"Narco" Economics 101

La economia del narcotrafico

Jorge Luis Sierra
Revista Contralinea

An analysis of the economic impacts drug trafficking has uncovered facts that shed light on the current fight against organized crime organizations.

Control of informal economic activity
A current trend in the behavior of organized crime groups is their monopolization and control of the full range of illegal activity in territory under their control. These activities range from arms and human trafficking, to car theft, extortion and kidnapping. However, the need to broaden their salary base and increase their income has led organized crime to impose a "tax liability" to those businesses or individuals operating in the informal economy that do not pay their taxes regularly to tax authorities.

An example of this “taxation” is seen in the border state of Tamaulipas, where small shops, street vendors and street merchants are forced to pay a financial contribution to organized crime, usually in the form of protection fees. There is, of course, no record of the gains in income from this expansion, but testimony from small businesses in that border region indicate that even the most humble sellers were ordered to pay their "taxes". What is certain is that this is one of the reasons for the decline of all business activities in the Tamaulipas border with Texas.

Creating a workforce skilled in violence
The increased government pressure and increased inter-cartel competition has forced drug trafficking organizations to “paramilitarize” and develop methods and places for education and training in tactics and handling of firearms. Young people belonging to street gangs or simply living in unsafe slums began to receive training that immediately led to a spike in the level of specialization in violence.

Recent estimates by researchers at Harvard University indicate that the cartels have produced nearly half a million jobs, most of them dedicated to the cultivation, protection, harvesting and processing of marijuana and opium poppy (“To be or not to be a drug trafficker-modelling criminal occupational choices” Viridiana Rios 4-27-2010).

The latest figures from the Mexican government itself establish that the seizure of these drugs has declined. This may be explained by the high concentration of federal troops in urban areas according to a report on drug control strategy released earlier this month by the U.S. Government (2011 INCSR country report-Mexico)

In addition to rural employment, the cartels have generated a significant criminal workforce in the cities. The same Harvard study estimated that for every 100 farmers engaged in the production of drugs, there are 46 other individuals involved in other phases of the drug trafficking industry, including protection of command cells, operations, surveillance, intelligence and the enforcement of its own rules through the use of kidnappings and assassinations.

Expansion into new areas of crime.
Drug traffickers have built parallel businesses that were until recently “under the radar” of police and military authorities. One is the theft of oil, condensate and jet fuel from PEMEX ( Petroleos Mexicanos, the State owned oil conglomerate). The cartels would then introduce the product into international markets through a network of U.S. and Guatemalan companies. Although several of these companies have been prosecuted in the U.S., the thefts from PEMEX continue.

Legislators believe that the profits Mexican criminal groups accrue from the sale of hijacked petroleum products amount to several billion dollars annually.

Cash flows
The flow of “drug” money into the Mexican economy has had minimal impact on the economic development of the areas most affected by violence. An analysis by the University of San Diego established that most inhabitants of Mexico’s border with the United States receives an annual per capita income of no greater than $ 7,000. On the U.S. side of the border, most inhabitants receive a per capita annual income of no higher than $14,000, which puts most of the inhabitants of the entire border region below the poverty line.

$6,000 to $12,000 annually

The workforce employed by the drug trade has a salary just over that amount. On average, a young man who is employed as a hitman, guard or caretaker of the drug gangs get an income that fluctuates between $6,000 and $12,000. This income is paid only partly in cash, payment is also in drugs and other perks like a car, cell phone, and so on.

The research out of Harvard University shows that the 468,000 individuals employed by organized crime account for an important part of the profits generated by drug trafficking. The lowest levels of gunmen, which number about 145,000 individuals, together receive about 1.74 billion dollars a year. The corrupt police and military commanders take a total cut similar to that above, but the number of people receiving this money is significantly lower. The rest of the profits remain in the hands of the cartel leaders.

Estimates of the global profits of organized crime in Mexico cover a wide range, anywhere between 12 billion to 80 billion dollars annually. A more measured analysis that includes the cost of operations and drug seizures indicate that the earnings of Mexican drug traffickers are between 3 billion and 9 billion dollars annually.

Whatever the actual amount of drug profits may be, the fact is that Mexican organized crime has a similar or greater economic power to that of the joint police and military forces engaged in combat against them. The drug trafficking groups have been acquiring an arsenal of light military-type weapons that have helped to counter the government offensive with a historical wave of violence.

Conclusion
Those areas of Mexico without systematic attention from the government or that are poorly valued in today's security strategies have produced a void that favors the constant renewal of organized crime in the country.

The crux of the fight against cartels lies not only in a combat of military strength vs. strength, but in the dismantling of the forms of wealth accumulation of drug traffickers. This would work on several fronts: one, the most immediate, is the social and economic development in areas of urban and rural poverty where organized crime feeds its ranks.

Another front that is slower, because of the time it takes to document ongoing money laundering, is to seal the mainstream economy and industry from the input of money of illegal origin. The third front is much more complex, and involves reducing the market for drug consumption through health policies, education and, above all, the legalization of drugs. While there is none to very little progress in attacking these conditions, drug traffickers will continue to exploit the voids in Government policy.

* The author, Jorge Luis Sierra, is a specialist in military and national security, and is a graduate of the Center for Hemispheric Defense Studies, National Defense University in Washington D.C.

Sources:
La economia del narcotrafico
http://contralinea.info/archivo-revista/index.php/2011/03/20/la-economia-del-narcotrafico/
To be or not to be a drug trafficker: Modeling criminal occupational choices.
http://www.gov.harvard.edu/files/Rios_MPSA2010.pdf
2011 International narcotics control strategy report, U.S. State Department

http://www.state.gov/p/inl/rls/nrcrpt/2011/vol1/156361.htm