Pubdate: Sat, 20 Feb 2016
Source: Wall Street Journal (US)
Copyright: 2016 Dow Jones & Company, Inc.
Contact:  http://www.wsj.com/
Details: http://www.mapinc.org/media/487
Author: Tom Wainwright
Note: Mr. Wainwright is the Britain editor of the Economist and the 
author of "Narconomics: How to Run a Drug Cartel,"  to be published 
Tuesday by PublicAffairs.

HOW ECONOMISTS WOULD WAGE THE WAR ON DRUGS

The Monstrous Cartels That Run the Narcotics Business Face the Same 
Dilemmas As Ordinary Firms - and Have the Same Weaknesses

In April, the world's governments will meet in New York for a special 
assembly at the United Nations to discuss how to solve the drug 
problem. Don't hold your breath: Since the previous such gathering 
nearly two decades ago, the narcotics industry has done better than 
ever. The number of people using cannabis and cocaine has risen by 
half since 1998, while the number taking heroin and other opiates has 
tripled. Illegal drugs are now a $300 billion world-wide business, 
and the diplomats of the U.N. aren't any closer to finding a way to 
stamp them out.
This failure has a simple reason: Governments continue to treat the 
drug problem as a battle to be fought, not a market to be tamed. The 
cartels that run the narcotics business are monstrous, but they face 
the same dilemmas as ordinary firms - and have the same weaknesses.In 
El Salvador, the leader of one of the country's two big gangs 
complained to me about the human-resources problems he faced given 
the high turnover of his employees. (Ironically, his main sources of 
recruitment were the very prisons that were supposed to reform young 
offenders.) In Mexican villages, drug cartels provide basic public 
services and even build churches - a cynical version of the 
"corporate social responsibility"  that ordinary companies use to 
clean up their images. Mexico's Zetas cartel expanded rapidly by 
co-opting local gangsters and taking a cut of their earnings; it now 
franchises its brand rather like McDonald's and faces similar 
squabbles from franchisees over territorial encroachment. Meanwhile, 
in richer countries, street-corner dealers are being beaten on price 
and quality by "dark web"  sites, much as ordinary shops are being 
undercut by Amazon.

Soldiers and police officers have done rather poorly at regulating 
this complex global business. So what would happen if the war on 
drugs were waged instead by economists?

Take cocaine, which presents one of the great economic puzzles of 
narcotics. The war against cocaine rests on a simple idea: If you 
restrict its supply, you force up its price, and fewer people will 
buy it. Andean governments have thus deployed their armies to uproot 
the coca bushes that provide cocaine's raw ingredient. Each year, 
they eradicate coca plants covering an area 14 times the size of 
Manhattan, depriving the cartels of about half their harvest. But 
despite the slashing and burning, the price of cocaine in the U.S. 
has hardly budged, bobbing between $150 and $200 per pure gram for 
most of the past 20 years. How have the cartels done it?
In part, with a tactic that resembles Wal-Mart's. The world's biggest 
retailer has sometimes seemed similarly immune to the laws of supply 
and demand, keeping prices low regardless of shortages and surpluses. 
Wal-Mart's critics say that it can do this in some markets because 
its vast size makes it a "monopsony,"  or a monopoly buyer. Just as a 
monopolist can dictate prices to its consumers, who have no one else 
to buy from, a monopsonist can dictate prices to its suppliers, who 
have no one else to sell to. If a harvest fails, the argument goes, 
the cost is borne by the farmers, not Wal-Mart or its customers.

In the Andes, where coca farmers tend to sell to a single dominant 
militia, the same thing seems to be happening. Cross-referencing data 
on coca-bush eradication with local price information shows that, in 
regions where eradication has created a coca shortage, farmers don't 
increase their prices as one might expect. It isn't that crop 
eradication is having no effect; the problem is that its cost is 
forced onto Andean peasants, not drug cartels or their customers.
Even if the price of coca could be raised, it wouldn't have much 
effect on cocaine's street price. The raw leaf needed to make one 
kilogram of cocaine powder costs about $400 in Colombia; in the U.S., 
that kilogram retails for around $150,000, once divided into one-gram 
portions. So even if governments doubled the price of coca leaf, from 
$400 to $800, cocaine's retail price would at most rise from $150,000 
to $150,400 per kilogram. The price of a $150 gram would go up by 40 
cents - not much of a return on the billions invested in destroying 
crops. Consider trying to raise the price of art by driving up the 
cost of paint: It would be futile since the cost of the raw material 
has so little to do with the final price.

Economics points to a fundamental mistake in the war on drugs. Most 
of the money spent tackling narcotics is directed toward disrupting 
supply - by uprooting coca bushes, battling cartels, locking up 
dealers and so on. In fact, focusing on demand would be more effective.
Demand for drugs is inelastic - that is, when prices rise, people cut 
their consumption relatively little. (Given that most banned drugs 
are addictive, this isn't surprising.) So even when governments can 
drive up prices, dealers continue to sell almost as much as they did 
before - only at higher prices, meaning that the value of the 
criminal market increases. Reducing demand, by contrast, triggers a 
fall in both the amount consumed and the price paid, cutting into the 
criminal market on two fronts.Demand-side interventions are not only 
more effective, they're also considerably cheaper than playing about 
with helicopters in the Andes. A dollar spent on drug education in 
U.S. schools cuts cocaine consumption by twice as much as spending 
that dollar on reducing supply in South America; spending it on 
treatment for addicts reduces it by 10 times as much. Rehab programs 
for prescription-painkiller users might seem costly, but they prevent 
those people from slipping into the colossally more expensive problem 
of heroin addiction. Where demand cannot be dampened, it can be 
redirected toward a legal source, as a few U.S. states have done with 
marijuana - a development that has inflicted bigger losses on the 
cartels than any supply-disruption policy.

In any other industry, the current approach to drug control would 
have been identified as faulty years ago. Despite billions of dollars 
spent and tens of thousands of lives lost, the business is stronger 
than ever. Yet the tendency to treat narcotics as a military or 
policing matter means that the flawed economics behind it seem to go 
unquestioned. As the U.N. prepares for its special assembly, 
governments should seek advice not from their generals but from their 
economists.
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MAP posted-by: Jay Bergstrom