Series: Drugs Uncovered: Part 14 Of 17

CLASS A CAPITALISTS

Who Reaps The Profits?

Illegal Drugs Sustain A Huge Global Industry, With A Highly Efficient
International Supply Chain. Faisal Islam Finds Out Who Reaps The Profits,
And Sketches A Possible Future If Drugs Were Legalised

Forget for one minute that drugs are illegal. Forget the pain, addiction
and social consequences of drug production, selling and use. For those with
a different perspective, forget the highs, the leisure and the pleasure value.

Adopt instead the mindset of businessmen in conventional legal industries.
Adopt the profit motive. The global narcotics industry makes enough money,
and employs enough people, to whet the appetite of the most respected
industrialist or management consultant.

The supply chain stretches from the Golden Triangle of Asia and the jungles
of South America to almost every street corner in the urbanised western
world. Here is an industry which does not advertise and is subject to
interdiction at every turn. Hundreds of millions are spent on anti-drugs
advertising campaigns.

But illegal drugs make up eight per cent of world trade, says the United
Nations, and are worth more than the combined global market for textiles,
clothing, iron and steel. In Britain alone some UKP6.6 billion is spent on
drugs, according to Home Office figures, making it a touch smaller than the
tobacco industry, but larger than DIY.

Indeed, the illegal drug industry has always been an economic phenomenon.
British history is a testament to this: in 1830 Britain solved its
ballooning trade deficit with China by flooding it with opium grown in
Bengal. This sparked the first opium war. More than 170 years later, the
nexus linking drugs, war and business remains intact.

Colombia and Afghanistan are the centres of US-led wars. Both are leading
producers of the agricultural precursors to hard drugs: opium poppies for
heroin and the coca bush for cocaine. Millions of people around the world,
from the cocaleros of Bolivia to the bouncers of London, are employed in
the industry.

There are broadly two channels for both trades, according to HM Customs and
Excise. 'One involves bulk shipments to wholesalers, and the other
"small-but-often" loads carried by couriers or mules,' says a recent
Customs report. The mark-ups can be phenomenal:

* Heroin: Afghan-originated heroin, transported in bulk, costs as little as
UKP600 per kilo. The so-called 'Turkish route' importers will trade 'tens
of kilos' for around UKP7,000 per kilo.

Middle-level brokers will purchase a single kilo for about UKP22,000.

'At this level, it will often be bulked out with cutting agents before
being sold for up to UKP1,000 an ounce (UKP35,000 a kilo),' says Customs'
latest analysis. That's a mark-up of 60 times the original price.

Alternatively, heroin purchased in Pakistan for UKP2,000 a kilo arrives in
smaller loads via air courier and courtesy of corrupt officials. These are
sold on at around UKP15,000 a kilo to regionally based dealers. The quality
of heroin arriving through this method is thought to be poor - but the deal
represents an eightfold mark-up.

* Cocaine: In Colombia cocaine costs about UKP2,000 per kilo, and
Colombians are said to sell a few kilos at a time for nearly 10 times that
amount in the UK. There are myriad routes. One goes through the Rio favelas
- - Brazilian shanty-towns - to Spain and then on to the UK. Here, the drug
would be sold on for UKP1,000 per ounce (or ?35,000 a kilo) - a mark-up of
18 times the original price.

The smaller-scale route is by air courier from the Caribbean where
'stuffers' and 'swallowers' bring over cocaine bought for about UKP12,000
per kilo in 15kg loads. This tends to be 'washed-up' into the much more
profitable crack form and sold for UKP20,000 to a middleman supplying 'a
network of retail outlets'.

* Cannabis: This is cheaper; 100kg loads are imported, mainly from Morocco
for around UKP1,200 per kilo, then sold on in multi-kilo units for a small
mark-up of around UKP50 per kilo. A kilo can be bought for about UKP1,400.
The retail price has remained static at around UKP15 for an eighth (3.5
grams), the heftiest mark-up in the chain.

These mark-ups are huge by the standards of legal commodities. Coffee sells
on world markets by the tonne for about 35p for a kilo, or in 60kg bags for
about 70p a kilo. Cocoa costs about treble this amount, and sugar is half
of coffee's wholesale price.

A 1lb bag of coffee for use in a cafe costs UKP5 - around 16 times the
world market price. The mark-up is excellent for the end-user or the
Nestles of the world. But the price for the coffee producer has
historically been pitiful, and minuscule set against the rewards for drug
cultivation. Independent reports show that oversupply in the coffee market
- - and the slump in coffee prices from UKP2,800 per tonne in 1995 to today's
UKP350 - has left many coffee producers selling at below cost. The mark-up
is negative.

But there is another important difference. From tree to supermarket shelf
or cafe bar, it is estimated that coffee beans can change hands as many as
150 times. Producers sell to local traders, who sell on to international
traders, who sell on to commodity traders. Illegal drugs have a much
flatter distribution network than do similar agricultural commodities. 'It
is a surprise how few links in the supply chain there are; for heroin there
are as few as four,' says HM Customs and Excise.

The narcotics distribution channel could best be described as a pyramid,
which works by protecting each higher level from informants.

Individuals also recruit the lower level of the pyramid, making it more
likely that friends or other vulnerable people are drawn into the net. It
is likely that any price rises get passed down the chain to consumers as a
reduction in quality rather than as a higher price.

Jeffrey Miron, an economist at Boston University, finds that when you take
purity into account, US street prices have fallen dramatically.

'Cocaine has fallen from roughly UKP500 per pure gram in the late Seventies
to about UKP42 during the Nineties. Heroin has fallen from UKP4,200 to
roughly UKP210 per gram in recent years,' he says.

In the UK, ecstasy pills are imported from Dutch factories at a unit cost
of around 50p for a load of 100,000. This passes through maybe two lots of
middlemen until it reaches a low-level dealer - usually someone who buys
hundreds of pills to supply to friends. A decade ago, the nightclub price
used to be UKP15. Today pills can be bought for less than a fiver.

The economics of these falling prices is clear. Production has massively
increased but consumption remained relatively constant. There appears to be
an effect from competition. But the basic story is that the demand for
illegal drugs will always beget a supply. These economic phenomena should
be troubling for the politicians who have signed up for a drug-free world
by 2008.

In the US alone, over $20 billion is spent every year on enforcement - what
might be called the 'prohibition industry'. 'Over the past 25 years,
enforcement of drug prohibition has expanded dramatically. Over the same
period, however, the trends in drug production and consumption have been
essentially flat,' says Miron. A look at interdiction efforts suggests that
increased prohibition merely transfers production from one country to
another, or from one drug to a different one, or from land-based transport
routes to the sea or air.

Somewhere there is a Mr Big who assesses which markets to move into.
Colombian cultivators replaced the acres of coca bush eradicated in Peru
during the 1990s. Before that time, Colombian gangs had focused on refining
the leaf into the intermediate product - cocaine paste. And when
eradication efforts stepped up in Asia, the Colombian Cali cartel quickly
diversified into growing opium poppies and peddling heroin.

As well as responding to production trends in the global drugs markets,
these Mr Bigs have proved themselves keen adopters of new technology. In
Holland ever more potent strains of cannabis are being developed by
cross-breeding plant varieties. Sources suggest that Colombian producers
have succeeded in growing coca bushes that are resistant to the herbicides
being used by the US-backed War on Drugs. Enforcement of policy, despite
occasionally spectacular hauls at airports, has essentially failed because
the street price for almost all illegal drugs is less than it was when
serious efforts began. For potential producers, relative prices are
important too. The collapse of coffee prices from UKP28 a kilo in 1995 to
35p today is indicative of the economic pressures facing poor rural
communities. Having been told by the IMF/World Bank to focus on 'cash
crops' - coffee, tea, cotton - at the expense of subsistence food, many
developing-country farmers found themselves bankrupt when the value of
those crops slumped because of oversupply. Vietnam's sudden entry on to the
world coffee market is thought to have precipitated the current coffee
price dilemmas. Tariff barriers prevent developing countries capturing any
of the huge mark-up in coffee production enjoyed in export markets.
Traffickers of illegal drugs, bizarrely, have greater control over money
earnt in the supply chain than do producers of legal crops. This is why
'alternative development' schemes which seek to use economic incentives to
stop drug production have had limited effect. Growing crops which will be
made into illegal drugs has been a rational measure to earn food in these
poverty-ravaged nations.

'Illegal drug dealing is a highly entrepreneurial risk-taking web of supply
and demand, which filters drugs through every estate, every tenement in the
land,' says Ed Mayo of the New Economics Foundation. Dealers charge a 'risk
premium' for the possibility of being jailed or shot dead. US economists
say that a quarter of the street price of drugs compensates for the jail
threat, and a third for the risk of physical harm.

There is some evidence of crude marketing activity. Dealers target their
markets carefully, varying prices according to the addictive properties of
the drug and the wealth of the user group. They offer massive discounts to
get young customers on board and then charge much more for subsequent hits.
McDonald's and mobile phone companies have used much the same marketing method.

In the existing illegal market, there is plenty of branding activity which
piggybacks off big business. Ecstasy pills are sub-branded as doves,
mitsubishis, euros, and PlayStations, with the appropriate logo on the
pill. 'Ecstasy is quite often branded with corporate brands,' says Michael
Gillespie of youth marketing specialist, Informer. 'Drugs marketing works
virally, by word of mouth. It can create enough credibility for people to
buy it. Lots of youth brands try the same tactics of focusing on a limited
number of people who can then spread the word.'

Though cocaine has long lubricated the mechanics of City deals, so far the
interest has been strictly recreational. Stock market highs tend to be of
the legal variety. But even that is beginning to change. When City
financiers were given their first chance to 'invest in drugs' there was a
stampede. Last June, GW Pharmaceuticals, a British pharmaceutical company
licensed to grow cannabis and produce a medicine for MS, was six times
oversubscribed at the stock market. Its share price is still riding high.

Indeed the most likely impetus for large-scale reform of the drug laws
would seem to come from the profit motive rather than concern about the
social impact of prohibition. Multinationals are running the slide rule
over the possible legalisation of currently banned drugs.

'Marley's' (as in Bob Marley) is registered as a trademark. Brand experts
are sceptical about whether legal cannabis would prove an immediate winner.
'It would be a very immature market. Advertising, if it was allowed, would
have to focus on the quality of the experience, rather than broader
lifestyle messages,' said one Soho marketeer. The Dutch experience suggests
the development of a cottage industry that sells different strains and
substrains of the drugs.

And perhaps the legality of drug use is increasingly irrelevant. 'For young
people in the UK, drugs are completely and utterly normalised to the point
that they're not even cool or edgy and exciting. The naughtiness has been
taken away, and the aspirational value removed because you can buy a pill
for UKP3,' says Informer's Gillespie.

There will be few people shedding tears for these businessmen if drug use
falls out of fashion. But the drug lords and dealers are not the only
capitalists whose business gives rise to deaths and mental injuries. The
main problem with narcobusiness is not actually the drugs. It is that drug
money rots the ability of countries and communities to govern themselves,
and corrupts social and legal systems. That could be down to the 'evil'
characters who trade these substances. Or it might be down to a system of
prohibition that leaves intact a massive shadow economy where control and
safety regulation is completely ceded to dealers.

There are other arguments for maintaining the status quo. Some investment
professionals hypothesise that there are so many 'narcodollars' pumped into
the US stock market that legalisation would lead to their withdrawal and
the collapse of the US and world economy.

Regardless of legal status, the drugs industry remains near the peaks of
high finance. The extent to which these funds prop up world stock markets
will always be unknown, but in their actions alone, the drugs
industrialists have long shown themselves to be Class A capitalists.