THE ECONOMICS OF DRUG VIOLENCE

Competition in the Narcotics Trade Is Preferable to Monopolistic Syndicates.

Mexico City - President Felipe Calderon still has two years left in
office. But he is already on track to go down in history as having
presided over the bloodiest Mexican sexenio since the revolution of
1910. By December, when Mr. Calderon completes his fourth year as
president, the national death toll from his war on the drug cartels
could reach 30,000.

Statistically speaking, Mexico is a relatively safe place with 12
murders per 100,000 inhabitants in 2009. The trouble is that the
violence is concentrated, and according to one economist I talked
with here, that's because the drug-trafficking business is structured
much like Colombia's was in the 1980s and '90s.

Powerful monopoly suppliers need to control key zones so they can
guarantee an army of contract employees. These "ants" carry the drugs
over the U.S. border at a limited number of strategic points in small
shipments. Without mafia-style terror, the cartel's domination along
the route cannot be maintained.

Mexican law enforcement has been courageous in trying to confront
these monopolies, but firepower has not done the job. That's because
this is an economic problem. Lower levels of violence in the U.S.,
despite widespread availability of drugs, and an improved picture in
Colombia, where cocaine still flows, are best explained by
competition and the smaller scale of the operators. It wasn't always
that way in Colombia. In Mexico it could also change.

To help Mexico deal with this "antitrust" problem, the U.S. has to
recognize that competition in the narcotics sector is preferable to
the monopolistic syndicates that threaten the state and could move
north. But this would require greater flexibility from U.S. drug warriors.

Some progress may be in the making on marijuana, and Mexicans will be
watching the California ballot initiative that asks the electorate to
approve the legalization of the ubiquitous weed. It is far from clear
that Proposition 19, as it is known, will pass. The combination of
conservatives who fear that legalization would transform us into a
hash-happy heap of hippies, drug warriors who make a living off of
the criminalization of pot smoking, and gangsters whose profits are
tied up in prohibition could be enough to defeat it by a narrow margin.

Nevertheless, the competitiveness of the "yes" vote on this
proposition suggests that attitudes toward "grass" have generally
softened, and that many Americans would prefer the business be run
legally. For sure, the U.S. market is robust, and "medical marijuana"
looks like a way of legalizing without admitting to it. There is also
the fact that the stuff seems to move around the country quite
easily, demonstrating some tolerance on the part of U.S. law
enforcement for the retail sector that distributes it.

More competition in marijuana production and distribution in the U.S.
would help beleaguered Mexico. As it stands now, the gangsters have
good reason to pull out all the stops to get their marijuana across
the border where the market is large, barriers to distribution are
low and prohibition adds value. Profit margins are not huge but the
sales volume is there.

Mexican officials estimate that the marijuana business makes up more
than half of the Mexican cartels' income. Legalizing grass in the
U.S. would mean increased competition for Mexican exporters and lower
profit margins, thereby depriving the monopolies of important income.

The bigger problem for Mexico is U.S. cocaine demand. Here there
seems to be at least some recognition among drug warriors of what
hasn't worked. Wrote former Drug Enforcement Administrator Robert
Bonner in a recent issue of Foreign Affairs magazine: "The goal must
be clear. In Colombia, the objective was to destroy the Cali and
Medellin cartels-not to prevent drugs from being smuggled into the
United States or to end their consumption."

This is risible. The entire raison d'etre of the last 40 years of
U.S. drug policy abroad has been to stop supply in order to reduce
demand in the U.S. Of course when this plan backfired and Colombian
cartels grew more powerful, American and Colombian authorities had to
adjust. But their war was predicated on the belief that interdiction
of supply could diminish U.S. drug consumption.

If Mr. Bonner is now backing away from that argument, it can only be
because he is looking at the numbers. Andean cocaine production in
2008 was down only 8% since 1999, and even that might be explained by
a shift in preferences in the U.S.

Analysts and policy makers agree that a crackdown on Caribbean
narco-routes has driven the business through Mexico, though it hasn't
reduced U.S. drug use. The economist I talked to argued further that
if cocaine moved more easily through the Caribbean as it once did and
the Mexican border were more porous, it would be harder for a big
cartel to monopolize the traffic, even through violence.

It's an interesting theory and of course runs totally counter to the
direction of U.S. policy. But if that policy is proven wrong, it
wouldn't be the first time in the long history of the drug war.