A cartel’s balance sheet: Are we winning the war on drugs?

World Finance speaks to Dr Benjamin Smith from the University of Warwick about the multi-million-dollar narcotics industry

February 17, 2015

Violence in the Americas – barely a week goes by without the horrific discovery of another mass grave, city-wide shootout or kidnapping making the headlines and often the underlying link is the trade in drugs.

World Finance: Benjamin, how large is the illegal narcotic industry in the Americas?
Dr Benjamin Smith: The recent US estimate is I think $150m, which is around 0.5 percent of global GDP is in the drug trade, and about 0.5 to one percent of the Americas’ GDP.

World Finance: The South American drug trade builds cult figure such as Pablo Escoba amid so much death and violence. But in reality, what does it cost the continent’s economy?
Dr Benjamin Smith: Quite how much it costs the economy is difficult to say. Obviously there’s a huge loss in terms of investment. People are scared off investing in certain countries.

People are scared off investing in certain countries

So for example Mexico at the moment is struggling to find even oil companies to invest in their newly privatised oil industry, partly because the vast majority of oil is in a state called Tamaulipas, which is probably the most violent state in Mexico. It’s pretty much a no-go zone for anyone who doesn’t have a private army behind them. Fortuitously, BP and Shell do have a private army, which they are intending to send there.

How much it loses the economy in general, then, it is fairly difficult to say, because we’re speculating on how much investment would come anyway. Also, quite clearly, a lot of money comes back from the drug trade, and I think there’s an argument to be made that that money is actually more broadly and equitably distributed than money from international investment, which normally seems to get sucked up by crony capitalists. Something has happened in Mexico which is somewhat played down is the fact that the middle class in Mexico has grown gradually over the last ten years.

World Finance: How large a part of it makes it into the legitimate finance industry through laundering, etc?
Dr Benjamin Smith: My own estimate would be somewhere around half, in that they estimate that 0.9 percent of the global GDP is in drug money, and about 0.5 percent comes back into the banking industry.

World Finance: Obviously it’s not uncommon in certain places for authorities to turn a blind eye in return for hush money. How big a problem is this?
Dr Benjamin Smith: It’s the fundamental problem if you want to clear up money laundering or want to clear up organised crime. Most authorities, whether it be in Mexico or the US, have had a fairly ambiguous relationship with drug money.

Just last month, Mexican government released the brother of former President Carlos Salinas, a guy called Raul Salinas, who was prosecuted for I think holding around $50m of Gulf cartel money, which his wife was trying to get out of a Swiss bank account in the last 1990s. So these people normally have a fair degree of impunity. He was rare in that he was actually put in jail, but then as soon as his brother’s party got back in power, he was released and recently filmed at a gala event turning up in a $200,000 Mercedes.

World Finance: So the modern day war on drugs, what measures are being taken? How much progress has been made? And has this actually cost America?
Dr Benjamin Smith: Well they recently gave $4bn to the Mexican government in order to fight the drug war, which has done a lot in terms of killing people. About 100,000 have been killed in the last decade, which is similar to the official figures for the deaths post-invasion of Iraq.

In terms of what it’s actually doing, it seems to have affected the drug industry extremely little. What has affected the drug industry to a certain extent is actually legalisation. There have been recent articles on legalisation of marijuana in several American states, that seems to have cut into cartel profits, which a lot of then, certainly in Mexico, are made from marijuana.

However, what has happened is they’ve simply moved into other drugs, so now you have a big upswing in heroin addiction in the midwest, which is driven to a certain extent by very cheap heroin coming in from Mexico. Also methamphetamine, previously a drug made by toothless hicks in Alabama, and is now actually mostly produced in Mexico.

World Finance: How do you see the illegal drug trade and its revenue developing?
Dr Benjamin Smith: I see it continuing, and at a fairly high rate. I don’t see that the solution has been found and the war on drugs, which has been going on really since the 1970s has seemed to have done very little apart from potentially mean that the drug trade has become more embedded within the finance industry and within the government.

New shifts towards legalisation in Uruguay and in the United States might change things, but until there’s a full legalisation of all narcotics, I don’t think that this is going to make a huge dent in the profits of cartels.

Whether governments in the Americas can stop the bloodshed through deals with these cartels, obviously not public deals with these cartels, time will tell. The Mexican government I think is trying to do this at the moment, but has been relatively unsuccessful because of the sheer fragmentation of these cartels, as the recent events surround the missing Ayotzinapa students seemed to indicate.