What McDonald's and Walmart Can Teach Drug Cartels

The narcotics industry is a multi-billion dollar business. Cartel leaders like El Chapo regularly make Forbes Billionaire Drug Lord list, despite the illegality of their operations and law enforcement's focus on them. With a seemingly infinite demand for commodities like cocaine, heroin, and the works being met by massive crime networks, consumption (and thus profit) is equally unlimited. And unlike Fortune 500 companies, cartels can build monopoly-like empires and achieve the type of industry dominance that CEOs like Warren Buffett and Zuckerberg could only dream of.

Tom Wainwright, the Britain editor of The Economist, who ran the magazine's Mexico desk for three years, recently published a book titled Narconomics: How to Run a Drug Cartel that looks at the drug industry as a business, finding common ground between the underworld and legitimate corporations like Walmart, McDonald's, and Amazon. Wainwright was struck by how "el narcotráfico" was basically a business like any other, but one that was normally written about as if it were a war. For example, the book examines how the dark web is destroying street-corner dealers' businesses through lower prices, better quality control, and its wide-range of vendors compiled in one place, not unlike how Amazon has made it harder for brick-and-mortar shops to stay open.

Wainwright spent five years in total researching and writing the book. His journeys took him into the gang-run towns and killing fields of Central America, a prison in the Dominican Republic, and the cocoa fields of the Bolivian Andes. The book looks at the drug trade as a regular business, including analyses of the money the industry generates, how mass incarceration leads to better-qualified criminals, and how we can use market forces to harness, if not solve, the drug problem. VICE chatted with Wainwright by email shortly before PublicAffairs released his book on February 23.

VICE: What made you decide to look at the drug trade as a regular business?
Tom Wainwright: I was in Mexico covering the whole region for The Economist, and I found that half the time I was writing about ordinary businesses—oil, cars, telecoms, whatever—and the other half I was writing about the drug wars. The more I covered the two, the more I realized that the drug story was really just a business story, albeit a particularly gruesome one.

When I spoke to the people involved in it, they made the same sorts of comments as other business people: gang leaders worried about recruitment, junior members complained about low wages, Mexican cartels were offshoring their operations to cheaper countries in Central America, and some of them were even getting into "corporate social responsibility" as a way of keeping locals happy. So I thought, what would happen if I wrote about the drugs business as if it were a normal business?

Can you tell me about the places you visited to research for this book?
I traveled quite a bit in Latin America, as well as roaming around Mexico. I got down to Central America—focusing on Guatemala, Honduras, and El Salvador—as well as visiting some coca farms in the Bolivian Andes and a prison in the Dominican Republic. In the States, I went to check out the legalization experiment in Colorado.

The book goes into the legal highs industry, too which, believe it or not, has its roots in New Zealand of all places, though I confess I haven't been there. I also look at the European smuggling business, including some reporting from Britain, where I live, and examples from various other places, particularly the Netherlands. It's a global business so I wanted to make the book pretty global in its scope, though the focus really is on the Americas.

What type of money are modern drug cartels making?
No one quite knows because they don't publish their accounts. But the UN reckons the illegal drugs business is worth about $300 billion a year. Of that, the biggest part is marijuana—it makes up nearly half the total, since it's so popular. Interestingly, marijuana is not all that profitable, compared to other drugs. As marijuana is legalized, the cartels are relying more on other drugs: cocaine is the mainstay of the Latin American ones, though they are getting more into heroin. They're following up on the big market opportunity that America's prescription-painkiller epidemic has opened up [for opiates].

What have the cartels learned from major businesses like Walmart?
Plenty, though it's worth making clear—so that I don't end up on the wrong end of a Walmart lawsuit—that none of the legitimate firms mentioned in my book are accused of any wrongdoing themselves. In the case of Walmart, it's about how they manage their suppliers. Walmart is sometimes accused of being a monopsony—that is, being the monopoly buyer of certain products in some markets. The idea is that it's so big, it can effectively dictate prices to its suppliers.

The cartels have a similar thing going on in South America with their coca-leaf suppliers. The farmers have no one else to sell to, so when a crop fails or is destroyed by the Colombian air force, it's the farmers that take the hit, not the cartels. That's why cocaine's price has hardly budged in the US for decades.

What about McDonald's?
With McDonald's, that's all about franchising. Look at the Zetas cartel in Mexico. They let local gangs use the Zetas brand, which makes them much more effective at extortion, and, in return, the main cartel takes a cut of the local gangs' earnings. The Zetas have also hit some of the same problems as McDonald's, such as when their franchisees often squabble over territorial encroachment, just as McDonald's restauranteurs do.

Can you tell me a little more about your thoughts on how mass incarceration leads to better-qualified criminals?
One of the big problems cartels face is recruiting people. They have a really high turnover of staff because their guys keep getting killed or arrested. And they can't exactly advertise in the newspaper. It's a nightmare for them. But, fortunately for them, we've invented these places where we get a load of unemployed young men with criminal backgrounds and put them all in the same place with nothing to do and no prospect of a job when they get out. It's called prison and although it's meant to reform offenders, it's a gift to organized crime. Carlos Lehder and George Jung, who basically introduced America to cocaine, met when they shared a cell in a prison. One knew how to smuggle drugs by plane, the other had connections in Colombia, and the rest is history. And their meeting was paid for and arranged by the American taxpayer.

What's your take on America's war on drugs, generally?
Well, I've met a lot of the police officers and soldiers who spend their lives fighting against drugs, and I think most of them think they're doing the right thing, and I respect them for it. But I think they've been led down the wrong path. In the past couple of decades, the number of people worldwide taking cannabis and coke has risen by 50 percent, and the number taking opiates has tripled. All that in return for billions of dollars spent and tens of thousands of lives lost. That's not what a successful policy looks like.

What are some lessons that we should learn concerning the economics of the drug trade?
The book's message is that if you want to crush the cartels, you'd better understand how they work. You're only going to do that if you understand that they follow many of the same rules as other businesses. More broadly, it seems crazy to me that the war on drugs has focused so much on cutting supply, when it makes a lot more sense to cut demand. The gist is that demand for drugs is inelastic—i.e. people keep buying them, more or less regardless of price—so if you drive up the price by making it harder to sell them, all you do is increase the value of the market.

I also think, from what I've seen in Colorado and the handful of other states that have legalized marijuana, that legalization is probably the least bad way of managing drugs. You're never going to find a perfect way of dealing with substances that are addictive and harmful (see alcohol), but I think we've got a better chance if they're managed by the government than if they're left to the mafia.

'Narconomics' is now available to order online through PublicAffairs Publishing.

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