Narconomics

Crooks already know these tricks. Honest men must learn them in self-defense. —“HOW TO LIE WITH STATISTICS,” DARRELL HUFF (Location 46)

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. Cutting supply has done more to raise prices than it has to reduce the amount of drugs consumed, resulting in a more valuable criminal market. (Location 138)

Note: Focus on cutting demand rather than supply

Third, even though the drug cartels are models of nimble, borderless global commerce, efforts to regulate them are still clumsily national in scope. The result is that the industry survives by slipping from one jurisdiction to another, easily outwitting the uncoordinated efforts of different countries. (Location 143)

Tags: regulation

Note: The world needs a more joined up approach to tackle drug cartels

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. The more I learned about the way the cartels do business, the more I wondered if legalization, far from being a gift to the gangsters, could be their undoing. (Location 145)

The idea is a simple economic one: if you reduce the supply of a product, you increase its scarcity, driving up its price. Scarcity is what makes gold more expensive than silver, and oil more expensive than water: if lots of people want something, and there isn’t enough to go around, they have to pay more to get their hands on it. (Location 217)

Tags: scarcity

The agricultural side of the cocaine industry is mostly handled by ordinary farmers like the ones in Trinidad Pampa, who would just as happily grow tomatoes or bananas if they paid as well as coca. 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. (Location 286)

Note: Cartels play a role similar to supermarkets, squeezing growers

Just as big retailers protect themselves and their customers from price rises by forcing suppliers to take the hit, cartels keep their own costs down at the expense of coca farmers. “The shock is assumed entirely by growers, as major buyers have the ability . . . to maintain fixed prices,” write Gallego and Rico. (Location 306)

Note: Farmers take the hit from cocoa eradication

Édgar Marmani, the local union leader, says he would consider switching to other industries if the start-up costs were lower. “Poultry, tomatoes, pork—they’re all more profitable than coca, but they need investment,” he complains. The European Union has put forward some cash to meet that need, funding projects in Bolivia that encourage the cultivation of bananas, coffee, and citrus fruits, among other things. (Location 334)

Note: Locals would switch to other crops if they had grants to overcome high startup costs

“Sin maíz, no hay país” (“Without corn, there is no country”). (Location 344)

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. (Location 397)

Tags: cocaine

Note: The land dedicatd to growing the crop reduced but the efficieny of the manufacturing process increased

Let’s imagine that the governments of South America make a breakthrough, and that by a massive increase in eradication or by providing coca farmers with alternative job opportunities they are able to treble the amount that cartels have to pay to acquire coca leaf. This would mean that to buy enough coca to make a kilogram of cocaine, cartels would have to shell out about $1,155, rather than the $385 that they pay at the moment. Now let’s imagine that every penny of that extra cost is pushed on to the consumer. (Again, that seems unlikely—the most probable outcome is that the cartels would force other people in the chain to absorb some of the costs, as they do with their suppliers.) It would mean that a kilogram of pure cocaine sold at the retail level in the United States would cost an extra $770—that is, $122,770, rather than $122,000. That would mean that one pure gram would cost $122.77 rather than $122: a rise of 77 cents. 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. (Location 421)

Tags: cocaine

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. (Location 434)

Tags: favorite, chocolate, cocaine

Note: Driving up the costs of the raw product have little impact on the final cost

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. (Location 510)

Note: There are less than 50 official order crossings

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). (Location 550)

Although it might make economic sense, Mexico’s cartels have struggled to divide markets up in this way. The important border crossings and ports are scarce, and with a city such as Juárez responsible for the transit of 70 percent of northbound cocaine, coming up with a “fair” division is difficult. For the maras, it is different. Although they have a modest line in international drug trafficking, most of their business is done locally, dealing drugs or running extortion rackets. This domestic market is relatively easy to divide up into local monopolies. (Location 701)

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. (Location 789)

Tags: contracts, violence

Note: Gangs cant use legal justice so use violence to ennforce.contracts

The high levels of violence in border towns have led to calls from some people in the United States for crossings to be shut down. Yet economics suggests the opposite: by opening more of them, each would become less valuable, and less worth fighting for. True, it would give cartels more opportunities to smuggle their drugs into the United States. (Location 794)

Tags: drugs

Colombian smuggling network that was recently discovered in the Netherlands. Rather than importing cocaine, this gang was devoted to the equally tricky problem of sending large quantities of illicitly acquired cash back to Colombia without raising the suspicions of the authorities. It did this by paying amateur mules €3,000 ($3,350) each to carry suitcases containing up to €150,000 in cash back to Bogotá. (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.) (Location 1144)

Tags: euro

Note: The €500 bill has made it far easier to smuggle cash

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. (Location 1182)

Tags: prison

Note: Prison is extremely expense, even more so than Eton college

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. Does it really need to lock up five times as many people per capita as Britain, six times as many as Canada, and nine times as many as Germany? (Location 1183)

Tags: prison

Note: The US locks up 5X as many people per capita than the UK

(“legalized lying” is how H. G. Wells described the advertising business; (Location 1277)

Tags: advertising

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. (Location 1354)

Tags: drugs

Note: Silver or lead

Whenever there are reports of violence, the authorities respond by sending large numbers of heavily armed police or soldiers to the troubled area, to keep a lid on things. This thicker presence of law enforcers makes it harder for the cartels to do business. 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. (Location 1375)

Note: Dispose of bodies and prevent media from reportng incidents

In New York City, the mafia was long involved in the garbage-collection business. It hardly sounds very profitable—certainly less glamorous than the international cocaine trade—but by fixing the prices charged for waste collection, garbage-disposal firms could dramatically increase their profits. The problem was that, as with the millers in nineteenth-century Sicily, the agreement would break down if one firm put in a competitive bid in order to steal the contract. The solution was to enlist the mafia to make sure that all sides kept the bargain. Bringing in the mob had the other useful (to the garbage-disposal firms) side effect of deterring new entrants to the market, Gambetta and Reuter note. (Location 1547)

Tags: mafia

the cartels have managed to win just enough support in a few key areas to lessen their chances of being reported and convicted. By making flashy donations to charitable or religious causes, they have softened their images. Stepping in to provide public services where the state has failed, they have come to be seen in some poor areas as alternatives to the legitimately elected authorities. By guaranteeing corrupt agreements between firms, they have forged links with the business class. By deploying advertising, mastering online media, and intimidating journalists, they have ensured that all of this is presented to the public in the most positive light possible. (Location 1568)

An international fashion for free trade saw many countries open up their economic borders through grand deals such as NAFTA, initiated by Canada, Mexico, and the United States in 1994, which was followed by the European Union’s eastern enlargement in the early 2000s. With these barriers broken down, companies assembling products in the United States and Europe wondered why they were paying rich-world salaries to local workers, and rich-world rents for local premises, when the job could be done just as well a few hundred miles away in a country where wages, property, and everything else were far cheaper. There began a great migration of manufacturing power to Latin America, North Africa, and the Far East. (Location 1630)

Central America is smaller in area than Texas, and yet it is home to seven tiny countries, (Location 1651)

Tags: central america

When it comes to corruption in the public sector, Honduras has a track record that few can rival. It was the original “banana republic,” so called because its politicians were so easily bribed and bossed around by the foreign fruit companies that arrived in the nineteenth century. (Location 1761)

Tags: banana republic

In the ordinary business world, one of the most common causes of complaints among franchisees is the belief that they are having to battle for turf against rival franchisees of the same company. Ordinarily, if a competitor opens up shop nearby, a company can try to outdo it in terms of quality or undercut it in terms of price. In the case of franchising, this isn’t really possible: if a McDonald’s restaurant is doing a roaring trade in a neighborhood where it is the only branch, and suddenly the parent company announces that it is going to open two more franchises in the area, the restaurant will lose revenue to competitors against whom it cannot compete, because they are selling the same products at the same price. (Location 2094)

Tags: franchise

Note: .franchise

The question of territory, and the proximity of other branches belonging to the same brand, becomes crucial to the success or failure of a franchisee. To the franchiser, however, it isn’t so important. The mother brand makes its money by taking a cut of franchisees’ sales, not of their profits. Opening more branches will always lead to an increase in total sales, even if each new branch cannibalizes some of the business of existing outlets. The interests of franchiser and franchisee are therefore not very well aligned, making the question of territory a subject ripe for conflict. (Location 2099)

Tags: franchise

Just as a single blunder in a restaurant kitchen can tarnish a company’s global brand, a single dire mistake by a group of Zetas affiliates triggered devastating strikes against the cartel’s top leadership. Licensing your brand comes with serious risks attached. (Location 2154)

Tags: reputation, franchise

the Kiwis are only human, and they like to take drugs just as much as people in other countries. Indeed, when it comes to drugs that they can get hold of, they consume them in prodigious quantities. Consider cannabis, which can be grown just as easily in the lush New Zealand countryside as it can in Morocco or Mexico. Kiwis grow and smoke masses of it—in fact, 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. (Location 2223)

“Legal highs” sound safer than illegal drugs. In fact, they are often riskier. When it comes to older, plant-based drugs, such as marijuana, cocaine, and even heroin, users at least know roughly what they are getting. Smoking a joint of cannabis is less hazardous than smoking crack, which in turn is probably a bit safer than smoking heroin. By contrast, a legal high, which may have been on the market for only a matter of days, is an unknown quantity. The mystery white powder could be very strong or very weak, and there is no way of knowing until taking it. (Location 2304)

Note: At least people know the relative strength and effects of traditional drugs

The endless tinkering with the chemical composition has created “Frankenstein drugs,” says Ross Bell of the New Zealand Drug Foundation, who claims that the compounds in the current crop of legal highs are more likely than past versions to cause anxiety, increased heart rate, hallucinations, and depression. (Location 2334)

Tags: drugs

Note: The constant banning of new legal drugs has let to drug releases which diiffer greatly from the traditional drugs they aim to imitate

Trying to suppress the drugs business is tricky at the best of times. The cartels are experts in finding ways to flout whatever bans governments announce. But the legal-highs phenomenon presents a new sort of problem. Usually the difficulty lies in tracking down and prosecuting those who break the law. But in this particular corner of the narco-economy, the people selling the drugs do not break the law at all: rather, they stay ahead of it. How can the business be policed? Regulators always struggle when it comes to industries that are based on innovation. In the tech business, new services and inventions created by the likes of Google and Facebook present legal and moral dilemmas about privacy and data protection faster than courts can rule on them. (Location 2384)

Note: Regulators struggle in industries with lots of innovation

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 one member of Parliament who voted against it did so because he was against plans for the drugs to be tested on animals). (Location 2411)

Tags: drugs

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. In May 2015, Matt Bowden, the original legal-highs entrepreneur, put his company, Stargate, into liquidation. “This has been the most difficult time of my life,” he told New Zealand’s 3 News. “Dealing with this has been more difficult than dealing with meth addiction.” (Location 2431)

Note: Change in regulations dramatically effected companies selling legal highs

The combination of untraceable browsing and anonymous payments has enabled an online criminal market to flourish. As well as drugs, all sorts of other unsavory things are sold on these hidden sites. The Digital Citizens Alliance estimates that illegal narcotics make up about two-thirds of the listings. (Location 2519)

Tags: dark web

The result is called a network economy. Players deal only with people who are part of their network, whether they be family, friends, neighbors, or former cellmates, rather than participating in an open market. (Location 2586)

Why are drug dealers so serious about customer service on the web, when they are so bad at it offline? The reason is that a Dark Web marketplace such as the Silk Road or Evolution is much more like a conventional market than a network economy. Sellers advertise their products openly, and buyers are free to compare the full range of prices being offered. Buyers and sellers alike can trade with everyone else in the market, rather than just with the people they know. This means that the need for a “network” vanishes—which in turn means that there is no longer much of an incumbent advantage. ... Sellers are forced to compete more seriously on price, quality, and customer service, rather than being able to stay in business simply because they have built the rare set of contacts required to make it work. What’s more, it is relatively easy for new dealers to enter the market, as barriers to entry are extremely low. (Location 2628)

Tags: dark web

Note: online market places force sellers to compete more on price, quality and customer service. In real life incumbents have the advantage of existing contacts

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. (Location 2661)

Who is central to a drug-dealing network? Police need to go through the same process as Signor Pucci. The simplest approach—looking at who has the most contacts—would suggest that the street-level dealer is the most important player, as the person with the highest number of connections. He distributes drugs to dozens, perhaps scores, of clients. Arresting him could mean that a hundred or more links are disrupted. It seems like a good place to strike. But there are more valuable targets: if the police apply the Google page-ranking methodology, they will find that the most influential people are those who sit at the top of the chain. They know fewer people—they might deal with only a handful of lieutenants—but through those contacts they are linked to the whole network. Take them out and everybody below them is affected. (Location 2737)

As the people-smuggling business gets tougher, the cartels, or at least cartel-aided coyotes, seem to be gaining market share over the more basic, one-person operations. That may not be desirable. But it may be tolerable if the overall size of the market is shrinking. Making the border harder to cross must make people less willing to cross it, one would think. Yes and no. A tougher border probably does put some people off. But it has persuaded others that taking out the services of a coyote is essential. Getting past the ground sensors and night-vision cameras in San Diego, or trekking through the Arizona desert alone, is beyond the capability of most would-be migrants (“suicide” is how Víctor Clark succinctly describes the idea). So seeking professional help has become more appealing. (Location 2976)

Note: An increased difficulty in crossing the border encourages migrants to hire professionals ie cartels

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. (Location 2988)

Tags: immigration

Note: .immigration

The vast increase in spending on border security has inadvertently transformed the people-smuggling business from an optional, cheap, amateur affair into a near-compulsory, very expensive, and cartel-dominated one. It is a gift to organized crime. (Location 3020)

Tags: immigration

Note: .immigration

look at a company that is about as different from a drug cartel as one could get: Disney. The Walt Disney Company started off making cartoons. Those cartoons established a following among children and their families, so Disney set about diversifying into all manner of other businesses, from theme parks to vacation cruises to television broadcasting, which it now sells to the same customers. “I suppose my formula might be: dream, diversify and never miss an angle,” Walt Disney once said. (Location 3027)

Tags: diversification

Note: .diversification

the Mickey Mouse silhouette can now be found on toys, clothes, books, stationery, and a multitude of other products. Disney has diversified not through its key skills—after all, running a theme park or a cruise ship has little in common with making a cartoon—but through its audience. The people who go to Disney’s theme parks or buy its branded clothes are the same people who enjoy watching its cartoons and movies. This strategy—launching completely different products, aimed at existing customers—is horizontal diversification in action. (Location 3030)

Tags: diversification

Note: .diversification launching completely different products for existing customers is called horizontal diversification

alcohol, it found that the ratio was about ten to one—in other words, if a couple of shots of vodka are enough to make you tipsy, twenty shots might kill you, if you can keep them down. Cocaine, it found, was slightly safer, with a ratio of fifteen to one. LSD has a ratio of 1,000 to one, whereas marijuana is safest of all: it is impossible to die of overdose, as far as anyone can tell. Even with the edibles, there is no evidence that one can die of overdose—you simply have a stronger and longer-lasting effect than you may have wanted. For heroin, the ratio between an effective dose and a deadly one is just six to one. Given that batches vary dramatically in their purity, each shot is a game of Russian roulette. (Location 3106)

Tags: heroin, overdose

Note: It is extremely easy to over dose on heroin

Art Schut, the head of Arapahoe House, another Denver rehab clinic, tells me that many of the heroin addicts he sees now are well-off young people of college age who get into heroin via OxyContin or similar pills. “Most of them are middle or upper-middle class, and the pathway is prescription drugs. Prescription drugs are pure, they’re medicine, we think they’re good for us. It’s a pretty easy step,” he says. Nationwide, two-thirds of America’s heroin addicts started off by abusing prescription painkillers. (Location 3129)

Tags: heroin

Note: Perscription drugs are a gateway to heroin

Some 680,000 Americans used heroin in 2013, nearly double the number that had used it only six years earlier. For the cartels, this represents an extraordinarily successful diversification of their business. A drug that many believed was dying out has been rehabilitated, now sold to an unsuspecting and lucrative new market. As cocaine goes out of fashion and cannabis is taken over by the legal market, the cartels can be expected to push even harder at their deadly Plan B. (Location 3172)

Tags: heroin

despite its illegality, about four out of ten Americans admit to having tried marijuana. Across the country, cannabis is thought to be worth roughly $40 billion a year—about the same as the recorded music industry. Until recently, every cent of that went to criminal organizations. (Location 3208)

Tags: weed

Note: .weed the weed industry is the same size as the recorded music industry

If Mexico does start producing cannabis for the American market, the warehouses of Denver may go the same way as the car factories of Detroit: bust, having been undercut by cheaper competition from abroad. And so legalization may turn the cannabis industry full circle: from illegal production in Mexico, to legal production in the United States, and eventually back to Mexico. The only difference will be that the Mexican cannabis farmers will be working for Philip Morris and the like, rather than for the drug cartels. (Location 3544)

Tags: cannabis, mexico

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. (Location 3565)

Tags: drugs

In the first chapter of this book we saw how disrupting the supply of coca leaves in the Andes, by dumping weed killer from light aircraft, has done remarkably little to alter the price of cocaine, in spite of decades of investment and a considerable amount of violence. One reason is that the cartels have used their buying power to force farmers to absorb any cost increases, just as Walmart squeezes its own suppliers. More significant, the cost of coca leaf, the drug’s raw material, is simply too low to have much impact on the final price of cocaine. The bundle of leaves required to make a kilo of powder costs only a few hundred dollars. So even doubling the cost of growing coca adds less than 1 percent to the price of the finished product, which sells for the equivalent of more than $100,000 per kilo. If the supply side is to be attacked, it should be at the end of the chain, in the rich world, where the product is valuable enough for its confiscation to do some economic damage to those who sell (Location 3584)

Note: Attacking the supply side does little to increase the final cost - farmers absorb the loss and the mark up is so large further up the supply chain

Making cuts to rehab and education programs in jails might save a few thousand dollars. But if it means even a handful of prisoners failing to learn to read, or to kick their drug addiction, and as a result reoffending rather than finding work on their release, the cost is immense. (Location 3642)

Note: Not spending money on prisons results in more crime later on

treatment is up to ten times more cost effective than enforcement (perhaps partly because it addresses demand rather than supply, as outlined in the previous section). 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. (Location 3650)

Andean governments could spend tiny amounts to get farmers growing tomatoes instead of coca, but instead they invest much greater quantities in destroying their coca crops by force. (Location 3656)

Note: Incentivising people to grow veg rather than drugs can be very effective

Rather than shell out for job-creation programs for young men, Central American countries prefer the more expensive option of hunting them down when they eventually find work with criminal gangs. Instead of spending a small amount on rehabilitation for prescription painkiller addicts, the United States allows them to slip into addiction to heroin—which it then spends a colossal amount attempting to suppress. (Location 3657)

MISTAKE THREE: ACTING NATIONALLY AGAINST A GLOBAL BUSINESS (Location 3663)

Frequently in this book we have seen examples of “squeezing the balloon,” or, in the Latin American terminology, the “cockroach effect,” in which the drugs business is driven out of one place only to pop up in another. In the 1990s, coca cultivation was pushed out of Peru—“a remarkable achievement,” in the words of the UN chief drug-control officer at the time6—only to crop up in Colombia. Within a decade, Colombia had forced it back out—“a remarkable achievement,” the United Nations noted again7—straight back into Peru, where it had originated. In spite of these two remarkable achievements, remarkably little was actually achieved. (Location 3667)

Note: Fixing the problem in one country pushes it to another

Cocaine use fell admirably in the United States in the early 2000s—but it rose by a very similar amount in Europe during the same period. In the war on drugs, it seems, national successes are common, whereas global ones are rare. “The only thing you can do is push it elsewhere, and make it someone else’s problem,” (Location 3677)

Tags: drugs

UN Office on Drugs and Crime. But it seems to be so committed to defending the strategy of suppressing supply that it isn’t a very honest assessor of the policy’s shortcomings. Its drug monitors have continued to trumpet isolated national successes, spending little time dwelling on the distinctly less impressive aggregate results. If a multinational company tried the same trick, highlighting strong results in one market while glossing over the disappointing bottom line, its shareholders would not allow the firm to get away with it for very long. (Location 3683)

Historically, most countries have fallen into one of three categories: those where drugs are produced (such as Colombia), those where they are trafficked (such as Mexico), or those where they are consumed (such as Europe and the United States). This has allowed governments, and their voters, to see only one side of the drugs industry. Consumer countries, which simply want to stop the drugs reaching their shores, have argued for attacks on the trade to be as severe as possible and to be made at the earliest point in the supply chain, even though it isn’t very effective. For their part, producer and transit countries don’t see why they should invest their own money and lives in suppressing a business whose ill effects are felt mostly outside their own borders. (Location 3704)