Narconomics

1. Drug Cartels Mimic Legitimate Business Strategies

Crooks already know these tricks. Honest men must learn them in self-defense.

Business Acumen. Drug cartels, despite their violent nature, operate much like legitimate businesses, employing strategies related to supply chain management, franchising, public relations, and diversification. They face similar challenges, such as managing personnel, navigating regulations, and dealing with competition.

Walmart Analogy. The Colombian cocaine manufacturers protect their profits by tightening control of their supply chains, along the same lines as Walmart. Mexican cartels have expanded on a franchise basis, with the same success as McDonald’s.

Business Manual. Understanding the economics of the drug trade and recognizing that cartels are run like multinational companies is crucial for predicting their next steps and developing effective counter-strategies. This book serves as both a business manual for drug lords and a blueprint for how to defeat them.

2. Supply-Side Drug War Ineffectiveness

The world’s taxpayers spend upward of $100 billion a year combating the illegal-drugs trade.

Eradication Futility. Governments focus overwhelmingly on suppressing the supply side of the drug business, particularly coca cultivation, but this approach has proven largely ineffective. Despite massive eradication efforts, cocaine prices remain stable, and production bounces back due to the "cockroach effect."

Monopsony Power. Cartels act as monopsonies, dictating prices to coca farmers and absorbing the costs of eradication efforts, leaving farmers impoverished without significantly impacting cartel profits or consumer prices. The best estimates available suggest that the wholesale price of marijuana in Mexico is about $80 per kilo, or just 8 cents per gram.

Demand-Side Solutions. Addressing demand through prisoner rehabilitation, job creation, and addiction treatment is a more effective approach than focusing solely on supply-side suppression. The vast markup between coca farm gate price and retail cocaine price means supply-side interventions have minimal impact on consumer prices.

3. Competition Breeds Violence; Collusion, Stability

Why did one market see heightened competition and the other collusion?

Cartel Violence. Mexico's war against the cartels, particularly in cities like Ciudad Juárez, demonstrates that heightened competition among cartels leads to increased violence. The fight for control of lucrative border crossings and the interference of multiple levels of law enforcement exacerbate the conflict.

El Salvador Truce. In contrast, El Salvador's maras, or gangs, experienced a dramatic decrease in violence after agreeing to a truce, illustrating that collusion can sometimes be more profitable than competition. The murder rate immediately dropped by the equivalent of about 2,000 lives a year.

Market Conditions. The level of violence in criminal markets can be dramatically altered by changes in market conditions, such as the scarcity of border crossings or the presence of government-mediated truces. Governments should consider ways to shape these markets to reduce violence.

4. Human Resources: Cartels' Greatest Challenge

Their clients have the same demands as other consumers, too.

People Problems. Drug cartels face significant human resources challenges, including recruiting trustworthy workers in a secretive industry and managing staff without legal recourse. Incompetence and "soap-opera lifestyles" often lead to the downfall of cartel operations.

Prison Recruitment. Prisons serve as key recruitment and training grounds for cartels, providing a pool of potential employees with criminal backgrounds. Gangs like La Nuestra Familia have developed elaborate constitutions to manage internal relations and attract new members.

Rehabilitation. The Dominican Republic's prison reform efforts, which focus on rehabilitation and education, demonstrate a more effective approach to reducing recidivism and disrupting cartel recruitment. By providing inmates with skills and opportunities, the state can undermine the cartels' ability to attract new members.

5. Public Relations: Image Laundering for Criminals

Shorty is more loved and respected than many politicians!

Narco-PR. Drug cartels engage in public relations campaigns to cultivate a positive image, often through narcomantas (banners), social media, and acts of philanthropy. These efforts aim to gain public support, intimidate rivals, and influence government policies.

Corporate Social Responsibility. Cartels invest in corporate social responsibility (CSR) initiatives, such as building churches and providing services in areas where the state has failed, to win the approval of local communities. This strategy helps them maintain a support base and avoid being reported to authorities.

Undermining Cartel PR. Governments can undermine cartel PR by improving public services, protecting journalists, and educating the public about the true cost of drug consumption. By addressing the root causes of cartel influence, governments can reduce their ability to manipulate public opinion.

6. Offshoring: Cartels Seek Weak Governance

Pressure in Mexico has caused a displacement to the east, to the Caribbean.

Central America. Drug cartels are increasingly offshoring their operations to countries with weak governance, such as Honduras and Guatemala, to reduce costs and evade law enforcement. These countries offer cheap labor, corrupt officials, and lax regulations, making them attractive bases for criminal activity.

Honduras Example. Honduras, with its high murder rate and corrupt government, has become a hub for drug trafficking, with Mexican cartels establishing processing labs and smuggling routes. The country's weak institutions and porous borders make it difficult to combat the cartels' influence.

Strengthening Governance. To combat offshoring, governments must strengthen their institutions, improve law enforcement, and address the underlying factors that make their countries attractive to cartels. International cooperation and targeted aid can help build more resilient states.

7. Legalization: A Disruptive Threat to Cartel Power

The legal market has become the black market for the rest of the United States.

Legal Cannabis. The legalization of marijuana in states like Colorado and Washington poses a significant threat to the cartels' cannabis business. Legal businesses can produce higher-quality products at lower costs, undercutting the cartels' market share.

Disrupting Cartel Revenue. Legalization could significantly reduce cartel revenues, as consumers shift to legal sources and the cartels struggle to compete on price and quality. This would weaken the cartels' overall power and reduce their ability to engage in other criminal activities.

Federal Legalization. Federal legalization of marijuana in the United States would further disrupt the cartels' business, potentially leading to a shift in production to countries with even lower costs, such as Mexico. This would require a comprehensive approach to managing the transition and addressing the social and economic consequences.

8. The Futility of National Drug Control Efforts

The only thing you can do is push it elsewhere, and make it someone else’s problem.

Global Business. Drug cartels are global businesses that operate across national borders, while efforts to control them are often limited to individual countries. This disconnect leads to the "cockroach effect," where suppressing the drug trade in one area simply causes it to pop up somewhere else.

International Cooperation. Effective drug control requires international cooperation and a coordinated approach to address the problem across borders. This includes sharing intelligence, coordinating law enforcement efforts, and addressing the underlying factors that drive the drug trade.

Economists as Police. By applying economic principles to the fight against drug cartels, governments can develop more effective strategies that address both supply and demand, target the most vulnerable points in the criminal network, and promote long-term stability. The key is to understand the economics of the drug trade and to go on quoting fantasy figures.

Last updated: February 27, 2025