Narconomics: How to Run a Drug Cartel

"Narconomics" has been on my list for a while. Amazon recommended it to me after I bought "Dreamland" which is itself an excellent work of investigative journalism about the opioid epidemic. When I first decided to make my 2018 reading theme "Crime and Punishment", I knew that Wainwright's investigation of illegal drug economics was going to be a cornerstone book. And the former Economist correspondent delivers! Treating the global narcotics industry "as if it were a business like any other," Wainwright delves into how drug dealers have to deal with supply chains, HR issues, and digital disruption just like everyone else.

By dissecting the economics of the narcotics supply chain, Wainwright launches a devastating critique of the raw ingredients eradication policy that has been the cornerstone of much anti-drug warfare. Noting that the value of the raw materials is a thousandth of the ultimate retail value in the US, he concludes:

by trebling the price of cocaine’s raw ingredient in South America —something no policy has yet gotten close to achieving — the best-case scenario is that cocaine’s retail price in the United States would rise by 0.6 percent. This does not seem like a good return on the billions of dollars invested in disrupting the supply of leaves in the Andes.

His section on prisons being schools for gang members was also eye-opening. The level of "regulatory capture" by these gangs is despicable - Wainwright notes that Mexico's national "drug czar" had been bought and paid for by the Juárez cartel.

As I get deeper into my year of "Crime and Punishment," I'm beginning to believe that big pools of dark money are at the heart of many large-scale national and global problems. This idea began with the amazing "Power Broker" which describes how construction kinpin Robert Moses ran the patronage system in NYC for decades. "Treasure Islands" about offshore tax evasion and "The Looting Machine" about African natural resource economics further supported the idea that dark money rapidly corrodes good governance. Wainwright's book only further supports this idea with his analysis of how government prohibition funnels tens of billions of narco-dollars to violent cartels.

Wainwright convincingly argues that drug legalization would eliminate the pools of dark money that power cartel violence. He points to some steps towards legalization in the US and abroad, although "Chasing the Scream" does a much better job exploring the possibilities and consequences of legalization. For a heavily-researched fictionalized account of Mexican cartel dynamics, check out Don Winslow's excellent "The Power of the Dog".

My highlights below.

Crooks already know these tricks. Honest men must learn them in self-defense. —“HOW TO LIE WITH STATISTICS,” DARRELL HUFF

Introduction - CARTEL INCORPORATED

This is the story of what happened when a not very brave business journalist was sent to cover the most exotic and brutal industry on earth.

The number of people murdered in Mexico in 2010 would reach more than twenty thousand, or about five times the figure recorded across all of Western Europe.

And the more I wrote about el narcotráfico, the more I came to realize what it most closely resembled: a global, highly organized business. Its products are designed, manufactured, transported, marketed, and sold to a quarter of a billion consumers around the world. Its annual revenues are about $300 billion; if it were a country, it would rank among the world’s forty largest economies.

Time and again, the most ruthless outlaws described to me the same mundane problems that blight the lives of other entrepreneurs: managing personnel, navigating government regulations, finding reliable suppliers, and dealing with competitors.

The more I looked at the worldwide drug industry, the more I wondered what would happen if I covered it as if it were a business like any other. The result is this book.

In reality, drugs, like beef, have to go through a long value-adding chain before they reach their final “street price.”

The best estimates available suggest that the wholesale price of marijuana in Mexico is about $80 per kilo, or just 8 cents per gram.

The world’s taxpayers spend upward of $100 billion a year combating the illegal-drugs trade. The United States alone shells out some $20 billion just at the federal level, making 1.7 million drug arrests a year and sending a quarter of a million people to prison.

The scale of public investment is huge, and the evidence used to support it is threadbare.

First, there is an overwhelming focus on suppressing the supply side of the business, when basic economics suggests that addressing demand would make more sense.

Second, there is a constant and damaging short-termism, in which governments economize on early interventions, preferring to run up bigger bills further down the line.

Third, even though the drug cartels are models of nimble, borderless global commerce, efforts to regulate them are still clumsily national in scope.

Finally, and most fundamentally, governments mistakenly equate prohibition with control. Banning drugs, which seems sensible at first, has handed the exclusive rights to a multibillion-dollar industry to the most ruthless organized crime networks in the world.

Chapter 1 - COCAINE’S SUPPLY CHAIN: The Cockroach Effect and the 30,000 Percent Markup

Here in the Andes is where the cocaine trade, a global business worth something like $90 billion a year, has its roots. Cocaine is consumed in every country on earth, but virtually every speck of it starts its life in one of three countries in South America: Bolivia, Colombia, and Peru.

The balmy weather and fertile soil of the Yungas mean that farmers can get up to three harvests a year out of their coca bushes — a much better deal than coffee, which yields a single annual harvest and is tricky to grow, requiring shade.

Coca farmers are tolerated, or even celebrated, in Bolivia, whose president, Evo Morales, is himself a former cocalero, as the growers are known.

In the past, virtually all of the coca grown could be turned into cocaine. Nowadays nearly half goes to waste, yanked up by the roots or sprayed with weed killer by the authorities.

Since the 1990s, the number of people regularly using cocaine in the United States has held pretty steady at between about 1.5 million and 2 million people.

These extraordinarily low prices make Walmart wildly popular with its customers. But for the farmers and manufacturers who supply the goods, the low prices are sometimes crippling. Their complaint is that Walmart and other big chains have such a big share of the groceries market that they are able more or less to dictate terms to their suppliers.

Driving down prices and forcing suppliers to be more efficient is great for consumers, of course, and indeed it has benefits for the wider economy — a McKinsey study made the extraordinary finding that Walmart alone was responsible for 12 percent of the US economy’s productivity gains in the second half of the 1990s.

Cartels play a role more like that of large supermarkets, buying produce from farmers, processing and packaging it, and then selling it on to consumers.

Instead, they discovered, eradication had virtually no impact on the price of coca leaf, or the various illegal refined-coca products that farmers also sometimes sell to cartels.

The reason, they hypothesize, is that the armed groups that control the cocaine trade in Colombia act as monopsonies.

“The shock is assumed entirely by growers, as major buyers have the ability... to maintain fixed prices,” write Gallego and Rico. In other words, it’s not that the eradication strategy is having no effect. Rather, the problem is that its impact is felt by the wrong people.

The process of converting coca leaves to cocaine powder is continually evolving as the cocineros, or “cooks,” develop new recipes in their clandestine jungle laboratories. It is usually done in two steps. The first is to convert the coca leaves to a damp, cream-colored paste known as cocaine base. To do this, one ton of fresh leaves is dried out until it weighs more like 300 kilograms. The dried leaves are then chopped up into smaller pieces and mixed with a toxic brew of chemicals, including cement, fertilizer, and gasoline, which coaxes the cocaine out of the waxy leaves. The remaining plant matter is then filtered out, the chemicals removed (at least, most of them), and the remaining residue boiled down. The result is about 1 kilogram of cocaine base. To turn this paste into cocaine hydrochloride, as snortable cocaine powder is formally known, it is mixed with a solvent such as acetone, and with hydrochloric acid. The resulting mixture is filtered and dried to derive just under a kilogram of pure cocaine: C17H21NO4

international smuggling is where many of the profits are found in the cocaine business.

According to the United Nations, the amount of land devoted to growing coca in South America fell by about one-quarter between 1990 and 2011. But, thanks to more efficient production processes, the amount of cocaine made using that smaller amount of land increased by one-third.

Look at the evolution of the price of a kilogram of the drug, as it makes its way from the Andes to Los Angeles. To make that much cocaine, one needs somewhere in the neighborhood of 350 kilograms of dried coca leaves. Based on price data from Colombia obtained by Gallego and Rico, that would cost about $385. Once this is converted into a kilo of cocaine, it can sell in Colombia for $800. According to figures pulled together by Beau Kilmer and Peter Reuter at the RAND Corporation, an American think tank, that same kilo is worth $2,200 by the time it is exported from Colombia, and it has climbed to $14,500 by the time it is imported to the United States. After being transferred to a midlevel dealer, its price climbs to $19,500. Finally, it is sold by street-level dealers for $78,000.10 Even these soaring figures do not quite get across the scale of the markups involved in the cocaine business. At each of these stages, the drug is diluted, as traffickers and dealers “cut” the drug with other substances, to make it go further. Take this into account, and the price of a pure kilogram of cocaine at the retail end is in fact about $122,000.

In sum, by trebling the price of cocaine’s raw ingredient in South America —something no policy has yet gotten close to achieving — the best-case scenario is that cocaine’s retail price in the United States would rise by 0.6 percent. This does not seem like a good return on the billions of dollars invested in disrupting the supply of leaves in the Andes.

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.

Chapter 2 - COMPETITION VS. COLLUSION: Why Merger Is Sometimes Better Than Murder

The one very noticeable change during his six years in office was that violence soared. The mild-mannered man from Michoacán inherited Mexico with its murder rate at an all-time low. With around ten murders per 100,000 people, in 2006 Mexico was one of Latin America’s safer countries. Indeed, its murder rate was lower than that of a handful of US states. By 2012, the rate had doubled, and Calderón left Los Pinos the most unpopular president in Mexico’s recent history.

A normal year saw about 400 murders — not too dreadful for a city of 1.5 million people, let alone a very poor one that borders a country with free-and-easy gun laws. But in 2008, something in the criminal underworld stirred. The level of violence rose steeply; by the summer of 2011, bodies were piling up in the city morgue at a rate of 300 per month. The murders bore the hallmarks of organized crime: many of the victims were killed with high-caliber rounds from the muzzle of a cuerno de chivo, or “goat horn,” as AK-47 rifles are known, owing to their curved magazine. Many of the dead had come from out of town—perhaps as traveling hit men, or else as their victims, kidnapped in another state and brought to Juárez for anonymous disposal.

The US Drug Enforcement Administration (DEA), the agency burdened with the task of shutting down America’s favorite vice, estimates that about 70 percent of the cocaine entering the United States via Mexico crosses the border at Juárez.

But a perverse economic consequence of tightening up the border is that each crossing point has become more valuable. The 2,000-mile frontier between Mexico and the world’s largest drug market has only forty-seven official border crossings — and of those, the largest half-dozen or so dwarf the rest in terms of the number of trucks loaded with shipping containers that they process. A cartel that fails to control at least one of these major crossings will not get far.

The six Mexican states that border the United States have among the highest murder rates in Mexico. The only places that rival them are states that are home to big ports, such as Veracruz and Michoacán, which are highly prized by cartels for the same reason.

In Mexico City, the driving is dreadful (partly because the driver’s test was abolished a few years back after examiners became so corrupt that it was difficult to pass without paying a bribe).

The focus on the police was no coincidence. When attempting to carry out a corporate takeover, cartels are like ordinary businesses in that they need to satisfy competition regulators that the deal should go ahead. The main regulators of the drugs industry are the police. They are the ones whose job it is to stop the business, and who can be persuaded, with enough bribery or intimidation, to allow it to go ahead. Here, El Chapo hit a problem. The Juárez cartel was skilled at wooing regulators — it had managed to corrupt the national drug tsar, remember — and the local city police were widely thought to be in its pocket.

The Juárez cartel has an enforcement arm, La Linea (The Line), whose members originally came from the ranks of the city police, both retired and serving.

As Sinaloa tightened its grip on Juárez’s drug-supply lines, the Juárez cartel found an alternative source of revenue in the form of extortion. This had a devastating effect on life in the city, as businesses were bled dry by the new “tax” demanded by the mobsters.

Perhaps the decisive moment in the battle for Juárez was the arrest in 2011 of Juan Antonio Acosta, known as “El Diego,” the head of La Linea. After his arrest, he claimed to have organized more than 1,500 killings. The murder rate fell, as El Chapo settled into a commanding position and the resistance from the Juárez cartel died down. With regulatory obstacles finally overcome, Sinaloa’s acquisition was complete.

The two main maras, or street gangs, are the Mara Salvatrucha and Barrio 18, which is also known as the 18th Street Gang. Both of these mobs were founded not in El Salvador but in the prisons and poor neighborhoods of California, where young Salvadoran immigrants banded together for self-defense and to run drug and extortion rackets. The gangs were reexported to Latin America when those same Salvadoran migrants were deported.

The gangs are now estimated to have roughly 70,000 members in Central America, about the same as the number of people directly employed by General Motors in the United States.

In El Salvador, the murder rate in 2009 was 71 per 100,000 people, making it the most murderous country in the world, according to the United Nations. Extrapolated over the course of a lifetime, at that rate a Salvadoran man has roughly a one in ten chance of being murdered.

The warring between the gangs killed nearly 50,000 people in the 1990s, he says.

The point of collusion between firms, whether they are drug cartels or ordinary businesses, is to turn one big competitive market into a series of small monopolies.

By splitting the country into uncontested “sectors,” they can charge higher prices for both their drugs and their extortion businesses, thus minimizing the costs normally incurred by fighting with each other. The truce had an extraordinary impact. Almost overnight, the murder rate fell by about two-thirds. That meant that El Salvador went from being one of the world’s most violent countries to being only about as dangerous as Brazil.

Research on the Sicilian mafia by Michele Polo, an Italian economist, found that violent competition between rival Italian gangs often took the form of attempts by one organization to poach the soldati, or foot soldiers, of another. Polo drew up a formula to explain how mafias write “contracts” with their members to minimize the chance of defections.

The maras are different in this respect. Gang membership in El Salvador is dependent not on who pays the highest wages but on where the would-be gangster is born. Once a young man has become a member and has gotten his body covered in Salvatrucha tattoos, defecting to join Barrio 18 is out of the question, and vice versa.

In economic terms, this means that whereas Mexican gangbangers are highly footloose, liable to change sides to work for whichever cartel seems to be stronger or higher paying, the labor market for Salvadoran mareros is completely illiquid.

for all Old Lin’s pious talk of going straight, the falling murder rate has not been accompanied by any reduction in revenue-generating crimes. Extortion — perhaps the most hated crime of all, because it affects ordinary people and not just gangsters — has continued to flourish. “Extortion is the principal source of income of the gangs. They have said: ‘We can negotiate, but not on extortion,’” says David Munguía, who was security minister at the time the pact was agreed on in 2012.

It is true that brutality is an essential part of the business: because criminal organizations cannot use the legal system, violence is the only way for them to enforce contractual agreements. But the examples of Mexico and El Salvador show that the level of violence can be altered dramatically by changes in market conditions.

The root cause of the brutal competition for control of cities such as Ciudad Juárez in Mexico is the necessity to control access to the limited number of border crossings.

At the moment, cartels are able to wage proxy wars against each other at the state’s expense, by taking control of rival police forces. Amalgamating them would render this much harder.

By contrast, the maras can maintain large workforces without paying them much at all, because the barriers to exit are so high. This means that tempting mareros away from gang life and into ordinary jobs ought to be extremely cheap; the only thing needed is an employer willing to look beyond the tattoos. The state can play an innovative role here by paying for inmates’ tattoos to be removed. A program run by the Los Angeles County Sheriff’s Department in California does just that, offering to remove the tattoos of gang members who have shown a willingness to turn over a new leaf once out of jail.

Chapter 3 - THE PEOPLE PROBLEMS OF A DRUG CARTEL: When James Bond Meets Mr. Bean

The narcotics game has an image of ruthless professionalism, with clinical hit men, ingenious smugglers, and logistical experts combining to outwit the police. Sometimes the business works like that. But it is also characterized by stunning incompetence.

The mismatch between the drug business’s high profits and the low capacity of its employees demonstrates perhaps the biggest problem that any drug cartel faces: human resources.

Cartels face two key problems. First, they must recruit their workers in an industry that operates under secrecy, where jobs cannot be advertised and total trust is required.

The second big human-resources headache is that the cartels must manage relations with their staff, as well as their suppliers and clients, without an easy way of enforcing contractual agreements.

The one way that criminal organizations can enforce contracts is with violence, which is why a capacity to intimidate and kill is at the heart of any drug cartel’s success. But deploying violence is an expensive course of action and bad for business.

In the “Miami Vice” years of the 1980s, speedboats would race from the Caribbean into Florida loaded with cocaine, then head back stacked with dollars. But that route was effectively shut down by the South Florida Task Force, an initiative of President Ronald Reagan that coordinated the work of the FBI, DEA, customs, tax authorities, and other federal agencies, under the command of Vice President George H. W. Bush. The task force made an immediate impact, and the Caribbean route dried up. Traffickers moved west, using Mexico as the main point of entry instead.

Most countries in the Americas seem to agree: the region has the highest rate of imprisonment in the world, led by the United States, where more than one in every 150 people is behind bars.

But for criminal organizations, prisons play a pivotal role in the recruitment and training of staff.

Lehder’s extraordinary rise shows how criminal careers can be built on the foundations of a stint in prison. As well as forming a working relationship with Jung, Lehder used his time in Danbury to mix with money launderers, hit men, and people who knew how the US extradition system worked. The millionaire crook, who was eventually busted in 1988 and is now growing old behind bars in the United States, later referred to Danbury as his “college.”

The first human-resources problem for drug cartels is finding potential employees with the right sort of criminal background. Someone looking to solve this problem could hardly come up with a more perfect solution than a prison: a place full of criminals, with nothing much to do and no job lined up for after their release.

Getting into gangs also has to be made reasonably difficult, in order to sift serious recruits from time wasters. Like other membership organizations, from golf clubs to college fraternities, gangs impose an up-front cost on new members, in the form of a payment or initiation ritual. (In one of the most harrowing initiation ordeals, new disciples of La Familia Michoacana, a bloodthirsty Mexican drug cartel, are reportedly forced to read the works of John Eldredge, an American author of Christian self-help books.) And, of course, unlike most golf clubs, prison gangs kill those who renounce their membership. This, too, has its own warped rationality: if life membership can be enforced, the risk of members turning informant is greatly reduced.

In other words, the gang faces what economists call a collective-action problem. Everyone stands to gain if all members can agree not to exploit each other, but the individual incentives for exploiting are so strong that it is unlikely that everyone will stick to the agreement.

In a fascinating study in the Journal of Law, Economics and Organization, David Skarbek, an economist at King’s College, London, analyzed La Nuestra Familia’s structure.

Many countries in Latin America operate an unofficial system in which prisons are allocated to particular gangs, to minimize the risk of fighting. Members of one mob will be sent to one prison, whereas members of a rival clan will go to a different one. This segregation may help to keep the peace, but it also strengthens the gangs’ organizational powers. In El Salvador, Old Lin is able to run his jail like a fiefdom, because it has been reserved exclusively for members of the 18th Street Gang.

Sixty percent of the proceeds of the sales are split between the prisoner and the jail, with the remaining 40 percent going to the prisoner’s family. This is part of a wider effort to keep the inmate in touch with her relatives while inside. Part of the reason people join gangs and other criminal groups is that they have no other network to fall back on, Santana reasons. So he goes to extraordinary lengths to maintain prisoners’ family links.

We know this because, unbeknownst to Pete, his phone was being tapped by the Dutch police (who, incidentally, are incorrigible snoops, with a phone-tapping order being issued for roughly one in every 1,000 working phones in the country).

(Smuggling cash out of Europe is made much easier by the existence of the €500 bill, a ludicrously high-value banknote that has made life much easier for criminals, who can hide €20,000 in a single cigarette packet. In some European countries the bills are known as “bin Ladens”: everyone knows they exist, but no one apart from criminals ever sees them.)

Unlike in the legitimate business world, then, race and nationality do seem to count for something when it comes to hiring — though the reason has more to do with the greater potential to carry out blackmail than with a preference for working with people of the same ethnic group.

Sending a teenager to jail costs more than it would to send him to Eton College, the private boarding school in England that educated Princes William and Harry. It seems especially odd that the United States, a country with a proud history of limited government, is so unquestioningly generous when it comes to this particular public service, on which it blows $80 billion a year.

“We’re not a gang, we’re a [labor] union,” prisoners in Ciudad Juárez, Mexico, told the London Times.

The implication of this is that if one can hamper cartels’ recruitment by limiting the flow of apprentices coming through prison, one can tighten up the criminal labor market.

Chapter 4 - PR AND THE MAD MEN OF SINALOA: Why Cartels Care About Corporate Social Responsibility

Howard Marks, a convicted drug trafficker from Britain, wrote an autobiography entitled Mr. Nice (one of his pseudonyms) and made a living giving talks in which he described his criminal career as a grand adventure.

In Britain, the number of people working in PR (47,800) now exceeds the number of journalists (45,000).

No one is likely to report the murder because journalists in Reynosa have been given strict instructions by the local cartel to obey a total blackout of drug-war news.

Mexico’s cartels have invested a lot of time and money in persuading journalists to tame their coverage. Persuasion takes the traditional form of plata o plomo — “silver or lead,” meaning a bribe or a bullet — which the gangs use to get their way in other areas of public life.

In 2010, the deadliest year to date, five Mexican newspapers publicly announced that they would no longer cover drug-war crimes at all, such was the risk to their journalists.

So preventing reports of violence is extremely important: if no news gets out about last night’s massacre, no extra troops will be dispatched the following week, and business can continue as usual. Following shootouts, cartels sometimes even drag away their dead, partly in order to bury them but also to minimize the appearance of violence and thus reduce the risk of a strong response from the army.

The reason is often because one gang is seeking to cause trouble on the patch of a rival. If a dozen dead bodies are dumped in a public place, the government tends to respond by sending a shock force of troops to the area, making it much harder to do business for a few weeks. Cartels will sometimes deliberately “heat up” a rival cartel’s patch—calentar la plaza, as it is known—precisely in order to provoke such a crackdown.

Unlike other airlines, which offer passengers the chance to “offset” their pollution by buying carbon credits, Ryanair has no time for green campaigners. “We want to annoy the fuckers whenever we can. The best thing you can do with environmentalists is shoot them,” Michael O’Leary, its pugnacious boss, has said.

Many drug lords have paid for the construction of churches. Mexicans even have a word for this: narcolimosnas, or drug alms.

In the criminal world, however, entrepreneurs’ freedom depends on their maintaining a basic level of support among the people in whose communities they operate.

One of the first signs of state failure is when people begin to take the law into their own hands.

In Grossman’s model, mafias extort money and provide services in much the same way that governments levy taxes to fund public spending.

“According to this analysis, the existence of the mafia harms only the members of the ruling class or political establishment whose main source of income is political rent,” Grossman writes

Organized criminal groups have provided similar services ever since, acting as the enforcers of contracts between businesses that cannot use the courts because they are selling an illegal product, such as drugs, or taking part in an illegal activity, such as price-fixing. In a classic essay in which they build on the work of Franchetti, Diego Gambetta and Peter Reuter give a host of examples of how the mafia has performed similar services in Italy and in New York City.

In New York City, the mafia was long involved in the garbage-collection business.

The evidence is that they charge quite reasonable prices for doing so: witnesses say that the New York mafia’s fee for fixing prices in the concrete industry was only 2 percent of the contract price;

The single-most-effective way to undermine gangsters’ “charitable” efforts is for the state to up its own game in the provision of basic public services.

As small, local firms are replaced by big, international ones, enforcing price-fixing agreements becomes harder.

The truth is that buying and taking illegal drugs probably won’t kill you. But it may very well kill someone else.

Chapter 5 - OFFSHORING: The Perks of Doing Business on the Mosquito Coast

Even more highly prized by the cartels are members of Guatemala’s special forces, known as the Kaibiles, a name derived from that of an indigenous leader who outwitted the Spanish conquistadors. The Kaibiles were responsible for some of the worst human-rights abuses of the country’s gruesome civil war in the 1980s and 1990s.

“Ciudad Juárez: the country,” is how one journalist friend describes Guatemala. He is right.

The full details of the strange tale are recorded in what is perhaps the weirdest case name in American legal history: United States of America v. One Lucite Ball Containing Lunar Material (One Moon Rock) and One Ten Inch by Fourteen Inch Wooden Plaque.

In 1988, for example, the Honduran ambassador to Panama was arrested at Miami International Airport carrying nearly 12 kilograms of cocaine in his luggage.

Just as Roman soldiers were paid their “salaries” in salt—an easy-to-transport, high-value item whose worth was understood across borders—traffickers have found it convenient to pay their troops today in cocaine, which fulfills the same criteria.

According to estimates from the US State Department, in 2012 three-quarters of all cocaine-smuggling flights originating in South America landed in Honduras.

Carl Gerstacker, a former chair of Dow Chemical, had a similar idea: “I have long dreamed of buying an island owned by no nation and of establishing the world headquarters of the Dow company on the truly neutral ground of such an island, beholden to no nation or society,” he once said.

Perhaps the most influential study, awaited anxiously by bureaucrats and business-people everywhere, is one that is published each year by the World Bank. “Doing Business” is a three-hundred-page document of tables and charts that looks rather dry but has the power to cause elation and despair in boardrooms and finance ministries around the world. In “Doing Business,” the World Bank’s experts rank nearly two hundred countries on how easy they make it for companies to operate.

The World Economic Forum’s rankings could almost have been designed with drug cartels in mind. Its analysts helpfully rate countries according to things such as how widely accepted bribery is, how corruptible judges are, how reliable the police force is, and even what presence organized crime already has in the country.

The mano dura campaign led many people to assume that Pérez Molina would take a hard line against the drugs trade. To everyone’s astonishment, following his inauguration the president did an about-face, announcing that, in fact, he was in favor of the legalization of all drugs.

Chapter 6 - THE PROMISE AND PERILS OF FRANCHISING: How the Mob Has Borrowed from McDonald’s

These days, there are about half a million franchisee-run businesses in the United States. Car dealerships, gas stations, retailers, and, of course, restaurants are the biggest sectors of the franchising industry. To that list, we can now add organized crime.

In order to finance this turbo-charged growth, the Zetas have employed a version of franchising.

The franchise model also explains why the Zetas, in particular, engage in such appalling acts of brutality. They are the ones who, more than any other Mexican mob, take care to photograph and video their atrocities, from beheadings to hangings. A gruesome murder carried out by the Zetas in northern Mexico hardens the image of its franchises all over the world, just as an advertising campaign by McDonald’s at the World Cup in Brazil strengthens the appeal of its outlets everywhere else.

Rodrigo Canales, a Mexican professor at Yale University’s school of management, believes that one reason for this diversification is that the Zetas don’t have first-class connections in the international drugs business.

Murdering Zapata broke a serious unwritten rule of Mexico’s cartels: never kill Americans, and especially not American cops. In spite of the endemic violence in the country and the high level of involvement of American agents in Mexican affairs, Zapata is believed to have been the first American law-enforcement official to die in the line of duty in Mexico since 1985.

Old-school cartels like Sinaloa exist everywhere and nowhere, their business based on smuggling goods rather than holding territory. Drive them out of Mexico, and they set up shop in Central America; put the heat on them in Colombia, and they scuttle over the border to Peru. A franchise like the Zetas, by contrast, lives or dies by the territory it controls. Force it off a particular patch, and its income from that area is lost.

Chapter 7 - INNOVATING AHEAD OF THE LAW: Research and Development in the “Legal Highs” Industry

On sale online and in almost any major city, from London to Los Angeles, are psychoactive substances in a new class, known variously as “legal highs” or “designer drugs.” Concocted in laboratories rather than on Andean hillsides or in Afghan poppy fields, these synthetic drugs mimic the effects of more mainstream narcotics. Some are close cousins of MDMA, also known as ecstasy. Others claim to have an effect closer to that of cannabis. The game-changing difference is that in most jurisdictions these fast-evolving chemical highs are completely legal to sell, possess, and consume.

according to the United Nations, no country in the world smokes more marijuana per person than New Zealand, where one in seven adults claims to have gotten stoned in the past year. But it isn’t only pot: New Zealand also has the second-highest consumption of amphetamines, which are made locally, in small laboratories dotted all over the islands.

A boring looking off-white powder, BZP was initially developed in the 1940s as a worming tablet for cattle. But tests revealed that it also had the side effect of giving people a euphoric rush, similar to that provided by amphetamines. Bowden began selling the drug as “party pills,” via his company, Stargate International, which styled its products as “social tonics.” In so doing, Bowden and Stargate became the most prominent ambassadors of an industry selling millions of legal, recreational drugs to young partygoers in the nightclubs of New Zealand. The drug became wildly popular. By some estimates, up to 5 million BZP-laced “party pills” were being sold in New Zealand every year, equivalent to more than one dose for every person in the country.

Ever since the clampdown on BZP, a game of cat-and-mouse has been played out between the manufacturers and the authorities. A new synthetic narcotic is developed, becomes popular, is identified by the government, and gets banned—by which time the narco-chemists have come up with a slightly different variation, which immediately goes on sale.

The new generations of legal highs have spread far beyond New Zealand. In the United States and Europe, they are sometimes coyly marketed as “bath salts.” Like the head shops selling “aromatherapy incense,” manufacturers believe that by marketing them as such, they further protect themselves from prosecution, should a substance be banned without them realizing it.

New drugs are being churned out at an extraordinary rate. The UN’s Office on Drugs and Crime says that in 2013, it was alerted to ninety-seven new synthetic drugs. It now monitors 350 and counting of these “new psychoactive substances” around the world.

For the companies that make them, the legal highs have proved handily profitable. Most of the manufacturers in New Zealand import their chemicals from laboratories in China, at a cost of between $1,000 and $1,500 per kilogram.

In 2013, New Zealand attempted to do exactly that. Its Parliament passed the Psychoactive Substances Act, upending the logic of the legal-highs business.

What it meant, in effect, was that New Zealand had voted to establish the world’s first legal, regulated market in synthetic drugs. The Psychoactive Substances Authority would not ban drugs if they got people high; only if they were dangerous. To everyone’s surprise, the law passed almost unopposed

The government appeared to have a crisis of confidence, and in 2014, with an election looming, it passed a hasty amendment revoking all the temporary licenses that it had granted. Taking the drugs off the market until they had been properly assessed might not have been such a bad idea. But the amendment also included a curious clause that the drugs could not be tested on animals. Without such tests, no drug is likely to be licensed for use by humans. And so at the time of writing, the reform is effectively suspended: the Psychoactive Substances Regulatory Authority stands ready to grant licenses to drugs that can be proved safe, but manufacturers are forbidden by law from carrying out the experiments necessary to do so.

Chapter 8 - ORDERING A LINE ONLINE: How Internet Shopping Has Improved Drug Dealers’ Customer Service

These may have been the first sales ever made on the web. But delve back to the earliest days of the Internet, before the Worldwide Web had been spun, and an even older transaction is said to have taken place online. In either 1971 or 1972—the precise date seems to have been lost to history—students at Stanford University’s Artificial Intelligence Laboratory used Arpanet, an ancestor of the modern Internet, to arrange a deal with students on the other side of the United States, at the Massachusetts Institute of Technology. The subject of the transaction was, perhaps inevitably, a bag of marijuana.

Indeed, since the Silk Road’s closure, the market has grown bigger still, as a succession of imitators has sprung up. Although most of the sites have a limited shelf life — Evolution Marketplace vanished a few weeks after I had checked it out — new ones pop up as quickly as the old ones are taken offline. The Digital Citizens Alliance, a nonprofit group, tracks a dozen such sites.

One academic study of the goods for sale on the original Silk Road estimated that about one-fifth of all its listings were aimed at dealers, and that these “business-to-business” transactions accounted for between 31 percent and 45 percent of the site’s trades by value.

Measuring the total value of the online drug economy is hard, not least because Bitcoin’s price is so volatile. The FBI originally estimated that the Silk Road had done $1.2 billion in business during its two and one-half years online. But it later scaled down this rough calculation: the estimate had been made when Bitcoin’s value was near its peak, whereas much of the Silk Road’s business was done when the digital currency was less valuable. The FBI did a revised estimate, using the currency’s varying value at the time that each different trade was made, and came up with the much lower figure of $200 million. That is a tiny proportion of the global drugs market, which is thought to be worth something like $300 billion. But for two years’ trading, it is extraordinary. For comparison, consider that in 1997, two years after its launch and just prior to being floated on the stock exchange, eBay was doing about $100 million in business a year.

Under these conditions, life is good for the established dealer. A key feature of network markets is that they tend to work strongly in favor of incumbents, who have had time to build up the biggest and strongest networks.

Unlike most parts of the Internet, where anonymity makes people ruder than in real life, the world of drug dealing seems to be friendlier online than it is on the street.

Online trading has another advantage regarding safety of a different sort. At a stroke, the move online eliminates the importance of territory. Bloody turf-wars are a signature feature of retail drug markets. In the 1980s, gangsters in Glasgow, Scotland, sold drugs out of ice-cream trucks, leading to the bizarre-sounding “ice-cream wars,” in which the ice-cream trucks were targeted for arson attacks and drive-by shootings.

The spread of mobile phones and pagers in the 1990s reduced the need for drug dealers to control territory, as the business moved off the street and indoors, to people’s apartments or other rendezvous points that could be set up by phone (some criminologists believe that the fall in violence in New York City in the 1990s was partly due to drug dealers’ adoption of mobile phones).

The majority of the students are members of a network that is large, but fragile. Most of its members have had only a couple of partners, meaning that in many cases a single person forms the link in a long chain. If any one of these individuals can be persuaded to have safe sex, the chain of infection is broken. As the authors write, “Relatively low levels of behavioral change—even by low-risk actors, who are perhaps the easiest to influence—can easily break a... network into small disconnected components, thereby fragmenting the epidemic and radically limiting its scope.” Surprisingly, sexual-health education may have more impact if dollars are focused on changing attitudes among those considered low risk, rather than targeting the most vulnerable.

Chapter 9 - DIVERSIFYING INTO NEW MARKETS: From Drug Smuggling to People Smuggling

Recent years have seen a growing number of migrants make the difficult and dangerous journey with the help of guides and fixers supplied or licensed by Mexico’s drug cartels, which appear to be diversifying into the people-smuggling business.

If you eat enough guacamole, there is a good chance that at some point you will tuck into an avocado grown or taxed by the Knights Templar cartel, which is said to control much of the agricultural business in the state of Michoacán.

Mexican officials have said that the Knights Templar cartel makes more money from taxing the iron-ore industry than it does from drugs.

The wide range of businesses in which the cartels are now involved means that some analysts say it no longer makes sense even to refer to the cartels as mere drug traffickers. Some institutions, including the FBI, now call them “transnational crime organizations,” or TCOs.

Lately, however, the industry has been turned upside down, Clark says. “The attacks of 9/11 caused the United States to see the border as a subject of national security. The border is now extremely well patrolled — practically closed.” The crackdown has made it harder for the coyotes to provide their usual services. As a result, they have jacked up their prices: foot crossings, which used to cost $2,000, now cost $5,000 in Tijuana. Crossing in the line, which used to cost $5,000, can now cost as much as $13,000. The local coyotes are “in crisis,” he says.

The heavier policing of the land around the border means that more people are going by sea, a passage that costs between $5,000 and $9,000. On foggy days, up to twenty-five people at a time are ferried up the coast in rickety speedboats, sometimes landing as far north as Santa Barbara, nearly two hundred miles from the Mexican border.

The Border Patrol now numbers some 21,000 officers, making it about the same size as Canada’s active-duty army.

Increased enforcement has helped to turn a cheap service that most migrants ignored into a very high-earning one that nearly all of them decide to purchase.

It calculates that since 2000, the annual flow of immigrants from Mexico has fallen from about 770,000 a year to fewer than 150,000, a steep drop that neatly coincides with the ramping up of border patrols.

During Obama’s first presidential term, from 2009–2013, an average of nearly 400,000 illegal aliens was deported each year — double the number at the turn of the century, and nearly ten times more than in the early 1990s. These days, most of the women in the migrant shelter are people who have just been deported. Most of them are planning immediately to return.

Estimates of exactly how much money the Mexican cartels make from different drugs vary widely, but everyone agrees that cocaine and marijuana make up the lion’s share of their drug income. Depending on whose estimate you trust, the proportion of total drug income accounted for by cocaine and marijuana alone is probably somewhere between 74 percent (based on a midpoint estimate by the RAND Corporation) and 90 percent (according to a slightly dubious calculation by the US Office of National Drug Control).

Discoveries like that used to be unusual. But lately they have become far more common: whereas in 2008 the police in Mexico discovered twenty-one meth labs, the following year they found 191. The US border authorities have intercepted a growing amount of Mexican meth bound for America, too. In 2001, they discovered 1.3 tons of the drug; by 2010, the annual figure had risen to 4.5 tons.

Mexican cartels, which have in the past bribed local police to overlook entire fields full of marijuana plants, had little trouble setting up crystal meth factories of a scale unheard of in the United States. And just as Walter White found, when you make the drug on a larger scale, using more sophisticated equipment, you come up with a much better product. Since the Mexican labs came onstream, the average purity of meth in America has doubled. Not only that: the efficiency of the labs means that Mexican meth is far cheaper than the amateurish stuff cooked up in American kitchens. The average price of the drug in the United States has fallen by more than two-thirds following Mexicans’ ramping up of supply.

Unlike cocaine, which they have to import from South America, or meth, which is made from chemicals usually brought in from the Far East, heroin can be made at home. Poppies are cultivated in the mountains of the Sierra Madre by farmers known as gomeros, or “gummers,” for the way that they harvest the gluey sap from the poppies.

Fortunately for the cartels, they had an unwitting accomplice: America’s doctors, who in recent years have done more to improve the reputation of opiates than any drug dealer could have hoped.

Whereas a single day’s supply of black-market OxyContin cost $480, an entire week’s supply of heroin cost only about $350, part of which she was able to afford by selling her small supply of OxyContins. As if from nowhere, Scudo had become a heroin addict.

The quantity of powerful opioid drugs being dished out by doctors is breathtaking: in some states, concentrated in the South, the number of prescriptions made each year is now greater than the population. The drugs help to save some patients from excruciating pain. But the rampant overprescription means that they are widely abused: about 11 million Americans a year take them illegally, more than the number who use cocaine, ecstasy, methamphetamine, and LSD combined.

Nationwide, two-thirds of America’s heroin addicts started off by abusing prescription painkillers.

Better still, the people taking those gateway drugs are a group that drug dealers have historically found hard to reach: older, richer women.

Whereas in the 1960s, more than 80 percent of heroin addicts were men, the gender balance now is nearly 50-50, with women in the slight majority. Users’ ethnic background has changed, too. In 1970, fewer than half of heroin users were white. Now, 90 percent are.

From 2006, poppy production surged, reaching a high of nearly 20,000 hectares, or almost 50,000 acres (at the start of the decade, total cultivation had been barely 2,000 hectares, or just under 5,000 acres, according to the United Nations). Mexico is now the world’s third-biggest poppy grower, after Afghanistan and Myanmar.

For the United States, the DEA figures that Mexican cartels now supply virtually all the heroin in the West, and about half of that in the East (the rest is mostly from Colombia and Afghanistan).

Chapter 10 - COMING FULL CIRCLE: How Legalization Threatens the Drug Lords

On January 1, 2014, Denver Relief broadened its market to include recreational users, after Colorado became the first place in the world to legalize the sale of marijuana for nonmedical purposes.

Across the country, cannabis is thought to be worth roughly $40 billion a year — about the same as the recorded music industry.

Denver Relief’s facility uses about 150,000 watts of light, plus around another 100,000 watts in air-conditioning and other gadgetry. The bill comes to $800 per day. For illicit growers, all the lights create another problem: heat. The police have caught on to this, and many departments now use infrared cameras to scan neighborhoods for suspiciously hot homes.

But the big question for the drug cartels is where dealers like that get their own supply.

On average, they found, marijuana’s wholesale price rises by $500 for every 1,000 kilometers (620 miles) that it has to travel within the United States.

The potential loss of most of the US cannabis market would represent a serious blow to Mexico’s criminal gangs. IMCO reckons that the cartels earn about $2 billion a year from selling marijuana in the United States. That makes the pot business almost as valuable to them as the cocaine trade, from which they are thought to make about $2.4 billion.

Take the 2014 ballot initiatives. In Alaska, the “yes” campaign won over a skeptical public partly thanks to $850,000 that was pumped into the campaign by the Marijuana Policy Project and the Drug Policy Alliance, a pressure group that is partly funded by George Soros, a wealthy financier who has long campaigned for legalization on moral grounds.

The Florida campaign, the highest-spending of the lot, was closer. Sheldon Adelson, a billionaire who made his money running casinos, helped the “no” side to raise $4.7 million. But the “yes” campaign raised $6.1 million. Much of it came from John Morgan, a wealthy Orlando lawyer.

As long as it remains illegal in most of the United States — not to mention every other country in the world, apart from Uruguay — the marijuana industry will be risky in both legal and public-relations terms.

Publicly, the Big Tobacco companies have denied any interest in marijuana. Privately, however, they have been pursuing the idea of cannabis cigarettes for decades.

Vicente Fox, a former Coca-Cola executive who served as Mexico’s president from 2000 to 2006, has said that he himself would be interested in turning his rancho in Guanajuato into a cannabis farm.

Conclusion - WHY ECONOMISTS MAKE THE BEST POLICE OFFICERS

It may not be all that surprising that police officers make unreliable economists. But what would happen if economists were given a chance to be police?

The analysts, who work for the Office for National Statistics, Britain’s official number-cruncher, devote most of their time to recording everyday things such as inflation and unemployment. But since 2014, as well as measuring the size of the regular economy they have been ordered to measure the economic activity carried out by criminals. So far they have restricted their inquiries to the markets for drugs and sex, using the same accounting model that they apply to legitimate businesses. Their early findings suggest that the illegal-drugs market in Britain contributes about $7.4 billion a year to gross domestic product, making it roughly as big as the advertising industry. The prostitution business is even larger, generating about $8.9 billion per year. Put together, sex and drugs are worth more to Britain than agriculture.

Running through this book is evidence that official efforts to tackle the drugs industry have been hampered by four big mistakes.

MISTAKE ONE: THE OBSESSION WITH SUPPLY

But most of the evidence suggests that demand for drugs is inelastic.

MISTAKE TWO: SAVING MONEY EARLY ON AND PAYING FOR IT LATER

The claims of scarce cash must seem odd, though, to anyone visiting the small New Hampshire town of Keene. Keene is not a violent place. Between 1999 and 2012, it saw only three homicides. Yet its police department has spent nearly $286,000 on an armored personnel carrier known as a BearCat. Asked why a town like Keene needed a vehicle better suited to trundling around Baghdad, the police chief explained that it would be used to patrol Keene’s “Pumpkin Festival and other dangerous situations.” The case of Keene shows that when it comes to fighting crime, money is no object — as long as it is spent on enforcement, rather than prevention.

The boring but unsurprising truth is that it costs less money to get someone off drugs and into a job than it does to chase that person down in a BearCat.

It is easy to call for more spending as a solution to the world’s every social problem. The difference in the drug world is that more than enough money is already being spent — it is just focused on the wrong area. It is time for governments’ generosity toward the police and miserliness toward development to be reversed.

MISTAKE THREE: ACTING NATIONALLY AGAINST A GLOBAL BUSINESS

The reason it goes on is that the most influential UN shareholders — the wealthy member states that pay the lion’s share of its upkeep — are reasonably satisfied with the way the war is currently being fought. Rich countries, which consume most of the world’s drugs, are happy for the fighting to occur far away from their own populations.

“Those that do not [cooperate] face the consequences: public shaming, economic sanctions, or back-channel punitive uses of American influence with international funding agencies like the World Bank and IMF [International Monetary Fund],” writes Moisés Naím, an expert on organized crime and himself a former executive director of the World Bank.

Drugs are predominantly a middle-class vice, and as developing countries get richer, their emerging middle classes are starting to take more of them—just as they are buying more cars, taking more foreign vacations, and acquiring other middle-class habits. The most visible example of this is in Brazil, which is now the world’s second-biggest market for powder cocaine, and the biggest bar none for crack. At the same time, consumer countries are seeing more domestic production of drugs. One strand of this trend is in marijuana, which now tends to be grown locally, especially in America.

In 2000, the UN drugs office received 96 percent of its funding from the “major donors group,” a collection of twenty mainly wealthy countries. By 2014, the major donors contributed only 60 percent of the office’s budget.

MISTAKE FOUR: CONFUSING PROHIBITION WITH CONTROL

Rather, specialized doctors have been given permission to prescribe heroin, free of charge, to addicts. The idea is that through managed, rationed use, addicts are gradually able to wean themselves off the drug. In Switzerland, whose program is the most well-established, doctors targeted 3,000 hardcore addicts, who made up 10–15 percent of the country’s users but accounted for up to 60 percent of consumption in the country. By providing them with free heroin, which they took under supervised conditions, the government reduced the number of robberies they committed by 90 percent. But that was just the beginning. By removing these heavy users from the market, the program took away the industry’s most valuable customers, making the heroin market far less viable in terms of demand. At the same time, it struck an unusually deadly blow against supply. The heavy users’ habits were so prodigious that most of them also dealt the drug, in order to pay for their own drug use. Taking them out of the game therefore simultaneously removed most of the country’s dealers, making it much harder for casual users to get a fix. By taking on as a patient anyone who was a serious customer, the program caused the market to collapse. In Zurich, the number of new addicts registered in 1990 was 850. In 2005, it was 150. Legalizing heroin — through a strictly limited, doctor-run program — has made the drug far harder to access than banning it ever did.

Acknowledgments

Narconomics started life as an article in the Economist’s issue of July 28, 2012.

Tom Wainwright is the Britain editor of the Economist. Until 2013, he was the magazine’s Mexico City correspondent, covering Mexico, Central America, and the Caribbean, as well as parts of South America and the border region of the United States.