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WSJ on economics of Mexico's drug war

December 27, 2009

This wonderfully comprehensive article in the Wall Street Journal on the economics of the drug trade, focusing on Mexico, is a must-read. Here are some highlights:

• On the difference between Colombian and Mexican traffickers…

Before, the Colombian cartels told Mexicans what price they would pay for wholesale cocaine. Now, Mexican gangs play smaller Colombian suppliers off of each other to get the best price. Mexican gangs are “price setters” instead of “price takers”…

Unlike Colombian drug gangs in the 1980s, who relied almost entirely on cocaine, Mexican drug gangs are a one-stop shop for four big-time illicit drugs: marijuana, cocaine, methamphetamines and heroin… This diversification helps them absorb shocks from the business. Sales of cocaine in the U.S., for instance, slipped slightly from 2006 to 2008. But that decline was more than made up for by growing sales of methamphetamines.

• On risk and innovation…

After Mexico restricted the importation of pseudoephedrine to slow the manufacture of methamphetamines, drug gangs found another way to make the drug using different, unrestricted chemicals widely used in the perfume industry. “I’ve always thought these guys had a good research and development arm,” says one exasperated Mexican official…

In many ways, illegal drugs are the most successful Mexican multinational enterprise, employing some 450,000 Mexicans and generating about $20 billion in sales, second only behind the country’s oil industry and automotive industry exports… The wholesale price of a single kilo of cocaine, for instance, costs $1,200 in Colombia, $2,300 in Panama, $8,300 in Mexico, and between $15,000 and $25,000 in the U.S., depending on how close you are to the Mexican border. At a retail level on the streets of New York, it can run close to $80,000.

• On the importance of marijuana…

Marijuana accounts for anywhere between 50% to 65% of Mexican cartel revenues, say Mexican and U.S. officials. While cocaine has higher profit margins, marijuana is a steady source of income that allows cartels to meet payroll and fund other activities.

Marijuana is also less risky to a drug gang’s balance sheet. If a cocaine shipment is seized, the Mexican gang has to write off the expected profits from the shipment and the cost of paying Colombian suppliers, meaning they lose twice. But because gangs here grow their own marijuana, it’s easier to absorb the losses from a seizure. Cartels also own the land where the marijuana is grown, meaning they can cheaply grow more supply rather than have to fork over more money to the Colombians for the next shipment of cocaine.

• On decriminalization versus legalization…

While [decriminalization] may make sense domestically for the U.S., Mexican officials say it is the worst possible outcome for Mexico, because it guarantees demand for the drug by eliminating the risk that if you buy you go to jail. But it keeps the supply chain illegal, ensuring that organized crime will be the drug’s supplier.

Making pot legal might actually increase violence south of the border even more in the short term, with drug gangs fighting over a smaller economic pie of the remaining illegal drugs. But it would eventually reduce the overall financial clout of cartels.

2 Comments leave one →
  1. January 7, 2010 11:29 pm

    These are some staggering numbers.

  2. January 28, 2010 1:04 am

    The idea that the drug economy is employing a half million people in Mexico is unbelievable. That is the size of decent city… alot of people would be out of work in Mexico if the States decriminalized drugs. It would definitely increase the “dog eat dog” scenario.

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