THE PRICE OF POWDER

The cheapness of illicit drugs isn't just a sign of police failure. It
is also evidence that the drugs business has got more competitive

Following a quiet spell, Britain's war on drugs seems to be heating
up. This week, the Home Office unveiled legislation that will create a
Serious Organised Crime Agency (SOCA), which, it is promised, will
conduct "a specialist and relentless attack" on racketeers. Suspected
traffickers will be compelled to produce documents and drug kingpins
encouraged to inform on one another. Other legislation will force more
addicts into treatment.

Hopes are high, which is surprising given the failure of previous
efforts. Street prices of Class A drugs have fallen steadily in recent
years (see chart) and the number of users has risen. Drug traffickers
are running slicker businesses. "We dealt with a team a while ago that
had a director of operations and a director of finance, and they
actually called them that," says Bill Hughes, the appointed
director-general of SOCA. More importantly, they are running a
different kind of business.

The drugs trade used to be dominated by stable, vertically integrated
outfits resembling mini-Mafia families. That was a response to the
risks of doing business. Drug buyers may be undercover police
officers; promises to pay may be broken (these are criminals, after
all); trusted contacts may be jailed and rivals get shopped. Stable
partnerships reduced these risks, as did recruitment from a shallow
ethnic pool. But market forces have gradually pushed these cumbersome
organisations out of business.

Competition in the cocaine trade has cut margins to minuscule levels,
considering the risks involved. Powder cocaine from central America is
sold in multiple-kilogram loads for UKP15,000-30,000 ($28,000-56,000).
But the price for a single kilogram, UKP18,000-32,000, is barely higher,
and the retail price not much more than that. Last year, the National
Criminal Intelligence Service estimated that cocaine was selling for
UKP56 per gram (equivalent to UKP56,000 per kilo) but the current London
price is said to be around UKP40 per gram.

The falling price of powder is especially striking considering the
supply problems of recent years. The United Nations Office of Drug
Control (UNODC) estimates that global coca leaf production has fallen
every year since 1999, from 353,000 to 236,000 tonnes. And, unlike
heroin, cocaine is perishable, which means it cannot be stockpiled
against lean times.

Margins are fatter in the heroin trade. Importers, many of them
London-based Turks, sell multi-kilo loads to white British middlemen
at UKP16,000-22,000 per kilo. The middlemen, who rarely deal in any
other product, sell on to retailers at prices up to UKP33,000 for a
single kilo, enhancing profits further by adulterating the drug.
Heroin is then cut again before being sold on the street for the
equivalent of UKP60,000 per kilo.

The reason why the cocaine price has fallen so much is that the market
is opening up. Dave King, a drugs specialist at the National Crime
Squad, says that the London-based Colombian importers who
traditionally controlled the import and wholesale trades now contract
freely with British entrepreneurs. A recent trend is for Britons
living in Spain to deal directly with Central American suppliers
before selling on to Colombians in London or directly to an army of
middlemen.

New importation routes open frequently, sometimes as a result of
police activity. Operation Airbridge, a co-operative Jamaican and
British venture, proved so successful that traders have explored other
routes through the Caribbean. Improvements in Spanish policing have
encouraged traffickers to ship cocaine through Africa, where it can be
bundled with other drugs likely to interest the same consumer. One of
the biggest domestic seizures this year came from a warehouse in west
London. Among a shipment of pineapples and vegetables from Ghana were
ten kilos each of cocaine and marijuana.

By contrast, the heroin trade is more closed and less innovative. Mr
King believes that is partly because demand for heroin is more
inflexible than demand for other drugs. Reliability of supply is more
important than price, which means there is less shopping around at any
stage of the supply chain. Another barrier to greater competition is
linguistic. To move cocaine from producer to market, English and
Spanish are essential; to move Ecstasy, it helps to speak Dutch. But
as many as 120 languages, from Italian to Pashto, are spoken by those
involved in the heroin trade. That makes it tricky to seek out new
sources or new routes.

Heroin traffickers do not constitute a cartel, though. They behave
more like members of an oligopoly, with a mixture of competition and
co-operation at the highest levels of the trade. Paul Evans, chief
investigation officer at Customs and Excise, says that this can extend
to emergency relief: "if your shipment hasn't arrived, someone else
will loan you stuff to tide you over."

Such cosy arrangements are likely to break down as new players enter.
Turkish importers have already lost business to Kurds and
Albanians--both groups now scattered across Europe, thanks to
instability at home and higher immigration into rich countries.
British-based Colombians squeezed out of the cocaine trade are
dabbling in the more profitable opiates. The dissolving of ethnic and
family bonds is likely to mean still freer trade.

Competition in the drug market is good for the consumer, which means
it is bad for anyone trying to reduce or eliminate drug taking.
Against Mafia-style cartels, the police might have succeeded. They are
less likely to prevail against the invisible hand of the market.