Review: A sobering twist on high finance – Reuters Blogs (blog)

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The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

In “Narconomics,” journalist Tom Wainwright applies the logic of business to the bloody world of drug cartels. His book is both an extended black joke and a hard-headed analysis of the economics of getting high. The “war on drugs” is a fiasco, he writes; legalization offers hope of a more effective, rational approach.

Wainwright, a former Mexico correspondent for the Economist, examines how a global industry with annual revenue of $300 billion and hideous levels of violence has grown from the commercialization of just a few cheap agricultural products. Cocaine, he writes, undergoes a 30,000 percent markup on its journey from remote Latin American farmland to U.S. city streets. World taxpayers spend at least $100 billion a year trying to fight the trade, with little effect on the number of consumers.

Drug cartels, though, face challenges that many regular multinational companies would recognize, from managing personnel and navigating government regulations to finding reliable suppliers and dealing with competitors. Their responses often echo those of major corporations. Like Wal-Mart Stores, for example, cocaine manufacturers have protected profit by tightening control of their supply lines. R&D spending has made the production process more efficient. Mexican cartels such as the Zetas have expanded on a franchise basis, in a similar way to McDonald’s.

Offshoring offers opportunities, too. Poor Central American countries such as Honduras can provide even cheaper labor and more accommodating regulatory environments than Mexico. Diversification, for example into smuggling people or kidnapping, can boost revenue when traditional lines of business mature. Competition from online suppliers, though, is a threat.

Wainwright is sardonically funny at times describing the problems drug gangs face in the spheres of human resources and public relations. Staff turnover, through arrest or death, can be a challenge. Lacking access to courts, dispute resolution is often a grim affair.

The humor comes with a serious purpose, though. He takes data from the World Economic Forum’s Global Competitiveness Report, which ranks countries on their suitability for (legitimate) business, and turns it inside out to produce a “Cartel Competitiveness Report.” Low regular rankings on metrics such as judicial independence, police reliability, pervasiveness of bribery and business ethics suggest exactly where drug gangs will do best.

The absence of basic state institutions, indeed, is one factor that allows cartels to prosper, presenting themselves as an alternative source of protection, law and even housing and schools. In some parts of Latin America charitable donations made with drug money, known as “narcolimosnas,” may be virtually the only money in town.

Governments make four big mistakes trying to tackle the drugs trade, Wainwright says. They focus overwhelmingly on suppressing supply rather than addressing consumption. They also skimp on cheaper measures such as addict treatment, prisoner rehabilitation and jobs programs but spend heavily on enforcement. Uncoordinated national laws and approaches allow cartels to easily indulge in regulatory arbitrage. And above all, they falsely equate prohibition with control, handing billions of dollars in revenue to violent though sometimes sophisticated thugs.

In this regard, events in the U.S. marijuana industry are illuminating. A study by the Mexican Institute for Competitiveness (IMCO), for example, attempted to calculate the likely effect on U.S. weed prices of internal smuggling from the states of Colorado and Washington to the rest of the country after they legalized the drug.

Working on the basis of a wholesale price of $2,000 per kg (which most Colorado growers said it cost to make their own batches), adjusting for product purity and factoring in a price rise of $500 for every 1,000 km that marijuana travels within the United States, the study found that U.S. weed would be cheaper than the Mexican cartel-supplied variety in 47 of the 48 mainland states. Only in Texas, right on the border, would the drug gangs offer better value. IMCO reckoned the cartels stand to lose nearly 75 percent of their revenue from U.S. marijuana, even before more states legalize.

Looking ahead, Wainwright sees marijuana moving ever more into the legal arena, in the United States and elsewhere, leading to a logical outcome of lawful production shifting from an initial U.S. base back to cheaper Mexico. Even former Mexican President Vicente Fox, he notes, says he might grow it if it were legal.

Other more dangerous drugs require a different approach, he argues, though still one that moves away from prohibition. A Swiss program focusing on the country’s most hardcore heroin addicts, for example, allows doctors to administer the drug in controlled settings. The result has been a big dip not only in national use but in crime and dealing, as the biggest users would also deal or steal to fuel their habits.

Wainwright doesn’t have all the answers to a complex problem that raises anger and passion. His rational, market-based approach is far from glib, though. An entertaining read, “Narconomics” is also thoughtful and in many regards persuasive.

Review: A sobering twist on high finance – Reuters Blogs (blog)}