The unusual economics of illicit drugs
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This is the original version of an article written by me and published, with subtle changes, in www.sharedresponsibility.gov.co on March 15 of 2006.
***
Illegal drug business has been tried to be explained through simplistic economic approaches, but this business is not even near to basic models of offer and demand and it involves several more factors which add an unusual complexity to its possible solutions. A sum of coordinated efforts and shared responsibilities is urged to win the war.
Conventional explanations and policies had made several assumptions which at first sight seem good enough to explain the behaviour of the illicit drug business and formulate possible ways to fight the problem. But in the long run these approaches has not been adequate to describe a business that implies not only the basics concerns of any traditional trade transaction, but also more complicated issues as addiction, illegality and an undercover evolving market.
As stated by J. Caulkins and P. Reuters, both of them investigators of the Drug Policy Research Center of Santa Monica (California - USA), simplistic approaches tell the story that: (a) restricting the supply will increase the price and consequently reduce the illicit drugs sold in the market, and (b) prevention and treatment for consumers will control demand consequently lowering the prices and quantities sold. But as Caulkins and Reuters also explained, drug business reality does not respond as is expected and it is a wrong assumption to presume that “seize a kilogram reduce consume by a kilogram”.
Particularities of drug markets make conventional law enforcement measures not enough to fight the problem by themselves. Moreover, isolated prevention and treatment programs do not let people see the violent consequences and the social problems that the drug business involves. A deep commitment and awareness coming from consumer countries are needed, as war against illicit drugs is a worldwide issue which requires harmonized international efforts.
Oddities of the drug business
The first oddity of the drug markets is addiction. Addiction makes consumers need the product over any vital supply; this means that unless addicted people is treated in a consistent way and prevention programs are widely disseminated, illicit drugs always are going to have a market. No matter how strong the law enforcement is, but as long as drug smugglers can find demand for their product, this criminal business will go on.
Secondly, there is a ‘trust factor’ which helps criminal organizations to create reliable networks for production and distribution; these networks are even more dependable than the ones created by legal business. The ‘trust factor’ can be found not only in the relationships existing between large illegal organizations, but also between the final consumer and the street seller. So the drug business, starting from the consumers until the peasants growers, has a worldwide structure that can not be defeated unless all the links of the chain are attacked.
Another special condition of the illegal drug business is its cost structure. Cocaine and heroin production is cheap, and in someway they are agricultural products which requires a not a great level of expertise. UNODC’s report for 2005, clearly shows that the profits obtained by farmers and peasants are just a small fraction of the profits generated at the retail level. Other costs as chemical precursors, packaging and drug-processing are also insignificant, but the determinant cost factor for illicit drugs is the high level of risk. Risks for drug trafficking are almost the same that for any other criminal activity: arrests, seizures of the product and possible injuries naturally occurred in an unlawful business.
Cost structure of the drug business defies conventional economics. Nonetheless street price of the drugs largely depends on the risks faced by traffickers; it is not be severely affected by isolated law enforcement actions. The only real method which has brought significant results is through international agreements and a serious nation’s commitment that looks for fighting the production, trading and consumption as three faces of the same problem.
Analyzing a 14-year trend, despite the vast worldwide efforts in eradication of drug crops and seizure of shipments, prices have fallen. According to the UNODC’s report for 2005, in the United Kingdom average retail price per gram of cocaine fell from $131 (US dollars) in 1990 to $97 in 2004; retail prices of opiates show a similar trend falling from $157 in 1991 to $100 in 2004. Regardless of these facts, international efforts and commitment are more effective every day as it is shown by the prices between 2001 and 2004 which have tend to remain stable.
Nonetheless, it is important to remember that seizures are a risk successfully managed by traffickers since ever. According to the United Nations profits in illicit drug are so inflated that three quarters of all drug shipments would have to be intercepted to seriously affect the profitability of the business. The UNODC’s report for 2005 shows that in 2003 just 44% of the total cocaine production was intercepted, in the case of opiates seizures are 23% of the total production. In both cases traffickers can still manage their business in a very profitable way.
An evolving business
Falling prices are also a sign of evolution of the drug business. Smugglers continuously find new trafficking routes and innovative ways to transport drugs. In some way their imagination has no limit, and when a traffic way or method is discovered –it gets hot– they easily change the strategy for a new one. For example, today when Spain’s coasts are so well watched, Africa has became an important entry gateway and store point of cocaine and heroin coming from South America to final destination Europe.
Since 2004 the magazine ‘The Economist’ explained that drug markets are open up, and the business formerly managed by London-based Colombian importers, now has spread and British entrepreneurs made part of the growing network.
Exporting drugs is not the only innovative area. Traffickers also find new and efficient ways to laundering their profits. Transportation of cash dollars is old history for drug smugglers who now create companies to manage and laundering their assets. Latin drug businessmen have also taken advantage of the neighbour countries’ situation, in the case of Ecuador since it adopted the dollar as its regular currency it became a convenient place for money laundering.
Like regular businessmen, criminal organizations also invest in the legitimate economy; this results in a mix of legal and illegal money which erases traces of the original funds. Of course these situations hurt local economies of drug producing countries by affecting competitive of legal exportations, generating regional crisis in areas with illegal crops, and increasing richness concentration.
Part of the success of drug business relies on the mobility of the business across the Andean region where the main producers are located. The magazine ‘The Economist’ in its edition of February 10th 2005, explains that despite eradication and seizure operations have been especially successful in Colombia over the last few years, facts like the displacement of coca crops to countries like Bolivia and Peru, and the use of the city of Guayaquil (Ecuador) as an exporting port of the third part of the cocaine produced in Colombia, diminish the impact of the enforcement measures taken.
Large-scale organizations
Another important factor which maintains drug economics in good health are the large organizations behind it. From many years ago, drug trafficking have been in charge of big criminal organizations supported by an increasingly intricate distribution network across the world, large capital resources, and large-scale facilities. In Colombia, the big mafia cartels were dismantled and it is believed that exists hundreds of ‘small cartels’ across the country, but leftwing and rightwing illegal armed groups are the real organizations behind the business.
Violent armed groups in Colombia, like the FARC (Colombian Revolutionary Armed Forces) and the AUC (Colombian United Self-defences), are the owners of vast plantations of illegal crops and also have the means to bring armed protection to its own drug processing facilities and shipments. Besides, these groups count with a worldwide network which facilitates to export drugs, and to import weapons used as intimidating tools.
Global commitment needed
Illegal drugs is an evolving and profitable business managed by large criminal organizations and illegal armed groups which hurt world economy and end with the lives of thousands of inhabitants in countries like Colombia.
Isolated actions have proved to be insufficient to win this war, so coordinate actions are needed not only in the Andean region to avoid the mobility that drug business has right now, but also across the world. Consumer countries should be more aware that every penny wasted in drugs finally converts into homicides and kidnapping, creates a greater social gap, and increases the poverty in third world countries. Fight against illegal drugs is a global concern and global responsibilities must be assumed.
This is the original version of an article written by me and published, with subtle changes, in www.sharedresponsibility.gov.co on March 15 of 2006.
***
Illegal drug business has been tried to be explained through simplistic economic approaches, but this business is not even near to basic models of offer and demand and it involves several more factors which add an unusual complexity to its possible solutions. A sum of coordinated efforts and shared responsibilities is urged to win the war.
Conventional explanations and policies had made several assumptions which at first sight seem good enough to explain the behaviour of the illicit drug business and formulate possible ways to fight the problem. But in the long run these approaches has not been adequate to describe a business that implies not only the basics concerns of any traditional trade transaction, but also more complicated issues as addiction, illegality and an undercover evolving market.
As stated by J. Caulkins and P. Reuters, both of them investigators of the Drug Policy Research Center of Santa Monica (California - USA), simplistic approaches tell the story that: (a) restricting the supply will increase the price and consequently reduce the illicit drugs sold in the market, and (b) prevention and treatment for consumers will control demand consequently lowering the prices and quantities sold. But as Caulkins and Reuters also explained, drug business reality does not respond as is expected and it is a wrong assumption to presume that “seize a kilogram reduce consume by a kilogram”.
Particularities of drug markets make conventional law enforcement measures not enough to fight the problem by themselves. Moreover, isolated prevention and treatment programs do not let people see the violent consequences and the social problems that the drug business involves. A deep commitment and awareness coming from consumer countries are needed, as war against illicit drugs is a worldwide issue which requires harmonized international efforts.
Oddities of the drug business
The first oddity of the drug markets is addiction. Addiction makes consumers need the product over any vital supply; this means that unless addicted people is treated in a consistent way and prevention programs are widely disseminated, illicit drugs always are going to have a market. No matter how strong the law enforcement is, but as long as drug smugglers can find demand for their product, this criminal business will go on.
Secondly, there is a ‘trust factor’ which helps criminal organizations to create reliable networks for production and distribution; these networks are even more dependable than the ones created by legal business. The ‘trust factor’ can be found not only in the relationships existing between large illegal organizations, but also between the final consumer and the street seller. So the drug business, starting from the consumers until the peasants growers, has a worldwide structure that can not be defeated unless all the links of the chain are attacked.
Another special condition of the illegal drug business is its cost structure. Cocaine and heroin production is cheap, and in someway they are agricultural products which requires a not a great level of expertise. UNODC’s report for 2005, clearly shows that the profits obtained by farmers and peasants are just a small fraction of the profits generated at the retail level. Other costs as chemical precursors, packaging and drug-processing are also insignificant, but the determinant cost factor for illicit drugs is the high level of risk. Risks for drug trafficking are almost the same that for any other criminal activity: arrests, seizures of the product and possible injuries naturally occurred in an unlawful business.
Cost structure of the drug business defies conventional economics. Nonetheless street price of the drugs largely depends on the risks faced by traffickers; it is not be severely affected by isolated law enforcement actions. The only real method which has brought significant results is through international agreements and a serious nation’s commitment that looks for fighting the production, trading and consumption as three faces of the same problem.
Analyzing a 14-year trend, despite the vast worldwide efforts in eradication of drug crops and seizure of shipments, prices have fallen. According to the UNODC’s report for 2005, in the United Kingdom average retail price per gram of cocaine fell from $131 (US dollars) in 1990 to $97 in 2004; retail prices of opiates show a similar trend falling from $157 in 1991 to $100 in 2004. Regardless of these facts, international efforts and commitment are more effective every day as it is shown by the prices between 2001 and 2004 which have tend to remain stable.
Nonetheless, it is important to remember that seizures are a risk successfully managed by traffickers since ever. According to the United Nations profits in illicit drug are so inflated that three quarters of all drug shipments would have to be intercepted to seriously affect the profitability of the business. The UNODC’s report for 2005 shows that in 2003 just 44% of the total cocaine production was intercepted, in the case of opiates seizures are 23% of the total production. In both cases traffickers can still manage their business in a very profitable way.
An evolving business
Falling prices are also a sign of evolution of the drug business. Smugglers continuously find new trafficking routes and innovative ways to transport drugs. In some way their imagination has no limit, and when a traffic way or method is discovered –it gets hot– they easily change the strategy for a new one. For example, today when Spain’s coasts are so well watched, Africa has became an important entry gateway and store point of cocaine and heroin coming from South America to final destination Europe.
Since 2004 the magazine ‘The Economist’ explained that drug markets are open up, and the business formerly managed by London-based Colombian importers, now has spread and British entrepreneurs made part of the growing network.
Exporting drugs is not the only innovative area. Traffickers also find new and efficient ways to laundering their profits. Transportation of cash dollars is old history for drug smugglers who now create companies to manage and laundering their assets. Latin drug businessmen have also taken advantage of the neighbour countries’ situation, in the case of Ecuador since it adopted the dollar as its regular currency it became a convenient place for money laundering.
Like regular businessmen, criminal organizations also invest in the legitimate economy; this results in a mix of legal and illegal money which erases traces of the original funds. Of course these situations hurt local economies of drug producing countries by affecting competitive of legal exportations, generating regional crisis in areas with illegal crops, and increasing richness concentration.
Part of the success of drug business relies on the mobility of the business across the Andean region where the main producers are located. The magazine ‘The Economist’ in its edition of February 10th 2005, explains that despite eradication and seizure operations have been especially successful in Colombia over the last few years, facts like the displacement of coca crops to countries like Bolivia and Peru, and the use of the city of Guayaquil (Ecuador) as an exporting port of the third part of the cocaine produced in Colombia, diminish the impact of the enforcement measures taken.
Large-scale organizations
Another important factor which maintains drug economics in good health are the large organizations behind it. From many years ago, drug trafficking have been in charge of big criminal organizations supported by an increasingly intricate distribution network across the world, large capital resources, and large-scale facilities. In Colombia, the big mafia cartels were dismantled and it is believed that exists hundreds of ‘small cartels’ across the country, but leftwing and rightwing illegal armed groups are the real organizations behind the business.
Violent armed groups in Colombia, like the FARC (Colombian Revolutionary Armed Forces) and the AUC (Colombian United Self-defences), are the owners of vast plantations of illegal crops and also have the means to bring armed protection to its own drug processing facilities and shipments. Besides, these groups count with a worldwide network which facilitates to export drugs, and to import weapons used as intimidating tools.
Global commitment needed
Illegal drugs is an evolving and profitable business managed by large criminal organizations and illegal armed groups which hurt world economy and end with the lives of thousands of inhabitants in countries like Colombia.
Isolated actions have proved to be insufficient to win this war, so coordinate actions are needed not only in the Andean region to avoid the mobility that drug business has right now, but also across the world. Consumer countries should be more aware that every penny wasted in drugs finally converts into homicides and kidnapping, creates a greater social gap, and increases the poverty in third world countries. Fight against illegal drugs is a global concern and global responsibilities must be assumed.
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