Illegal Drugs

BIG BUSINESS

The Risks Are High--But So Are The Rewards

THE drugs industry is simple and profitable. Its simplicity makes it
relatively easy to organise; its profitability makes it hard to stop. At
every level, its pricing and its structure are shaped by the high level of
risk from enforcement: the risk of seizure and jail, and the uncertainty
that arises because traders cannot rely on the law to enforce their bargains.

The industry's products are of two sorts.

Most of its products are agricultural, but a growing sideline is made from
simple chemicals. Production of farmed drugs is concentrated increasingly
in two countries: about two-thirds of the world's heroin (made from opium)
may come from Afghanistan and most of the rest from Myanmar; four-fifths of
coca from Colombia. Only cannabis is produced in large quantities not just
in the poor world--principally Mexico--but also in the rich, where much of
the best stuff is grown.

It is a tolerant crop. It can be interplanted in cornfields in Kentucky, or
lovingly tended in an apartment in Amsterdam, where a taxi driver told this
correspondent that he regularly raised 150 plants in a cupboard to sell at
nine weeks for 60 guilders ($23) apiece to a local coffee shop. The
bulkiness of cannabis, and its relatively low value, make it a crop best
grown near the market.

Tracking crops is difficult, but easier, thanks to spy satellites, than
tracking chemicals.

Nobody is sure whether the Netherlands is the world's main producer of
ecstasy or (as seems more likely) merely the world's main entrepot for a
product made in Poland and other parts of Eastern Europe. Methamphetamines
seem to be produced mainly in small factories on both sides of the
Mexican-American border.

William Gore, of the Federal Bureau of Investigation in San Diego, thinks
that successful law enforcement on the American side of the border has
reduced factories there to making only 1-2lb (up to a kilogram) of the drug
at a time; laxer vigilance to the south means that Mexican factories
produce 100-200lb at a time.

Getting drugs from the poor world to the rich requires a distribution
network. The task is tougher for cocaine than for heroin, because cocaine
is more frequently shipped or flown to its markets, making it vulnerable to
seizure. Most heroin consignments appear to travel overland.

But this is where the big money starts to be made. The price paid to a
Pakistani farmer for opium, reckons the United Nations, is $90 a kilo (see
table, next page). The wholesale price in Pakistan is almost $3,000. The
American wholesale price is $80,000. On the street, at 40% purity, the
retail price is $290,000. As for cocaine, the leaf needed to produce a kilo
costs about $400-600, according to Francisco Thoumi, author of a remarkable
unpublished study of the Andean drugs industry.

By the time it leaves Colombia, the price has gone up to $1,500-1,800. On
America's streets, after changing hands four or five times, the retail
price for a kilo of cocaine works out at $110,000, and in Europe
substantially more.

That vast gap between the cost of producing the stuff and the price paid by
the final consumer goes a long way to explaining why drugs policies so
often fail. However, the people who grow or make illegal drugs see only
modest returns.

The value is embedded mainly in the distribution chain.

In Pakistan, for example, 90% of the domestic retail price of heroin goes
to local wholesalers and retailers.

The price at which heroin leaves the country may be only 10% of its street
price in the United States or Europe.

Developing-country producers can find distribution difficult.

Bruce Porter, the author of "Blow", a book about the 20-year career of a
drug merchant called George Jung that has now been made into a film,
recounts that the Colombians in the early 1970s had trouble getting their
cocaine to the American market. "George showed them how to distribute,
using the marijuana distribution chain." Once that was in place, "George
became a bulk transporter, shipping cocaine from Colombia to Colombians in
Miami."

The people who dominated the cocaine trade in Colombia in its early days
were experienced smugglers, thanks to the country's long history of gold
and emerald smuggling.

Much the same was true in Mexico, says Peter Smith, director of Latin
American studies at the University of California, San Diego. When tough
policing in Miami drove up their costs, Colombians formed joint ventures
with Mexicans who were in the general smuggling trade, rather than with the
small "mom-and-pop" cartels in Mexico that had previously grown marijuana
for sale in the north.

They reckoned that the professional smugglers were more likely to have the
logistics skills needed for the job.

In the early 1990s, these smugglers began to insist on being paid in drugs
rather than cash, allowing them to break into American distribution too.
They swiftly evolved from subcontracted transporters to urban distributors.
The relationship is finely balanced: the Mexican smugglers know that, if
they ask for too large a share, the Colombians can always return to
shipping their cocaine by a different route.

Down-Payment On A Rolls-Royce

Over the years, these distribution networks have become more efficient.
That may explain one of the many mysteries of the drugs business: the
halving of the price of heroin and cocaine between 1980 and 1990. The
National Research Council speculates: "The drug industry may have
experienced the learning-curve effects often associated with new industries
as they find ways to be more efficient in their operations." In a footnote,
the report adds: "Learning by doing has a long history in studies of
industrial organisation, productivity and growth."

Certainly the Mexicans, according to a study done for the United Nations,
seem to have concentrated on the drugs business in a way that might be
expected to improve efficiency. Unlike other distributors, they avoid
diversifying into other sorts of crime.

Joseph Fuentes, a senior New Jersey policeman who has written a doctoral
thesis on the industry, explains that the Mexican distributors operate with
great professionalism, sometimes employing top managers with degrees in
business studies, and relying heavily on honour, credit and collateral.
"The recruitment process is very like that for IBM or Xerox," he
says--except that the drug distributors require detailed information about
the whereabouts of a prospective employee's parents, spouse and children.

In Europe, distribution patterns seem to be different.

The United Nations reckons that organised crime is less involved, at least
in cocaine trafficking, and that more trade passes through ordinary
businesses, many of them based in Spain. The retail side is often run by
small groups or individuals supplying a network of friends; gang-controlled
distribution is rarer. That may change: for instance, Martin Witteveen of
the Dutch public prosecutor's office believes that Israeli crime syndicates
are taking over much of the trade in ecstasy between the Netherlands and
the largest market, America.

Distribution within the rich importing countries is often dominated by
immigrant groups.

A police officer in Bern, in Switzerland, counts them off on his fingers:
cocaine comes into the country mainly from Spain, but the trade is run by
African asylum-seekers and by Turks. Heroin comes from Turkey and the
Balkans, and the business is mainly in the hands of Albanians, Serbs and
Macedonians, he says. Few of these folk appear in the streets: the final
deal is often done by Swiss junkies.

There are similar stories everywhere: in Denmark, it is Gambians, in
Australia, Vietnamese.

This foreign control is no accident.

Immigrant groups may have strong links with producing countries; they speak
languages the police rarely understand; they have close ties of loyalty to
each other.

All these things give them a competitive advantage over locals.

In addition, they have less to lose because they find it harder than locals
to get decent legitimate jobs.

Given that heroin and cocaine are both highly concentrated, these dealing
networks are probably not large: about 500 tonnes of cocaine come into the
United States each year, and some dealers handle more than 10 tonnes a
year. A few hundred people probably handle most of it.

Getting A Fix

The big battalions are on the streets.

In poor parts of town, dealing is often a big source of employment. A study
of drug markets in Milwaukee a couple of years ago by John Hagedorn, of the
University of Illinois-Chicago, found that at least 10% of Latino and black
men aged 18-29 drew at least part of their income from the drugs business.

It was, he said, the most profitable activity in the town's informal
economy: 28 businesses, dealing mainly in cocaine, employed about 190
people, their owners grossing between $1,000 and $5,000 a month.

Many of the owners also had jobs in the legitimate economy--drug selling
seemed to be a complement to, rather than a substitute for, legitimate
work. Thirteen of these businesses had been going for at least two years,
developing innovative ways of avoiding the police and so reducing their
business risk. The owners had stopped dealing from street corners or homes,
and used pagers and mobile phones instead.

They also employed runners to deliver drugs, and so carried almost no drugs
themselves.

Different customers are willing to incur different risks.

Richard Curtis of the John Jay College of Criminal Justice in New York, who
has studied the retail market for drugs there, has found that customers in
the smart areas of midtown and lower Manhattan tend not to travel to the
shadier areas of Harlem or Washington Heights to buy drugs, even though
they would save money if they did.

Recruiting employees appears to be easy. "In a lot of poor communities,
drug dealers are the only equal-opportunity employer," says Deborah Small,
director of public policy at the Lindesmith Centre, a drug-campaigning
organisation. The main alternative source of illegal income, numbers
betting, has been largely destroyed by legalisation. And drug-dealing pays
well: one study of dealers in Washington, DC, at the height of the 1980s
crack epidemic found that they could earn $30 an hour, compared with about
$7 from legal employment.

That is an attractive rate, especially for the middle-aged high-school
drop-out who is getting too old for mugging and has few other ways to make
a living.

But, as in every business, earnings vary with responsibility, and have to
be set against the risks.

A sophisticated study of the finances of one drug gang by two economists at
the University of Chicago, Steven Levitt and Sudhir Alladi Venkatesh, found
that, whereas the top members earned far more than their legitimate market
alternative, the street-level sellers earned roughly the minimum wage. They
seemed to stay in the job in the hope of rising to the top. But the risks
are enormous: gang wars, essential to gain market share and to resolve
disputes, also drive customers away--and for this particular sample
resulted in a death rate of 7% among distributors.

Many of the "runners" at the tip of the distribution chain are paid in a
mix of drugs and cash. That turns drug-dealing into a sort of
pyramid-selling, giving them an incentive to make more sales.

And customers, as with any business, are the lifeblood of the drugs trade.

Next article: http://www.mapinc.org/drugnews/v01.n1356.a01.html