Stanford Progressive

The Hidden Cost of the War on Drugs

By Colin Gray, published May, 2010


Since Mexican President Felipe Calderon took office in September 2006, there have been well over an estimated 13,600 drug-related killings in the country. The killings are tied to Mexican drug cartels, which supply vast amounts of marijuana, methamphetamines, and cocaine primarily to U.S. markets. The deaths are only becoming more prevalent. The New York Times reports that “in 2008, there were more than 6,200 drug-related murders, more than double the figure from the year before….” There has been significant spillover into the U.S. as well, including the kidnapping of more than 60 Americans in the border town of Nuevo Laredo within the last few years.

The current wave of violence (the most deadly in Mexico’s history) began with the election of Mr. Calderon in September 2006. Upon taking office, Calderon reversed the Mexican government’s passive approach to the illicit drug trade. The President incited the conflict when he sent 6,500 Federal troops to the state of Michoacan to address drug violence there on December 11, 2006. Since then, he has increased the scale and intensity of his War on Drugs to involve 45,000 Federal troops, as well as Federal and state police departments.

While violence is escalating and some are calling Mexico a failed state, the Mexican effort has certainly disrupted the drug trade. Officials point to evidence of criminal organizations diversifying as drug revenues begin to dry up and to the rising price of cocaine. As early as the second quarter of 2007, the White House reported cocaine shortages in 37 U.S. cities and a 24% increase in the drug’s retail price. Yet, such disruption of the trade has revealed a new issue: the dependence on the drug trade by many parts of the Mexican economy. In considering how to fight illicit drugs in Mexico, it is crucial to consider how a blow to drugs may damage other sectors and industries.

As a net effect, most experts would agree that the illicit drug trade adversely affects the Mexican economy. Cartels undermine the rule of law. Instability alienates current investors and deters potential investors or business-owners. Government revenues fall, as taxable commodities are replaced in the economy by illegal goods that are not taxed by the government. Tourism, one of Mexico’s most important exports, suffers: the U.S. military has officially discouraged travelers from vacationing in many parts of Mexico. Drug cartels often intervene in economies directly, further discouraging investment. According to the L.A. Times, the Zetas (the military arm of the Gulf Cartel) “have proved to be ruthless overlords. They have kidnapped businessmen, demanded protection money from merchants, taken over sales of pirated CDs and DVDs and muscled into the liquor trade by forcing restaurant and bar owners to buy from them.” Viridiana Rios of the Harvard Department of Government estimates that “the cost of violence is equivalent to 1.07 billion dollars, investment losses accounts for other 1.3 billion, drug abuse generates a loss of 0.68 billion dollars, and other costs may have an impact as high as 1.5 billion dollars.”

Despite the net damage that such cartels create in the Mexican economy, the issue is not as homogenous as it initially appears. In fact, the Mexican economy is, in many ways, dependent on this industry. Economists estimate that the industry brings in between U$25 billion and U$50 billion every year. In 2009, Mexico probably made more money in the drug trade than it did in its single largest export industry: oil. One study, noted by Global Envision, reported that “the loss of the drug business would shrink Mexico’s economy by 63 percent.” Others attribute as much as 20% of Mexico’s GDP to this industry. Mexican journalist Carlos Loret de Mola claims that cartels make three times as many profits as Mexico’s 500 largest companies combined.

Furthermore, the effects of a blow to drugs would not be uniformly felt in Mexico. Certain legal industries would be hit harder. Luxury goods, for example, have thrived in Mexico due to the lavish tastes of drug dealers, smugglers, and organizers. These include cars, flight schools, yachts, and the like. While drug lords do not single-handedly keep such industries afloat, they do provide significant business. Some argue that banks are inadvertently dependent on drug money, and may have stayed afloat during the crisis partly due to this money. While deposits are usually made into thousands of different accounts, the money flowing through the banking system provided valuable liquidity during the 2008-2009 financial crisis.

By far, the people most hurt by a blow to the drug cartels would be the rural poor in certain areas of Mexico. According to Ms. Rios: “drug traffic cash flows are in fact helping some Mexican communities to somehow alleviate a grinding stage of poverty and underdevelopment. In fact, for almost all drug-producing communities, the drug traffic industry seems to be the only source of income.” This is partly due to the nature of drug cultivation, which, in many ways, is similar to farming. As of the late 1990′s, roughly 300,000 peasants were employed in drug production. The National Farm Workers’ Union (UNTA) estimates a number around 600,000. The importance of drugs in the area is nothing new. The earliest documented poppy production in the state of Sinaloa, called “the heart of Mexican drug country” by Newsweek, was in 1886. The extent of this dependence was illustrated in 1976, when a joint operation by the U.S. Drug Enforcement Agency and the Mexican government was organized. Called “Operacion Condor”, it involved helicopters that would spray (and ruin) poppy and marijuana fields. The operation caused such immediate economic destabilization in the region that the Mexican government indefinitely halted the project. This dependence on drug cultivation, especially on the labor-intensive process of processing poppy gum, still exists today.

Given the close ties between drug revenues and the economy, it is not entirely surprising to see some support for cartels in certain areas. Drug organizations have begun to provide psuedo-governments in certain towns, and sometimes win the support of locals by positive means. Of course, terror tactics, including a rising trend of beheadings, death threats, and atrocities, balance these. Still, a dependence on drug money establishes what some call an “artificial economy” that may simply disappear as the drug war goes on.

The question remains: how can we stabilize those parts of the Mexican economy that are dependent on drug money, even while combating drugs? In the long-run, a stable government that sends positive messages to investment is perhaps the most crucial aspect of the struggle. In the short run, the government must give alternative economic opportunities to the rural poor in drug-producing areas. These can come in the form of incentives for companies to move to those areas or artificial increases in the price of crops by means similar to current U.S. means for artificially boosting corn and sugar prices. Other sectors, such as banking and luxury industries, may have to suffer. Yet, with economic meltdown averted and globalization increasing demand for a myriad labor-intensive goods, the Mexican economy could presumably fill those jobs without serious long-term difficulty. Action would have to be taken now, as the government battles drug cartels, to ensure the well-being and sufficient political support of these populations.

Notably, alternative methods for fighting cartels may have alternative effects on these industries. For example, the legalization of drugs in Mexico would undercut cartels by causing a significant price drop. While independent ethical issues may conflict with this approach, it would probably keep many drug-dependent Mexican industries in business, albeit with lower profits. The unilateral legalization of drugs in the United States may be the most effective means in combating Mexican cartels, as cartel profits would dwindle as prices fell while prosecution of criminal activity within Mexico could continue. Yet, such an approach would not alleviate the threat those Mexican industries still indirectly dependent on drugs.

Whatever technique is used, it is the sad reality that drug organizations will not fail easily. Violence is increasing, but whether this is due to desperation on the part of the drug cartels or increasing power of drug lords is unclear. Criminal organizations hang banners in towns advertising higher pay for police officers and soldiers who defect. Brutality has become a type of game for some of these organizations, which have begun rolling heads onto crowded dance floors, strapping skinned faces onto soccer balls, and leaving clear signs of torture on corpses. While the need to battle these threats to law and order is clear, there are more subtle economic considerations that must be taken into account. Growth and stability, not stubbornness or punishment for industries implicitly tied into the drug trade, must be priorities.


11 Comments »

  1.  malcolm kyle, May 19, 2010 @ 11:18 am

    Prohibition is a sickening horror and the ocean of incompetence, corruption and human wreckage it has left in its wake is almost endless.

    Prohibition has decimated generations and criminalized millions for a behavior which is entwined in human existence, and for what other purpose than to uphold the defunct and corrupt thinking of a minority of misguided, self-righteous Neo-Puritans and degenerate demagogues who wish nothing but unadulterated destruction on the rest of us.

    Based on the unalterable proviso that drug use is essentially an unstoppable and ongoing human behavior which has been with us since the dawn of time, any serious reading on the subject of past attempts at any form of drug prohibition would point most normal thinking people in the direction of sensible regulation.

    By its very nature, prohibition cannot fail but create a vast increase in criminal activity, and rather than preventing society from descending into anarchy, it actually fosters an anarchic business model – the international Drug Trade. Any decisions concerning quality, quantity, distribution and availability are then left in the hands of unregulated, anonymous, ruthless drug dealers, who are interested only in the huge profits involved.

    Many of us have now, finally, wised up to the fact that the best avenue towards realistically dealing with drug use and addiction is through proper regulation which is what we already do with alcohol & tobacco, clearly two of our most dangerous mood altering substances. But for those of you whose ignorant and irrational minds traverse a fantasy plane of existence, you will no doubt remain sorely upset with any type of solution that does not seem to lead to the absurd and unattainable utopia of a drug free society.

    There is an irrefutable connection between drug prohibition and the crime, corruption, disease and death it causes. If you are not capable of understanding this connection then maybe you’re using something far stronger than the rest of us. Anybody ‘halfway bright’, and who’s not psychologically challenged, should be capable of understanding that it is not simply the demand for drugs that creates the mayhem, it is our refusal to allow legal businesses to meet that demand.

    No amount of money, police powers, weaponry, diminution of rights and liberties, wishful thinking or pseudo-science will make our streets safer, only an end to prohibition can do that. How much longer are you willing to foolishly risk your own survival by continuing to ignore the obvious, historically confirmed solution?

    If you still support the kool aid mass suicide cult of prohibition, and erroneously believe that you can win a war without logic and practical solutions, then prepare yourself for even more death, corruption, terrorism, sickness, imprisonment, unemployment, foreclosed homes, and the complete loss of the rule of law and the Bill of Rights.

    “A prohibition law strikes a blow at the very principles upon which our government was founded.”
    Abraham Lincoln

    The only thing prohibition successfully does is prohibit regulation & taxation while turning even our schools and prisons into black markets for drugs. Regulation would mean the opposite!

  2.  Bill Harris, May 19, 2010 @ 1:10 pm

    None of these suggested measures has a possibility of success because none of them address the cause of the problem, which is prohibition. Society is sick from lack of liberty. Prohibitionists would have you believe that God made a mistake when He created the psychoactive plants and determined their efficacies. Molecules don’t cause crime and violence, only prohibition does that. Repeal prohibition and all problems become tractable.

  3.  Kirk Muse, May 19, 2010 @ 1:51 pm

    Mexico didn’t have 13,600 drug related killings. It had
    13,600 drug prohibition caused killings.

    How much crime do we or Mexico have related to the drugs
    caffeine or nicotine? None.

    Why? Because they are legal.

  4.  Lisa, May 19, 2010 @ 4:44 pm

    Legalizing marijuana which is safer than beer is the answer as this piece points out, it could be done with great results to the United States as well as Mexico, but there is too much corruption in government which is why they would rather have the current policy which causes all these deaths, which has cost the US over a Trillion dollars so far and drugs are more widely used and cheaper than ever before. If you read between the lines, you’ll see the people are the only ones that want the change, because we are the ones most effected. Police get guaranteed drug funding which guarantees them job security and a nice budget to play GI Joe with while trampling our civil rights, the private prison system gets to keep raping the US Tax payers, the Pharmaceutical industry gets to keep marketing their deadly pills to everyone on TV with no other options to the sick, the rehab centers and drug courts get a steady income of court ordered clients, the Oil Companies don’t have to worry about a bio fuel, the US government gets to collect all the contributions for their election campaigns they want from the lobbyists from these other industries which guarantees their security. Its simple, America is now ran by powerful corporations, not the people, because they can now control our government officials by bribery, and as of a recent law change, their is now NO limit to the amount of money corporations are allowed to donate to our elected officials to advance their own agendas and secure their positions.

    A country by the people and for the people is a thing of the past, money and greed have won, and thats the reality.

  5.  malcolm kyle, May 20, 2010 @ 5:39 pm

    Prohibitionists dance hand in hand with every possible type of criminal one can imagine.

    An unholy alliance of ignorance, greed and hate which works to destroy all our hard fought freedoms, wealth and security.

    We will always have adults who are too immature to responsibly deal with tobacco alcohol, heroin amphetamines, cocaine, various prescription drugs and even food. Our answer to them should always be: “Get a Nanny, and stop turning the government into one for the rest of us!”

    Nobody wants to see an end to prohibition because they want to use drugs. They wish to see proper legalized regulation because they are witnessing, on a daily basis, the dangers and futility of prohibition. ‘Legalized Regulation’ won’t be the complete answer to all our drug problems, but it’ll greatly ameliorate the crime and violence on our streets, and only then can we provide effective education and treatment.

    The whole nonsense of ‘disaster will happen if we end prohibition’ sentiment sums up the delusional ‘chicken little’ stance of those who foolishly insist on continuing down this blind alley. As if disaster wasn’t already happening. As if prohibition has ever worked.

    To support prohibition is such a strange mind-set. In fact, It’s outrageous insanity! –Literally not one prohibitionist argument survives scrutiny. Not one!

    The only people that believe prohibition is working are the ones making a living by enforcing laws in it’s name, and those amassing huge fortunes on the black market profits. This situation is wholly unsustainable, and as history has shown us, conditions will continue to deteriorate until we finally, just like our forefathers, see sense and revert back to tried and tested methods of regulation. None of these substances, legal or illegal, are ever going to go away, but we CAN decide to implement policies that do far more good than harm.

    During alcohol prohibition in the 1920s, all profits went to enrich thugs and criminals. Young men died every day on inner-city streets while battling over turf. A fortune was wasted on enforcement that could have gone on treatment. On top of the budget-busting prosecution and incarceration costs, billions in taxes were lost. Finally the economy collapsed. Sound familiar?

    In an underground drug market, criminals and terrorists, needing an incentive to risk their own lives and liberty, grossly inflate prices which are further driven higher to pay those who ‘take a cut’ like corrupt law enforcement officials who are paid many times their wages to look the other way. This forces many users to become dealers themselves in order to afford their own consumption. This whole vicious circle turns ad infinitum. You literally couldn’t dream up a worse scenario even if your life depended on it. For the second time within a century, we’ve carelessly lost “love’s labour,” and, “with the hue of dungeons and the scowl of night,” have wantonly created our own worst nightmare.

    So should the safety and freedom of the rest of us be compromised because of the few who cannot control themselves?

    Many of us no longer think it should!

  6.  TYC, May 21, 2010 @ 2:36 pm

    Time to quit playing Al Capone and Elliott Ness. It didn’t work before and it’s not working now. I find no compelling reason to continue the war on some drugs.

    Legalize and regulate.

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    You’ve done it again. Great article!

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    If only more people could read this!

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