Narconomics: How To Run a Drug Cartel

by Tom Wainwright

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. For the big-thinking executive, national borders belong in the twentieth century.

Even before the age of offshoring, the narcotics trade was an early standard-bearer of globalization, with prim Victorians enthusiastically trading drugs along with tea and spices as world trade opened up in the nineteenth century. Britain twice went to war with China to keep the international opium trade alive. Meanwhile, Western consumers began to develop a taste for imported narcotics. Charles Dickens was supposedly a fan of opium; in Vienna, Sigmund Freud devoured line after line of cocaine, causing him to write giddy letters to his girlfriend, Martha Bernays

For cartels it is just the opposite: countries with weak institutions make ideal places to set up shop. 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. Drug cartels wanting to know where they are going to find it easiest to outgun the local cops, bribe the judges, and get the business community to launder their cash only need read the index.

Computer scientists at the University of California–Berkeley and UC–San Diego hijacked a working spam network to see how the business operated. They found that the spammers, who were selling fake “herbal aphrodisiacs,” made only one sale for every 12.5 million e-mails they sent: a response rate of 0.00001 percent. Each sale was worth an average of less than $100. It doesn’t look like much of a business. But sending out the e-mails was so cheap and easy—it was done using a network of hijacked PCs, which the fraudsters used free of charge—that the spammers made a healthy profit. Pumping out hundreds of millions of e-mails a day, they had a daily income of about $7,000, or more than $2.5 million a year, the researchers figured.

order to finance this turbo-charged growth, the Zetas have employed a version of franchising. According to a recent analysis5 by the regional head of the UN’s Office on Drugs and Crime, the Zetas have decided not to send their own representatives into new markets to set up criminal outposts from scratch and instead have adopted local gangsters into their club, as franchisees. Zeta scouts go to new areas and identify the most promising local criminals, “to whom the mother cell offers a kind of franchise on the use of the Zetas’ criminal marque,” the UN report says. As part of the “affiliation package,” the Zetas’ central command provides the franchisees with military training, and in some cases arms. In return, franchisees share a slice of their revenues with the central organization and agree to form a “solidarity pact,” an agreement that they will fight for the Zetas if a war breaks out with another cartel.

Perhaps most important, there is the brand. McDonald’s hasn’t conquered the world by making food that tastes delicious: it has done so by making food that tastes reliably the same.

But consumers know that any restaurant displaying the famous golden arches is going to meet a basic level of quality. Franchisees are buying a reputation they would otherwise have to earn. And when McDonald’s sponsors the Olympics or hires Justin Timberlake to endorse its food, every franchise benefits from the advertising message, too.

Murdering Zapata broke a serious unwritten rule of Mexico’s cartels: never kill Americans, and especially not American cops.

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.

In drug trafficking as in burger flipping, franchisees, who are not truly part of the company, are never going to be quite as loyal to the brand as regular staff. Entrepreneur magazine has pointed out that franchises tend to have a weaker “core community” of employees than do top-down organizations. The same is true of criminal gangs. No one knows this better than the Zetas, who started out as the armed bodyguards of the Gulf cartel. Within a few years the Zetas had become too ambitious for their limited role, at which point they turned against their Gulf employers, all but destroying them.

As they take on more and more franchisees, the Zetas take on more and more risk. The franchising model that has powered the cartel’s growth could yet prove to be its undoing.

Getting drugs into the country may be hard, but that has only made the Kiwis experts in producing and consuming narcotics of their own.

BZP as a safer alternative to methamphetamine—in fact, one academic study suggested that rather than being a “gateway drug” to harder substances, it was offering some people a gateway out.

The research-and-development teams in drug-makers’ laboratories are not trying to come up with products that are better, or safer. Instead, they are simply trying to devise something that is new enough to be allowed on sale. If it turns out to be rough on the user, never mind—by the time anyone realizes, it will be banned anyway, and it will be time to release the latest variety.

Again, some drugs prove to be duds, and the companies best placed to survive these failures are those that can hedge their bets by investing in several different products at once. This, too, gets expensive. And just like pharmaceutical companies, legal-high peddlers need to stay on top of fast-evolving regulation.

Rather than allow manufacturers to put their products on the market and then ban them once they had been proven harmful, the government turned the tables and established a system under which pill makers would have to prove that their product was safe before they were allowed to sell it. The manufacturers’ claims would be assessed by a new Psychoactive Substances Regulatory Authority, which would have powers similar to the bodies that regulate medicines. In effect, the reform reversed the burden of proof: instead of the government constantly chasing after new products that had gone on sale, it would force manufacturers to prove that their drugs met basic standards before they were allowed to put them anywhere near consumers.

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.3 If that is the case, even drug users who buy their supplies “offline,” from a dealer or friend, may well be buying a product that was traded online at an earlier stage in the supply chain.

The more they spread the word about their good-value, high-quality drugs, the more they risk arrest: when a product is illegal, there is only so much advertising one can do.4 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.

A few even claim that their cocaine is “fair trade” or “conflict free”—a boast that is patently untrue, given that the world’s cocaine supply is controlled by a group of murderous cartels, but interesting in that it shows how drug dealers are starting to mimic the tactics used by ordinary retailers.

But with drugs available online, the corners have become less important, just as the brick-and-mortar outlet has become less important to ordinary retail businesses.

the increase in competition brought about by the easier entry to the market will exert even more downward pressure on prices. Cheaper drugs are an unwelcome development for governments that want to curb their use.

The listings on sites like the Silk Road suggest that to a large extent, these websites are taking on a role similar to the “multi-commodity drug broker.” On these sites, retail buyers, as well as dealers, can find almost any type of drug known to users and buy such drugs in fairly large quantities. This is problematic for the police, because the nature of the online trade means that there is no single central “node”: thousands of buyers and sellers are able to interact in an open market, and taking one dealer, or even a dozen, out of business, will not make much of an impact on the supply chain for everyone else. Even if an entire marketplace goes offline, as the Silk Road and Evolution eventually did, new ones pop up to take its place.

There is pretty good evidence that many people who take drugs—perhaps even the majority—never have contact with a professional dealer at all. Rather, they buy (or are given) drugs by people they know: friends, partners, colleagues, and so on.

Drugs are usually sold by professional dealers at some point in their supply chain, but it seems that after that, they are widely passed around through networks of friends.

But if in fact there is a sort of “after-retail” market, in which drugs are passed around a secondary network of friends and acquaintances, there may be scope for a different sort of intervention. Looking at the map of high-school romances, one can import some of its lessons. The researchers started off with the assumption that targeting the best-connected people would pay the highest dividends. In the school, this meant the people with the most sexual partners; in the drug world, it could mean the dealers.

What they found was that it made more sense to target less-well-connected members of the network, because although they were attached to fewer people, they formed

links in long chains that were relatively easy to break up. Apply this to the drug world, and it may be that an effective intervention would be to focus on the nonprofessional dealers who informally pass drugs on to friends. These people are the equivalent of the high school students with few partners: they might be relatively easy to influence, and breaking just one link in a friendship “chain”—that is, preventing one person f...

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.

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.

A paper in Addiction, an academic journal, estimated the quantity of various drugs needed to get an average person high versus the amount required to kill them.5 In the case of 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.

The cops aren’t the only ones who hunt for cannabis farms in this way: criminals in Birmingham, England, have been caught using drones equipped with infrared cameras to spot hidden grow-sites, to rob or extort the owners. “They are fair game,” a drone-using extortionist told the local Halesowen News. “It is not like I’m using my drone to see if people have nice televisions. I am just after drugs to steal and sell. If you break the law then you enter me and my drone’s world.”

The cheapest illegal weed is found in the border region: in El Paso, Texas, the wholesale price of a kilogram can be as little as $200. By the time it reaches New York City, the same drug costs upward of $1,000. Pity the person who wants to get high in Hawaii, where a kilo of marijuana costs $6,000, wholesale.

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.

According to IMCO’s calculations, the spread of legal cannabis from Colorado and Washington to other states could mean that Mexico’s cartels lose nearly three-quarters of their current business, cutting their cannabis revenues to $600 million.

Just as NAFTA has led to the sprouting up of factories in Mexico assembling televisions and refrigerators to be exported to the United States, cannabis warehouses would surely move south of the border, to take advantage of low rents and wages.

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.

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 it.

Whether the subject is drugs, migration, or another illegal business, the point is the same: whereas attacking supply can only reduce consumption by driving up prices—and therefore criminal revenues—attacking demand can reduce both.

For every $1 million spent on treatment, the consumption of more than 100 kilograms of cocaine is averted. In other words, 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.

Half a century after Nixon’s war was declared, sadly, there has never been a better time to run a drug cartel.