DRUGS TRADE 'THE THIRD LARGEST ECONOMY'

The DRUGS business is the third biggest economy in the world today. In
fact, according to more alarmist estimates of its value, it could even
be starting to catch up with the United States as the leading player
in the world economy.

Like any other business, organised crime has gone global, and the
drugs trade is its most profitable sector. Of necessity, the figures
are mainly guesswork, but the Financial Action Task Force (FATF) of
the Group of Seven leading industrial nations (G7) has estimated that
at least $120bn (UKP73bn) from the drugs trade are laundered through
the world's financial system a year.

This extremely conservative estimate amounts to about the same as the
total amount of funds invested legally in the emerging market
economies last year.

The comparison gives some idea of the potential that drugs money -
much of it flowing through London, the biggest foreign-exchange
trading centre in the world - has to disrupt the financial markets.
After all, 1998 was scarcely a calm year in the markets.

The G7, whose finance ministers met in Bonn at the weekend, set up the
FATF to combat money laundering, bribery and other financial aspects
of organised crime. Its existence is a tacit admission that these
powerful countries need to engage in combat with their illegal
counterparts.

For the possibility of financial turbulence is actually the least of
the G7's worries. The growth of the illegal drugs trade has led to a
mounting bill for the medical, social and policing costs. In the US,
the annual social cost is estimated to be about $67bn a year,
according to the 1998 National Drug Strategy. More than one-third of
the country's new cases of HIV are linked to the injection of drugs.

In the United Kingdom, the direct cost of dealing with serious drug
abusers is estimated at well over UKP4bn a year. The Office for
National Statistics puts the size of the drugs economy in the UK at up
to 1.2 per cent of official gross domestic product.

While it is impossible to compile comprehensive statistics - estimates
of the annual value of the worldwide trade in illegal drugs range
between $1,500bn to $5,000bn - the direct costs alone are clearly sizeable.

But the negative economic impact goes beyond the direct costs of
patching up the damage caused by drugs. It even goes beyond the
indirect costs crime imposes by disrupting the efficient functioning
of the economy, making the costs of crime-prevention a kind of tax.
Illegal drugs, like legal alcohol, also devalue the quality of the
workforce. The policing of the problem diverts resources that could be
put to other uses.

However, perhaps the most serious impact of the problem, as far as
economists are concerned, is the way that illegal drugs degrade the
institutions of politics and society. Take a recent example. One of
the serious issues facing the G7 this weekend was the slump in Japan,
where the economy is contracting for the second year running, and has
not really grown at all for most of the decade.

At the heart of the country's economic crisis is a near-bankrupt
banking system, saddled with trillions of yen in debts that will never
be repaid. The defaults were triggered in 1995 by the collapse of
local savings banks that had been forced to accept bad loans by the
local yakuza, the Japanese mafia.

Drugs form Latin America's most successful export business, and
provide its biggest cash crop. The region is peculiarly vulnerable to
capital flight in part because its most dynamic entrepreneurs, the
drugs barons, shift funds abroad. In Colombia, the Medellin cartel
once even proposed to pay off the country's foreign debt in cash in
return for legitimacy - a deal halted by the US.

Similarly, experts such as Manuel Castells, an eminent sociologist at
Berkeley, in California, argue that Russia's economy is doomed to
perpetual chaos because of the activities of organised crime. The
government is unable to collect tax, but the mafias can.

The drug-financed illegal economy has filled the vacuum created by the
transition from Communism, and its dominance now prevents the
emergence of normal economic institutions.

The FATF has reported that money laundering takes place not just
through offshore financial centres, but also through high-street
lawyers and accountants, banks and bureaux de change. The drugs
business is eating away at the economy from within, for market
economies are defined by their institutions.

Predominant among these is the rule of law in upholding property
rights. The illegal drugs trade has grown to a scale that is
undermining this basic framework. It is threatening the ability of the
world's biggest economies to continue prospering.