In short,
Governments are approaching the cocaine market as if it were the chocolate market, in which a rise in the price of cocoa beans leads to a corresponding rise in the price of chocolate bars. In reality, it is more like the art market, in which the tiny cost of the raw materials is insignificant compared with the high price of the finished product. Attempts to raise the price of cocaine by forcing up the cost of coca leaves is a bit like trying to drive up the price of art by raising the cost of paint.
Is the expenditure of billions of taxpayer dollars on crop eradication and law enforcement a sound investment?
One study attempted to calculate how much cocaine consumption would be prevented by investing in a range of different government interventions.
It estimated that for every $ 1 million spent on controlling supply in “source countries” in Latin America, there would be a reduction of about 10 kilograms in the total amount of cocaine consumed in the United States.
If $ 1 million were spent trying to intercept cocaine further down the supply chain, on its way to America, that would save more like 20 kilograms.
Prevention programs in schools were a bit more effective, saving about 25 kilograms per $ 1 million.
All of these interventions were vastly outdone, however, by treatment programs for drug addicts.
For every $ 1 million spent on treatment, the consumption of more than 100 kilograms of cocaine is averted.
In other words, treatment is up to ten times more cost effective than enforcement (perhaps partly because it addresses demand rather than supply, as outlined in the previous section).
So, what needs to change in my opinion?
The focus of affluent governments is on destroying the coca plant, conveniently off their soil. The plight of farmers struggling to make ends meet is not seen as a problem for wealthy nations.
It's naive to believe that merely banning an item will reduce its demand to zero—there will always be a black market. While fully legalizing hard and addictive drugs has significant political and social implications, nations must acknowledge the shortcomings in their drug policies. Current strategies are failing; they allow criminal organizations to thrive and meet the demand.
By offering incentives such as subsidies to coca farmers or by treating drug addicts as individuals in need of support rather than stigmatizing them, the situation could improve. Real change can only occur by shifting the incentives that drive both production and consumption.
What is the situation today?
The drug trade persists in flourishing and causing upheaval across the globe.
Take Ecuador for example, as per The Economist,
Ecuador, particularly its port at Guayaquil, became a more important hub for the shipment of cocaine from Peru and Colombia after Colombian ports tightened their security in 2009….
Ecuadorean gangs have generated cashflow by establishing a lucrative foothold in Europe, where cocaine consumption is growing. The busiest cocaine-trafficking route in the world today runs from Guayaquil to the port of Antwerp in Belgium,…
Europe’s demand “has turned Ecuadorean ports into one of the most valuable pieces of infrastructure you can control,…
The fight for territory has manipulated the outlook of an entire country.
Meanwhile, global cocaine production and consumption continue to escalate alongside enforcement efforts.
The 'War on Drugs' shows no signs of abating but will eventually need to be succeeded by a more rational 'Policy on Drugs' if we are to witness significant change.
I hope you enjoyed this read and it made you question the traditional way we all think about the global drug trade.
I would appreciate it if you shared this with others who might find it interesting. It helps the newsletter grow and keeps me motivated.
Filtered Kapi #51