Why did Mexican organized crime grow so out of control?

A look at the market conditions that have allowed the cartels and drug trade to thrive

By Alberto Islas

Conventional wisdom states that Mexican organized crime is fighting the government of President Felipe Calderón because he has confronted corruption and ended a long-time pact between the former PRI governments and cartel members. This explains the escalation of violence and the shift of crime gangs to other lines of business such as human trafficking, counterfeit goods and selling drugs in the local market.

However, this is false. The above explanation does not address why in the last 10 years—under PAN administrations—Mexican cartels have become the No. 1 suppliers of meth to the U.S. market; the price setters in the cocaine market; the No. 2 producer of heroin; netted profits over $75 billion in counterfeit goods and piracy, or why cartels run regular operations in Italy, Africa and Argentina.

Mexican organized crime organizations have gained extraordinary power in the past 10 years, due to shifts in the drug market and their ability to use Mexico’s logistical infrastructure at a very low risk due to the lack of a national security and crime policy. These elements have provided a fertile ground for corruption in law enforcement agencies and society. Today we have a highway of illegality in the country, where any black market product can be traded by organized crime with the support of top-notch logistic experts in the cartels who can outperform the chief of operations of DHL or Federal Express.

[MARKET SHIFTS IN COCAINE]

Plan Colombia was very effective in undermining the Colombian drug cartels. The increased interception of cocaine shipments in the Caribbean, combined with a decline in consumption, reduced their ability to determine the price of cocaine. Mexican cartels would only pay as much as $8,000 per kilo upon delivery, down from the $17,000 the Colombians would receive by selling it on the streets of Miami themselves. The dependence on Mexican cartels grew. In 1999, under the PRI, 54 percent of cocaine consumed in the U.S. passed through Mexico. Today, under President Felipe Calderón that number is 90 percent.

Under Plan Colombia, customs developed a modern IT platform that enabled them to exchange information with other countries in order to detect chemical precursors for the transformation of coca leaves to cocaine. This strategy reduced the output of cocaine and disrupted the manufacturing process. The same strategy and the lack of trade agreements with other countries stopped Colombian cartels from being a player in the meth market—the new drug that seized the U.S. and Europe.

On the other hand, the lack of control and corruption in Mexican customs facilitate the transport of pseudoephedrine (a nasal decongestant used to make meth) to the country. Mega labs are set up in Mexico in areas controlled by the Sinaloa Federation—Zapopan and Tijuana – where 50 percent of meth sent to the U.S. is produced. Based on the consumption patterns in the U.S. and output estimates, it is calculated that revenues from meth ($6 billion) double the net sales of cocaine ($3 billion).

After 9/11, poppy production was destroyed in Afghanistan, and the consumers needed to find a supplier. Mexico, a long-time producer of low quality poppies, increased the production from 6.6 tons in 2002 to 18 tons in 2007. Mexican black tar, as it is called, is of lower quality, but the gap in the market enabled Mexican cartels to gains market share on the east coast and central U.S. Asian gangs who controlled heroin distribution lost turf to “La M” (Mexican crime organization), which became a one-stop shop for drug buyers.

Due to acquired volume and the control of the retail chain in the U.S. market, Mexican cartels gained a strong leverage in setting the price when purchasing cocaine and ephedrine. In the case of cocaine, the fragmentation of Colombian cartels and the increased seizures by the Colombian Navy and U.S. Coast Guard reduced their ability to provide large volumes to their clients. As a result Mexican crime organizations paid a fixed price upon delivery to Mexico, giving them control over their Colombian counterparts and reducing their risk. In the case of ephedrine, Mexicans have taken advantage of the lack of control in Customs, the ease to set up meth labs, and the reach of the distribution network with the Mexican gangs, to increase their bargaining position due to the large amounts they produce.

As a result of global market conditions, a superb logistical base without government supervision and a 10-year lack of investment in security under the PAN administration, the Mexican cartels have been empowered. That’s why, however much success governments have in killing drug lords, while the current market conditions prevail criminal gangs will continue to be able to challenge the state.



Alberto Islas is a graduate of MIT and CEO of Ridsk Evaluation, a crisis management and risk assessment firm in Mexico City.