Narconomics: How to Run a Drug Cartel

by Tom Wainwright

I dealt with a trader of crystal-meth pipes who was as attentive as any Amazon representative.

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

Colombian cocaine manufacturers have protected their profits by tightening control of their supply chains, along the same lines as Walmart.

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.

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

But the cartels have quickly found other sources of supply. Peru’s crackdown triggered a coca-growing boom in Colombia.

“balloon effect”: if you squeeze in one place, it bulges up somewhere else.

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.

a monopsonist can dictate prices to its suppliers, who have no one else to sell to.

cartels are more like big-box retailers than one might imagine, playing the role of buyers rather than growers.

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.

armed groups that control the cocaine trade in Colombia act as monopsonies.

if the cost of producing the leaf goes up—owing to eradication, disease, or anything else—it will be the farmers who bear the cost, not the cartel.

cartels keep their own costs down at the expense of coca farmers.

farmers have only one customer.

they’re all more profitable than coca, but they need investment,”

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.

Juárez’s real value to cartels, of course, lies in its role as the gateway to a much bigger market.

70 percent of the cocaine entering the United States via Mexico crosses the border at Juárez.

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 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.

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.

One British smuggler estimated that of the cocaine “mules” he sends on flights from the Caribbean to the United Kingdom, one in four will be stopped.

The taxpayer may not like paying for criminals’ lunches, but beans are cheaper than metal detectors.

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).

Mexican hit man who has been accidentally targeted by his colleagues is sent on an all-expenses-paid trip to the seaside resort of Mazatlán, by way of compensation.

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.

Under the old Dominican system, half of all inmates reoffended within three years of their release. Under the new system, fewer than 3 percent do.