DEALING WITH FAILED STATES - III

Ending The War On Drugs

The illegal drug trade can only be curtailed if we legalise the industry, says
Deepak Lal

From the Andean countries -- Bolivia, Peru and above all Colombia -- to the
Golden Crescent countries -- Afghanistan, Pakistan and Iran -- to the Golden
Triangle countries -- Myanmar, Thailand and Laos -- the US and the Western
European war on drugs has created conditions for the actual or incipient
failure of these states.

This is because making drugs illegal has provided an immense incentive for
illegal production in these states to feed the drug habits of a myriad Western
consumers. The illegal profits are then used to fund arms, terrorism, and the
promotion of extra legal 'institutions' which subvert the State.

The illegal drug trade was estimated to be about $400 billion in 1997, compared
with a value of legal world exports of $5 trillion, that is about 8 per cent of
the value of legal world trade (see A. Krueger and C. E. Aturupane :
'International Trade in 'Bads'', in H. Giersch (ed) Merits and Limits of
Markets). The profits from the trade are also huge.

Thus, a kilogram of cocaine base sells for between $650- $1,000 in Bolivia or
Peru. It can be processed into cocaine hydrochloride for export at between
$900- $1200, which sells for between $13,000 to $40,000 wholesale in the US
before reaching consumers at a retail price of between $17,000 to $172,000.

Heroin from Burma begins its progress with $70 per kg to the Burmese producer,
to $3,000 after processing in Thailand, from where it is exported from Bangkok
at $6,000 to $10,000. It sells wholesale in the US for between $90,000 to
$200,000, and at retail for nearly $ 1 million.

Given the enormous profits at each link in the drug chain, it is hardly
surprising that there can be no victory in the war on drugs by attempting to
control supply. The profits are enormous and sufficient not only to corrupt the
polities and law enforcement institutions of the producing countries, but also
the enforcement agencies in the consuming countries.

In addition, these profits being illegal have to be laundered. The
International Monetary Fund (IMF) has estimated that this 'gross criminal
product' is around $500 billion annually. The stock of criminal cash invested
in financial and other assets being even larger.

This poses a serious problem not only for the producer states threatened by the
subversion financed by their drug lords, but also as the links between the
Taliban (funded largely by drug smuggling) and Al Quaeda showed, for the
ongoing 'war on terror'.

So what should be done? Is better enforcement the answer, or should the US and
Western Europe stop their war on drugs as the US did with alcohol after its
disastrous experience with Prohibition in the inter war years?

Apart from the costs of destruction of civil society in the producing
countries, the direct budgetary costs of enforcing prohibition of drugs in the
US have been estimated to be over $20 billion per annum (see: J.A. Miron and J.
Zweibel: 'The economic case against drug prohibition', Journal of Economic
Perspecties, 1995). This does not take account of the other indirect costs I
will come to later.

Whether or not the US and Western Europe should legalise drugs in their
countries, economic theory is clear on whether they should seek to ban trade in
drugs, by forcing the producing countries to cease production.

If there is a reason for prohibiting drugs in the consuming countries it must
be because, though drug consumption provides utility to the drug addict, there
are nevertheless important negative externalities from their use for society as
a whole to levy an infinite tax on their consumption.

But, as the modern theory of trade and welfare teaches us, as long as this tax
is levied on domestic consumption there is no need to interfere with production
of the good. Of course imports of the good will have to bear the same
consumption tax as domestic production. But, production should still be based
on a country's comparative advantage.

Thus, for instance even if, because of this consumption externality the US
prohibits domestic consumption of drugs, but holds sway in their production, it
should not ban domestic production and exports to meet the demand in the rest
of the world.

That this is not a fanciful notion is shown by the case of Turkey which is a
low cost producer of opium, but Turks generally do not choose to use it --
certainly not on the scale of use in the US and Western Europe. There can thus
be no case for taking the war on drugs to the producing countries, and getting
them to stop or control supply.

Not only will this lead to the incipient failure of these producing states, it
is also likely to be ineffective. For there is considerable evidence that the
supply of drugs from around the world is nearly perfectly elastic. (See
P.B.Stares: Global Habit, Brookings, 1996).

When the supply of drugs dries up from one country because of local
enforcement, other sources of supply spring up fairly soon. This is because
given the enormous profits in the illegal drug trade there is an incredible
incentive for impoverished peasants in the Andes, Central Asia, South and South
East Asia and Africa, where the returns from alternative agricultural crops is
much lower, to switch to producing the agricultural products on which the drugs
are based, whenever the opportunity presents itself.

Thus, a substantial portion of the labour force in the Andean countries is
involved directly or indirectly in the narcotics industry, as given the harsh
terrain, coca production offers much higher returns than any alternative crop.

Ultimately, the problem is one for the consuming countries which are mainly the
US and Western Europe. Despite the vast resources spent, clearly their number
of drug addicts has not gone down. Purely from this one can say that the war on
drugs has failed.

Many are therefore arguing that this war be ended with the legalisation of
drugs and their control as it has been for alcohol and tobacco, through a tax
and information regime. What would be the effects on the consuming countries?

There seems to be little hard evidence to determine the costs and benefits of
legalisation versus prohibition if one takes account of the purported negative
externalities which have been succinctly summarised by Miron and Zweibel: "drug
users suffer diminished health, decreased earnings and moral degradation.
Similarly, the market in illegal drugs promotes crime, destroys inner cities,
spread AIDS, corrupts law enforcement, officials and politicians, produces and
exacerbates poverty and erodes the moral fabric of society".

In forming a judgement, the important point to bear in mind is that the former
costs of drug use are by and large borne by the addict, while the costs of
prohibition are borne by society. There is no doubt that legalisation of drugs
would reduce their price -- for heroin it is estimated for the US by a factor
of 20= and this would, if demand is even mildly elastic, raise consumption.

The great societal fear is that this increase in addicts would fuel crime. But,
as Miron and Zweibel show from the US evidence, drug related crime is not
committed by those under the influence of drugs but rather to finance their
drug habit.

Finally, the prohibition of drugs has created a whole class of criminals who
have chosen to take drugs. Nearly 20 per cent of state and 60 per cent of
federal prisoners have been incarcerated for drug law violations. The majority
for not dealing but possessing drugs.

It is a sign of incredible inhumanity that a drug addict is thus made a victim
for a victimless crime. Whatever the reasons for their addiction, they deserve
our pity and compassion not incarceration.

The time has surely come to let people kill themselves with drugs if they
choose to and not try to save them from themselves by a war which has not only
done untold damage to the body politic in the consuming countries, but much
more seriously to the many poor producing developing countries which have
turned or are turning into failed states because of this unjustified war.