The Tangible Costs of Criminalization; A Case for Drug Policy Reform

In this paper I analyze the alarming trend of militarization and media silencing in the international drug trade and the implications of complete legalization of prolific banned substances on human lives saved and the world economy.

Background

The drug trade has always been considered a taboo issue, even in light of how pronounced it has been in the lives of Americans since the nation gained its independence. There has always been a substance in demand, whether it be tobacco, alcohol, marijuana, or any number of illicit substances in the contemporary market. Moreover, the growth of the industry for illicit substances over the last 50 years has been exponential.

As the 2005 World Drug Report elucidates, “[T]he value of the global illicit drug market for the year 2003 was estimated at $13 billion at the production level, at $94 billion at the wholesale level (taking seizures into account), and at 322 billion based on retail prices and taking seizures and other losses into account.”

When added up, the production, wholesale, and retail sale levels adjusted for losses account for $429 billion dollars or roughly 1% of the worlds $45 trillion GDP in 2005. Now in 2012, it wouldn't be surprising if the trade has grown to account for 3% or greater of world GDP.

Since the demise of the Cali and Medellin Colombian drug cartels in the early 1990s, Mexican drug cartels have stepped into the fold and monopolized the industry. It is now estimated that 90% of the drugs that enter the United States pass through Mexico. 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 and employ nearly 500,000 people.

In 2006 Mexican President Felipe Calderon sent 6500 troops to the state of Michoacan, in the first of several tactical military strikes against cartels. Instead of quelling the violence, this policy had an adverse effect. In order to regain control, cartels began targeting officials and civilians in broad daylight. Moreover, the military strikes fragmented cartels and lead to bloody turf wars between new entrants. It is estimated that 86,000 people have been killed from violence associated with the drug war since 2006, nearly twice the number of casualties of the Iraq War.

Why the Mexican Drug War Should Be, and Isn't Being Discussed

The externalities of the Mexican Drug War are absolutely immense. However, Americans barely know anything about the conflict. Cartels intimidate journalists, so it is nearly impossible to understand their intentions and further plans for growth.  Between 2000 and the beginning of 2012, 55 journalists have been murdered in Mexico and, according to the Committee to Protect Journalists, eight journalists were killed in Mexico last year, with 10 killed in 2012. And this year more murders and threats have been reported.

As for the effects on Americans and the world at large:

 (1) Cartels are incredibly sophisticated and maintain the capacity to fundamentally alter world trade and growth. For example, the Los Zeta cartel was formed by former Mexican special forces commandos who deserted and joined the ranks of the Gulf Cartel before breaking off and becoming a separate organization. These guys are capable of gathering intel like the CIA, via wiretaps on government officials and a careful network of paid spies and lookouts. Also, they have an arsenal of weapons including tanks, armored trucks, rocket propelled grenade launchers, and special forces helicopters. Cartels like Los Zetas are so powerful that the local police and judicial system have literally no capacity to arrest or prosecute them. This allows them to infiltrate other aspects of criminal organization such as racketeering and control entire cities via fear and intimidation. Because cartels feed off poverty for membership, growing organizations can pass recruitment downstream and further interrupt the growth of Central and Latin America as well, and play a hand in weakening world markets by having a hand in all aspects of the local economy. Note the picture below to see a fraction of a cartels earnings, and why they can essentially do whatever they want via bribe.

This picture shows $22 B of cash confiscated from a Sinaloa Cartel boss' home

 
(2) The drug war has escalated war time human rights violations such as civilian murders and torture. As the cartels war with one another and the government, they have made it of utmost importance to keep people under the banner of fear. The Sinaloa Cartel infamously undertook a mass hysteria campaign by posting videos on youtube of gruesome murders of its enemies in both the criminal and public sectors such as the beheading of two informants using a chainsaw. Without intervention, these tactics are becoming more and more commonplace.

(3) Cartels are reinvesting profits from drug sales into even more messed up exploits such as human trafficking.  Conservative estimates conclude that over 100,000 women, a number predicted to increase by the end of 2010, are trafficked out of Latin America annually for the purpose of prostitution. This number is estimated to have grown by a factor of 2 or 3 by the end of this year, making human trafficking the highest growth criminal activity in the world.

(4) Cartel violence is of particular risk to Americans given its proximity. Cartels are most involved in cities that precede immigration into the US such as Tijuana and Ciudad Juarez. These cities are among the most violent in the world, though they are only an hour from the US border (Baja, CA and El Paso, TX respectively). Additionally, as long as the cartels keep growing, the local chain of American gang affiliated sellers will grow as well. These local organizations, though not nearly as powerful as the cartels themselves, are still extremely violent and responsible for a large number of homicides yearly.

A Case For Legalization

The most interesting aspect about the cartel violence and its development is the root cause underlying the industry; American demand for drugs.  Though cartels deal in a variety of illicit substances, marijuana is by far and away the largest export encompassing nearly 50% of American demand. When politicians bring up the debate about legalization, it is largely focused on the moral issue of allowing people to consume substances which may harm them rather than the very real tangible harm that comes from the shadow industry of suppliers. The conclusion here is very clear. Full scale legalization of banned substances would have very tangible impacts, primarily it would remove the need for a shadow industry by allowing corporations to publicly and transparently distribute goods to consumers under regulation by the US government. Furthermore, the US would essentially free itself to 90% (Mexico's share) of an industry that makes up 3% of world GDP, effectively creating a large number of jobs both in the public and private sphere domestically. Though some people would choose to abuse the system, its unlikely that use of dangerous "hard" drugs would proliferate beyond current numbers.  

The only qualms I have with legalization is that destroying the drug trade would effectively displace half a million people in Mexico without taking away their arsenals or desire to cause harm, which could incense crime and violence in the short run. The best way to solve this problem in my opinion would be for Mexico to enforce anti-trust legislation to break up legal monopolies (such as TelMex) which keep overhead costs of business amongst the highest in the world. In any case, corruption and money talk and it would be unlikely that anything would change in the short run. Perhaps the US would step in and try to live up to the promises it made when it signed NAFTA and try to outsource jobs to Mexico instead of China and India. Luckily for Mexico, at least they have some shale gas.

The Paradise of the 2nd World 3rd World

The following paper discusses a commonality I have found between the two Caribbean countries I have visited in the last years (Jamaica and Dominican Republic); the idea that a state can be autonomous and self-content despite the third world living conditions of its citizens.  


How do we rank countries in terms of development?

Economists generally classify countries into pools of "worlds" based on the development of their economies, life expectancy of citizens, and educational attainment levels. A country does not necessarily have to have an extremely high standard of living in aggregate to be considered "first world". For example, the United States is most often considered the paragon of the term despite having wealth stratification comparable to many economically weaker Latin American countries. The one central characteristic of the first world that is undisputed is that the term refers to capitalist countries with highly developed economic infrastructure and access to capital markets. On the other hand, Third world countries have underdeveloped to non-existent economies and are ridden with problems such as Kleptocracy, civil war, malnutrition, and lack of medical care.

The interesting outlier to this case has historically been the Second world, which traditionally referred to Communist nations during the 1900s hey day of the Soviet bloc. Though Communist countries once sustained a middle level of human development and societal infrastructure, much of this was predicated on the exportation of various natural resources such as LNG, precious and base metals, and manufactured goods. Communist countries that lacked these resources quickly became Third world hell holes such as North Korea or the former Yugoslavia. Additionally, even Communist countries with resources had difficultly getting much value because of their preordained commitment to keeping markets closed and noncompetitive  So in turn, I think its wrong to assume that Communism alone is enough to make a nation Second world.

The New Second World

Today, I contend that the term should be used to describe nations with middle level economic growth with the highest gross national happiness (GNH) index scores. Interestingly enough, there is only a slight correlation between development and GNH index scores which seems to imply that a high GDP per capita and nominal health and education are not significant drivers of national happiness. Gallup recently conducted a poll to find the countries with the highest national happiness  According to Gallup’s findings, the happiest people in the world live in Panama and Paraguay, followed by El Salvador and Venezuela, then Trinidad and Tobago, Thailand, Guatemala, the Philippines, Ecuador and Costa Rica.

The OECD recently constructed a HPI (Happy Planet Index). Once again as you can see from the below data, there is only a spurious relationship between "well being" and "happiness".
 

Notice that footprint and well being are only slightly positively correlated and that countries such as Israel are outliers.

Notice the inverse correlation between satisfaction and HPI

Whats the Point?

In the Dominican and Jamaica I noticed I could hardly go ten minutes without having a smile on my face. Maybe it was the warm weather or the people I surrounded myself with, but I noticed this change not only with my friends but also with my family in Jamaica. Even the locals who by all accounts are Third world economically showed a profound desire to prioritize happiness over material pursuits. Now I'm sure there could be bias factoring into play here. Does the lack of a developed economy denote a lower utility weightage to material possession versus carefree living?

My initial thoughts are both yes as well as no. Its equally strange that these countries, excluding Brazil and Chile, have lower levels of satisfaction than traditional first world nations. I think this detail only suggests that wealth brings with it satisfaction though it may bring additional stress factors and unhappiness.  Out of the top 20 HPI countries, only 3 have a GDP footprint sufficient to designate as near first world. Only Bangladesh, Pakistan, Indonesia, and Vietnam are thoroughly Third world. The implication is that in aggregate Second World Third World isn't a warzone like Somalia or Iraq or endemically poor like Chad or Zambia. Instead most of the nations on this list are developing countries with one or more natural resources coupling with tourism as economic drivers. The only universal characteristic of all these nations is warm weather and plenty of sunlight. In the top 20 OECD countries only one (Albania) has a moderate to colder climate.

So in the end, whats the point of growth? A higher GDP has classically denoted lower wealth stratification and consequently a "better" lifestyle, yet these studies come directly at odds with classical conservative euphemism. Moreover, the OECD recently rated the Scandinavian countries and Switzerland as the highest standard of living of any country in the world. Should the United States continue to be the role model for the world when it sees an increasing wealth gap and unhappier people than Thailand?