Robin Williams said, “Reality is just a crutch for people who can’t handle drugs.”. The probably global figure for the total illicit drug industry would be approximately $360 billion with a quarter billion consumers worldwide. Despite the relentless war on drugs the governments are leading, and the billions of dollars per year invested trying to disrupt drug cartels, they have always managed to adapt and prosper. What is it that makes this business so lucrative? In “Narconomics: How to run a drug cartel”  former Economist reporter Tom Wainwright explains the organization of drug cartels using classical economics and modern business theory.
Effectiveness of interventions
Wainwright got sent to Mexico in 2010, right at the time when the drug on war started and the murder rate was spiraling. Around that time, the Mexican government discovered a warehouse in Tijuana with over 100 tons of marijuana, largest load ever seized in the country. They decided to make a huge bonfire and the police had to monitor the area downwind to make sure no one was standing there and accidentally getting high on a gigantic joint. It was at the time widely reported that this seizure was a half a billion dollars blow to the drug cartel. Wainwright was intrigued by how implausibly high this was. Not many companies in the world could withstand such a hit, yet the cartel was still going. This half a billion dollars estimation stems from the retail price of marijuana in the states: they simply multiplied the $5 per gram by the 100 tons which is the equivelant of calculating the price of a cow according to the price of steak in New York. When you factor in that wholesale price in Mexico is 8 cents per gram, the 100 tons are actually worth less than 10 million dollars. If what’s being done in the supply side is 98% less effective then we think, what other misconceptions towards the limitation of the illicit drug industry do we have? According to Wainwright, the attempt to control drug distribution by cartels should be viewed as a business rather than a war on drugs. Cartels have invested in franchising, public relations and even online retail – just like any legitimate business.
Burden of cutting supply
Up until now, drug control policies and interventions have mainly focused on the supply aspect of the business and not the demand side. Cocaine, for example, originates exclusively from Bolivia, Columbia and Peru. Traditional economic theory would suggest that if you cut into the supply of cocaine but that the demand remains constant, prices would go up and you would expect people to consume less. For decades, these three governments have successfully cut supply in all three countries by eradicating the coca leaves production yet prices in the USA have always remained around $180 per gram. The reason why this particular issue does not follow the traditional economical model is that coca farmers cannot exactly sell their crops to the highest bidder, they need the cartels to buy it because they are actually the only bidder, thus the cartels can pressure farmers into selling at a low/constant price regardless of the scarcity of the coca leaves. The efforts to cut supply seem to be affecting the wrong people, rather than affecting the cartels and consumers, the burden seems to fall on the farmers.
Effect of cutting supply
Cutting supply and increasing the price of coca leaves has not proven to affect the supply of cocaine. But according to Wainwright, even if we managed increase the price of coca leaves there is little reason to think it would affect the retail price of the final product. A ton of fresh coca leaves makes 1kg of cocaine. In Columbia, that ton is worth about $400. 1kg of cocaine is worth about $150’000. Hence, even if we effectively raise the price of coca leaves from $400 to $800 and that all the extra cost fell onto the consumer, this would only raise the price of the final product from $150’000$ to $150’400. Much like doubling the price of paint would not affect the price of artwork, this means that you would effectively raise the price of a gram of cocaine by 40 cents which is hardly deterrent for anyone.
Human resource issue
Leading organized crime groups effectively poses several fundamental issues in the human resources department. The main problem is the rapid turnover due to the high violence and arrests. In the cocaine traffic rout from the Caribbean to UK, one in four drug mules gets arrested. It seems impossible to run a business where you need to replace a quarter of your staff with every transaction.
Another issue cartel leaders face is how to recruit new employees. Because of the particular nature of the industry, they cannot exactly advertise the vacancy on LinkedIn or other recruitment websites. They have to recruit people from prison, which has become the main candidate pool for cartels because it is the only place where they can find unemployed men with records.
When you consider how difficult it can be to replace your employees, you might want to avoid losing them in the first place. A study in the Netherlands has shown that when there are fewer people in prison and those prisons are managed better it creates a tighter labor market therefore drug cartels treat their employees better and are less likely to resort to violence to solve problems. But when it’s easy for a gang to replace their staff, they are much more likely to resort to violence to settle a dispute. Therefore, in countries like El Salvador where there is a very slack labor market, it is easy to recruit people from prison and crime groups don’t need to worry about the cost of replacing their staff, making them far more likely to resort to violence and treat their people like they’re disposable.
The war on drugs has cost governments $100 billion a year with a failure rate of 90% on drug capture, meaning that only 10% of illicit drugs are captured. Perhaps analyzing a drug cartel’s dynamic and treating it as a business could be the answer law enforcers are desperately looking for to combat drug consumption.