The following post contains extracts from Narconomics - How To Run a Drug Cartel.
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Narconomics is a brilliant insight into the black market drug trade, from a completely different perspective. From the start the author admits he has written about drugs from a consumer point of view and this would be a different perspective.
This is the story of what happened when a not very brave business journalist was sent to cover the most exotic and brutal industry on earth.
One of the first things I noticed when I started looking at the illegal-drugs industry through the eyes of an economist was that many of the impressive-sounding numbers quoted by the officials in charge of fighting it simply don’t make sense.
Not long after I arrived in Mexico, a giant narcotic bonfire was set alight in Tijuana. Soldiers lit the kindling and stood well back as 134 metric tons of marijuana went up in thick, pungent smoke. The stash, which had been discovered hidden inside six shipping containers in a warehouse on the edge of the city, represented the biggest drug bust in the country’s history.
General Alfonso Duarte Múgica, the Mexican Army’s commander in the region, proudly announced that the smoldering stash had been worth 4.2 billion pesos, then equivalent to about $340 million. Some US newspapers went even further, reporting that the haul was worth more like half a billion dollars, based on what the drugs could have fetched in the United States.
By any reasonable analysis, they were both wrong by a mile. General Duarte’s calculation seems to have been based on the assumption that a gram of marijuana can be bought in Mexico for about $3. Multiply that by a hundred tons and you come up with a total value for the stash of around $300 million. In the United States, a gram might cost more like $5, which is where the half-billion estimate comes from.
The logic sounds reasonable enough, even if the numbers are very rough. But it is ludicrous. Consider another fiercely addictive Latin American export: Argentine beef. In a Manhattan restaurant, an eight-ounce steak might cost $50, or 22 cents per gram. By General Duarte’s logic, that would imply that a half-ton steer is worth over $100,000. A steer has to be slaughtered, butchered, packed, shipped, seasoned, grilled, and served before it is worth $50 per slice. For this reason, no analyst of the beef industry would calculate the price of a live steer mooching around on the Argentine pampa using restaurant data from New York City.
Yet this is effectively how the value of heroin seized in Afghanistan or cocaine intercepted in Colombia is sometimes estimated. In reality, drugs, like beef, have to go through a long value-adding chain before they reach their final “street price.” A gram of marijuana might fetch $3 in a Mexico City nightclub, or $5 in an American college dorm. But hidden in a warehouse in Tijuana—yet to be smuggled across the border, divided into retail-size quantities, and furtively marketed to consumers—it is worth much less.
The best estimates available suggest that the wholesale price of marijuana in Mexico is about $80 per kilo, or just 8 cents per gram.3 At this price, the stash in Tijuana would have been worth more like $10 million—and probably less, because no one hiding 100 tons of an illegal product would be able to sell it by the kilogram.
The Tijuana seizure was a whopper, and heads no doubt literally rolled in the cartel that lost it. But the $340 million blow to organized crime that most newspapers reported was a fantasy: the loss incurred by the criminals who owned the drugs was probably less than 3 percent of that amount. If assumptions about the value of a single big warehouse of Tijuana marijuana could be so wildly wrong, I wondered, what else might be found out by analyzing the drug trade from a completely different perspective, applying basic economics? Look again at the cartels, and further similarities to legitimate businesses become clear.
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