How Economists Would Wage the War on Drugs

The monstrous cartels that run the narcotics business face the same dilemmas as ordinary firms—and have the same weaknesses

By Tom Wainwright

Most of the money spent tackling narcotics is directed toward disrupting supply—by uprooting coca bushes, battling cartels, locking up dealers and so on. Would focusing on demand be more effective? Pictured, a Mexican farmer works in a poppy field in Guerrero, Mexico, in January.

Most of the money spent tackling narcotics is directed toward disrupting supply—by uprooting coca bushes, battling cartels, locking up dealers and so on. Would focusing on demand be more effective? Pictured, a Mexican farmer works in a poppy field in Guerrero, Mexico, in January. Photo: Pedro Pardo/Agence France-Presse/Getty Images    
 
 
In April, the world’s governments will meet in New York for a special assembly at the United Nations to discuss how to solve the drug problem. Don’t hold your breath: Since the previous such gathering nearly two decades ago, the narcotics industry has done better than ever. The number of people using cannabis and cocaine has risen by half since 1998, while the number taking heroin and other opiates has tripled. Illegal drugs are now a $300 billion world-wide business, and the diplomats of the U.N. aren’t any closer to finding a way to stamp them out.

This failure has a simple reason: Governments continue to treat the drug problem as a battle to be fought, not a market to be tamed. The cartels that run the narcotics business are monstrous, but they face the same dilemmas as ordinary firms—and have the same weaknesses.

In El Salvador, the leader of one of the country’s two big gangs complained to me about the human-resources problems he faced given the high turnover of his employees. (Ironically, his main sources of recruitment were the very prisons that were supposed to reform young offenders.) In Mexican villages, drug cartels provide basic public services and even build churches—a cynical version of the “corporate social responsibility” that ordinary companies use to clean up their images. Mexico’s Zetas cartel expanded rapidly by co-opting local gangsters and taking a cut of their earnings; it now franchises its brand rather like McDonald’s MCD -0.55 % and faces similar squabbles from franchisees over territorial encroachment.

Meanwhile, in richer countries, street-corner dealers are being beaten on price and quality by “dark web” sites, much as ordinary shops are being undercut by Amazon.

Soldiers and police officers have done rather poorly at regulating this complex global business.

So what would happen if the war on drugs were waged instead by economists?

Take cocaine, which presents one of the great economic puzzles of narcotics. The war against cocaine rests on a simple idea: If you restrict its supply, you force up its price, and fewer people will buy it.

Andean governments have thus deployed their armies to uproot the coca bushes that provide cocaine’s raw ingredient. Each year, they eradicate coca plants covering an area 14 times the size of Manhattan, depriving the cartels of about half their harvest. But despite the slashing and burning, the price of cocaine in the U.S. has hardly budged, bobbing between $150 and $200 per pure gram for most of the past 20 years. How have the cartels done it?

In part, with a tactic that resembles Wal-Mart’s. The world’s biggest retailer has sometimes seemed similarly immune to the laws of supply and demand, keeping prices low regardless of shortages and surpluses. Wal-Mart’s critics say that it can do this in some markets because its vast size makes it a “monopsony,” or a monopoly buyer. Just as a monopolist can dictate prices to its consumers, who have no one else to buy from, a monopsonist can dictate prices to its suppliers, who have no one else to sell to. If a harvest fails, the argument goes, the cost is borne by the farmers, not Wal-Mart or its customers.

In the Andes, where coca farmers tend to sell to a single dominant militia, the same thing seems to be happening. Cross-referencing data on coca-bush eradication with local price information shows that, in regions where eradication has created a coca shortage, farmers don’t increase their prices as one might expect. It isn’t that crop eradication is having no effect; the problem is that its cost is forced onto Andean peasants, not drug cartels or their customers.

Even if the price of coca could be raised, it wouldn’t have much effect on cocaine’s street price.

The raw leaf needed to make one kilogram of cocaine powder costs about $400 in Colombia; in the U.S., that kilogram retails for around $150,000, once divided into one-gram portions. So even if governments doubled the price of coca leaf, from $400 to $800, cocaine’s retail price would at most rise from $150,000 to $150,400 per kilogram. The price of a $150 gram would go up by 40 cents—not much of a return on the billions invested in destroying crops. Consider trying to raise the price of art by driving up the cost of paint: It would be futile since the cost of the raw material has so little to do with the final price.

Economics points to a fundamental mistake in the war on drugs. Most of the money spent tackling narcotics is directed toward disrupting supply—by uprooting coca bushes, battling cartels, locking up dealers and so on. In fact, focusing on demand would be more effective.

Demand for drugs is inelastic—that is, when prices rise, people cut their consumption relatively little. (Given that most banned drugs are addictive, this isn’t surprising.) So even when governments can drive up prices, dealers continue to sell almost as much as they did before—only at higher prices, meaning that the value of the criminal market increases.

Reducing demand, by contrast, triggers a fall in both the amount consumed and the price paid, cutting into the criminal market on two fronts.

A soldier entered a bullet-riddled home covered ​with the initials of drug cartels—CDG for the Gulf Cartel and Z for Los Zetas—in Ciudad Victoria, Mexico, Sept. 6, 2014.
A soldier entered a bullet-riddled home covered ​with the initials of drug cartels—CDG for the Gulf Cartel and Z for Los Zetas—in Ciudad Victoria, Mexico, Sept. 6, 2014. Photo: Eduardo Verdugo/Associated Press
 

Demand-side interventions are not only more effective, they’re also considerably cheaper than playing about with helicopters in the Andes. A dollar spent on drug education in U.S. schools cuts cocaine consumption by twice as much as spending that dollar on reducing supply in South America; spending it on treatment for addicts reduces it by 10 times as much. Rehab programs for prescription-painkiller users might seem costly, but they prevent those people from slipping into the colossally more expensive problem of heroin addiction. Where demand cannot be dampened, it can be redirected toward a legal source, as a few U.S. states have done with marijuana—a development that has inflicted bigger losses on the cartels than any supply-disruption policy.

In any other industry, the current approach to drug control would have been identified as faulty years ago. Despite billions of dollars spent and tens of thousands of lives lost, the business is stronger than ever. Yet the tendency to treat narcotics as a military or policing matter means that the flawed economics behind it seem to go unquestioned. As the U.N. prepares for its special assembly, governments should seek advice not from their generals but from their economists.


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