AGRIBUSINESS: JOINT INTEREST IN AN ECONOMY GONE TO POT

Chris Tyler is not the only person troubled by marijuana. Every Australian
taxpayer has a problem with the drug. For Tyler, the former chief executive
of computer software company Solution 6, the problem was his failure to
disclose a marijuana-possession offence in the United States in the 1980s.
For Australia, the issue is more mundane: what to do with a black-economy
industry that in 1995 turned over an estimated $5 billion, is growing
rapidly, and goes largely untaxed.

The easy option is to do nothing, pretend that the marijuana industry can
never be tamed, and leave the debate as a moral and health-care issue. The
alcohol industry certainly prefers that approach because research shows a
direct correlation between the availability of marijuana and sales of beer
and wine: when marijuana is freely available, alcohol sales fall.

Electricity suppliers would prefer a more direct approach because theft of
their product to help grow marijuana has become a serious problem. Last
month, the Electricity Supply Association (ESA) said that illegal drug
growers were stealing up to $24 million worth of electricity a year,
accounting for 20% of the $120 million in power theft in Australia each
year (by tampering with household meters or running unmetered lines off the
mains).

ESA chairman Keith Orchison says the greatest single use of the stolen
electricity is to power hydroponic cultivation of marijuana, a technique
that uses large amounts of artificial light and pumping equipment to
provide water-borne nutrients to the plants. 'It is the fastest-growing
area of electricity theft in Australia,' he says, adding that the total
cost of electricity theft over the past 10 years was about $1 billion.

As competition grows in the electricity industry, the theft is even seen as
a threat to the survival of some companies. 'At this annual rate of loss,
the cost of theft represents a substantial cost to honest customers, who
bear the burden of theft in their bills, as well as an added risk (of
survival) for power suppliers,' Orchison says.

Another community cost from the growth in marijuana production and
consumption - the percentage of people who said they had used marijuana was
up from 28% in 1998 to 35% in 1995 (National Drug Strategy household
surveys) - can be found in crime statistics. In early May, the Australian
Institute of Criminology released a study of the relationship between drug
use and traffic offences and burglaries. The results came from urine
samples obtained at police stations in New South Wales, Queensland and
Western Australia. The study found that 72% of traffic offenders were
affected by illegal drugs: 12% tested positive to opiates such as heroin,
and about 60% were influenced by marijuana. The study also found that 66%
of burglars had used marijuana before offending.

The Australian Taxation Office (ATO) was one of several government and
industry bodies that requested copies of the paper on the economics of
marijuana consumption published last year by Professor Ken Clements and
honors student Mert Daryal from the University of Western Australia's
economic research centre.

The ATO declines to comment on its interest in marijuana or the university
paper. However, tracking the black economy is one of the more interesting
pursuits of tax collectors.

In the case of marijuana, the prize seems to be finding a way of levying a
tax, possibly the 10% goods and services tax (GST), to catch the estimated
$500 million that should be going into government coffers. The only way
hydroponic marijuana cultivation can now be taxed is through sales tax (GST
after July 1) on the industry's equipment.

The Yellow Pages directories are a guide to the boom in marijuana growing.
Clements has counted 149 suppliers of hydroponic equipment in Victoria and
58 in Western Australia. The word marijuana is never used, but some of the
display advertisements show plants with a very distinctive leaf shape and
the text makes it clear that good advice on home-grown drugs is available
(with Holland having in effect legalised marijuana, one of the key words
used is 'Dutch').

Other industries are also benefiting from Australia's marijuana boom. The
evidence ranges from an increase in the sales of roll-your-own cigarette
papers to participation in organised crime.

However, marijuana is not just about cigarette papers and crime gangs. To
put the $5 billion turnover estimate into perspective, it is the same size
as the gold industry, or the same as the combined size of wool and dairy
exports ($3 billion wool, $2 billion dairy).

The study by Clements and Daryal went further than any other research into
estimating the size and spread of the marijuana industry in Australia.
Among their more interesting discoveries was that marijuana expenditure in
1995 (the year used for their research) was equivalent to 1% of Australia's
gross domestic product. Expenditure on marijuana was double that on wine
and three-quarters the size of beer sales.

They found, from a survey of university students, that legalisation of
marijuana would lead to a fall in sales of wine and beer. 'Alcohol and
marijuana seem to be substitutes, with cross-price elasticities.' They
estimate (from confidential surveys) that 50% of first-year students at the
university had used marijuana and that legalising the drug would increase
consumption 8-14%, with a corresponding fall in alcohol consumption.

Since publishing their study in September last year, Clements and Daryal
have continued their research into the economics and business implications
of marijuana production. Clements says he hopes to start another study next
year if funding can be found.

He says the three main issues surrounding the marijuana industry are the
amount consumed, the price sensitivity of consumption, and the possible
effects of legalisation.

Although no official data is available, a survey of 10,000 households taken
as part of the National Drug Strategy in 1995 found that about 35% of
people were classified as users at some stage of their lives. Of the 35%,
59% no longer used marijuana, 5% were daily users, 9% weekly, 7% monthly
and 20% less frequently than a month. Average annual estimated consumption
per user was 0.79 of an ounce (22 grams), equivalent to 44 marijuana
cigarettes.

The researchers assumed an average price of $450 an ounce, although recent
work has indicated a fall to about $350 an ounce. At the higher figure,
they calculated that the annual per capita expenditure on marijuana in 1998
was $354. The per capita expenditure on wine in 1998 was about $200 and
beer about $450. On price elasticity, the research found (as would be
expected) that as the price of marijuana falls, demand rises.

On what might happen if marijuana were legalised, Clements says the theory
that the drug has a 'forbidden fruit' factor is not supported by research
surveys. 'The work shows that, if we average all users, legalisation would
cause marijuana consumption to rise by about 8%, or 14% if we re-weight the
survey to reflect the whole population,' Clements says. 'Legalisation does
not have the effect of pulling in new users.'

Having estimated the size and structure of the marijuana industry, Clements
would now like to know more about the drug's relationship with alcohol. 'It
all started with a feeling that something important was out there. We have
established that,' he says. 'Now we want to take the next step and get a
better understanding.' Clements says funding requests for further studies
have been made but declines to say which organisations have been approached.

Clements says that from an economic perspective, legalisation of marijuana
seems an attractive option. 'There are obvious parallels between marijuana
today and alcohol during the prohibition period in the United States during
the 1920s,' he says. 'Prohibition was a complete failure. All it did was
provide a business boost to criminals.

'Something further can certainly be done about refining the link between
marijuana consumption and alcohol consumption,' he says.

Having studied marijuana for more than a year, does Clements have an answer
to the problem of finding a way of taxing a significant item in the black
economy? 'There may be some creative approaches, such as a higher tax on
cigarette papers, but the real solution probably lies in legalisation, and
then taxing it as other commodities.'