SURVEY: ILLEGAL DRUGS
Big business
Jul 26th 2001
From The Economist print edition
The risks are high—but so are the rewards
THE drugs industry is simple and profitable. Its simplicity makes it
relatively easy to organise; its profitability makes it hard to stop.
At every level, its pricing and its structure are shaped by the high
level of risk from enforcement: the risk of seizure and jail, and the
uncertainty that arises because traders cannot rely on the law to
enforce their bargains.
The industry's products are
of two sorts. Most of its
products are agricultural,
but a growing sideline is
made from simple chemicals.
Production of farmed drugs
is concentrated increasingly
in two countries: about
two-thirds of the world's
heroin (made from opium)
may come from Afghanistan
and most of the rest from
Myanmar; four-fifths of
coca from Colombia. Only
cannabis is produced in
large quantities not just in
the poor world—principally
Mexico—but also in the rich,
where much of the best
stuff is grown. It is a
tolerant crop. It can be
interplanted in cornfields in Kentucky, or lovingly tended in an
apartment in Amsterdam, where a taxi driver told this
correspondent that he regularly raised 150 plants in a cupboard to
sell at nine weeks for 60 guilders ($23) apiece to a local coffee
shop. The bulkiness of cannabis, and its relatively low value, make
it a crop best grown near the market.
Tracking crops is difficult, but easier, thanks to spy satellites, than
tracking chemicals. Nobody is sure whether the Netherlands is the
world's main producer of ecstasy or (as seems more likely) merely
the world's main entrepôt for a product made in Poland and other
parts of Eastern Europe. Methamphetamines seem to be produced
mainly in small factories on both sides of the Mexican-American
border. William Gore, of the Federal Bureau of Investigation in San
Diego, thinks that successful law enforcement on the American
side of the border has reduced factories there to making only 1-2lb
(up to a kilogram) of the drug at a time; laxer vigilance to the
south means that Mexican factories produce 100-200lb at a time.
Getting drugs from the poor world to the rich requires a distribution
network. The task is tougher for cocaine than for heroin, because
cocaine is more frequently shipped or flown to its markets, making
it vulnerable to seizure. Most heroin consignments appear to travel
overland. But this is where the big money starts to be made. The
price paid to a Pakistani farmer for opium, reckons the United
Nations, is $90 a kilo (see table, next page). The wholesale price
in Pakistan is almost $3,000. The American wholesale price is
$80,000. On the street, at 40% purity, the retail price is $290,000.
As for cocaine, the leaf needed to produce a kilo costs about
$400-600, according to Francisco Thoumi, author of a remarkable
unpublished study of the Andean drugs industry. By the time it
leaves Colombia, the price has gone up to $1,500-1,800. On
America's streets, after changing hands four or five times, the
retail price for a kilo of cocaine works out at $110,000, and in
Europe substantially more.
That vast gap between the
cost of producing the stuff
and the price paid by the
final consumer goes a long
way to explaining why drugs
policies so often fail.
However, the people who
grow or make illegal drugs
see only modest returns.
The value is embedded
mainly in the distribution
chain. In Pakistan, for
example, 90% of the
domestic retail price of
heroin goes to local
wholesalers and retailers. The price at which heroin leaves the
country may be only 10% of its street price in the United States
or Europe.
Developing-country producers can find distribution difficult. Bruce
Porter, the author of “Blow”, a book about the 20-year career of a
drug merchant called George Jung that has now been made into a
film, recounts that the Colombians in the early 1970s had trouble
getting their cocaine to the American market. “George showed
them how to distribute, using the marijuana distribution chain.”
Once that was in place, “George became a bulk transporter,
shipping cocaine from Colombia to Colombians in Miami.”
The people who dominated the cocaine trade in Colombia in its
early days were experienced smugglers, thanks to the country's
long history of gold and emerald smuggling. Much the same was
true in Mexico, says Peter Smith, director of Latin American
studies at the University of California, San Diego. When tough
policing in Miami drove up their costs, Colombians formed joint
ventures with Mexicans who were in the general smuggling trade,
rather than with the small “mom-and-pop” cartels in Mexico that
had previously grown marijuana for sale in the north. They
reckoned that the professional smugglers were more likely to have
the logistics skills needed for the job.
In the early 1990s, these smugglers began to insist on being paid
in drugs rather than cash, allowing them to break into American
distribution too. They swiftly evolved from subcontracted
transporters to urban distributors. The relationship is finely
balanced: the Mexican smugglers know that, if they ask for too
large a share, the Colombians can always return to shipping their
cocaine by a different route.
Over the years, these
distribution networks have
become more efficient.
That may explain one of
the many mysteries of the
drugs business: the
halving of the price of
heroin and cocaine
between 1980 and 1990.
The National Research
Council speculates: “The
drug industry may have
experienced the
learning-curve effects
often associated with new
industries as they find ways to be more efficient in their
operations.” In a footnote, the report adds: “Learning by doing has
a long history in studies of industrial organisation, productivity and
growth.”
Certainly the Mexicans, according to a study done for the United
Nations, seem to have concentrated on the drugs business in a
way that might be expected to improve efficiency. Unlike other
distributors, they avoid diversifying into other sorts of crime.
Joseph Fuentes, a senior New Jersey policeman who has written a
doctoral thesis on the industry, explains that the Mexican
distributors operate with great professionalism, sometimes
employing top managers with degrees in business studies, and
relying heavily on honour, credit and collateral. “The recruitment
process is very like that for IBM or Xerox,” he says—except that
the drug distributors require detailed information about the
whereabouts of a prospective employee's parents, spouse and
children.
In Europe, distribution
patterns seem to be
different. The United
Nations reckons that
organised crime is less
involved, at least in cocaine
trafficking, and that more
trade passes through
ordinary businesses, many
of them based in Spain. The
retail side is often run by
small groups or individuals
supplying a network of
friends; gang-controlled
distribution is rarer. That
may change: for instance,
Martin Witteveen of the
Dutch public prosecutor's
office believes that Israeli
crime syndicates are taking over much of the trade in ecstasy
between the Netherlands and the largest market, America.
Distribution within the rich importing countries is often dominated
by immigrant groups. A police officer in Bern, in Switzerland,
counts them off on his fingers: cocaine comes into the country
mainly from Spain, but the trade is run by African asylum-seekers
and by Turks. Heroin comes from Turkey and the Balkans, and the
business is mainly in the hands of Albanians, Serbs and
Macedonians, he says. Few of these folk appear in the streets:
the final deal is often done by Swiss junkies. There are similar
stories everywhere: in Denmark, it is Gambians, in Australia,
Vietnamese.
This foreign control is no accident. Immigrant groups may have
strong links with producing countries; they speak languages the
police rarely understand; they have close ties of loyalty to each
other. All these things give them a competitive advantage over
locals. In addition, they have less to lose because they find it
harder than locals to get decent legitimate jobs.
Given that heroin and cocaine are both highly concentrated, these
dealing networks are probably not large: about 500 tonnes of
cocaine come into the United States each year, and some dealers
handle more than 10 tonnes a year. A few hundred people
probably handle most of it.
Getting a fix
The big battalions are on the streets. In poor parts of town,
dealing is often a big source of employment. A study of drug
markets in Milwaukee a couple of years ago by John Hagedorn, of
the University of Illinois-Chicago, found that at least 10% of Latino
and black men aged 18-29 drew at least part of their income from
the drugs business. It was, he said, the most profitable activity in
the town's informal economy: 28 businesses, dealing mainly in
cocaine, employed about 190 people, their owners grossing
between $1,000 and $5,000 a month. Many of the owners also had
jobs in the legitimate economy—drug selling seemed to be a
complement to, rather than a substitute for, legitimate work.
Thirteen of these businesses had been going for at least two
years, developing innovative ways of avoiding the police and so
reducing their business risk. The owners had stopped dealing from
street corners or homes, and used pagers and mobile phones
instead. They also employed runners to deliver drugs, and so
carried almost no drugs themselves.
Different customers are willing to incur different risks. Richard
Curtis of the John Jay College of Criminal Justice in New York, who
has studied the retail market for drugs there, has found that
customers in the smart areas of midtown and lower Manhattan
tend not to travel to the shadier areas of Harlem or Washington
Heights to buy drugs, even though they would save money if they
did.
Recruiting employees appears to be easy. “In a lot of poor
communities, drug dealers are the only equal-opportunity
employer,” says Deborah Small, director of public policy at the
Lindesmith Centre, a drug-campaigning organisation. The main
alternative source of illegal income, numbers betting, has been
largely destroyed by legalisation. And drug-dealing pays well: one
study of dealers in Washington, DC, at the height of the 1980s
crack epidemic found that they could earn $30 an hour, compared
with about $7 from legal employment.
That is an attractive rate, especially for the middle-aged
high-school drop-out who is getting too old for mugging and has
few other ways to make a living. But, as in every business,
earnings vary with responsibility, and have to be set against the
risks. A sophisticated study of the finances of one drug gang by
two economists at the University of Chicago, Steven Levitt and
Sudhir Alladi Venkatesh, found that, whereas the top members
earned far more than their legitimate market alternative, the
street-level sellers earned roughly the minimum wage. They
seemed to stay in the job in the hope of rising to the top. But the
risks are enormous: gang wars, essential to gain market share and
to resolve disputes, also drive customers away—and for this
particular sample resulted in a death rate of 7% among
distributors.
Many of the “runners” at the tip of the distribution chain are paid
in a mix of drugs and cash. That turns drug-dealing into a sort of
pyramid-selling, giving them an incentive to make more sales. And
customers, as with any business, are the lifeblood of the drugs
trade.