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How to Run a Drug Cartel

by Tom Wainwright

Eradication policy doesn't work, bc scarcity doesn't alter the price the dealers will pay - the poor farmers take the hit. Better to subsidise alternative crops. But biggest part of the problem is that the cartels have radically improved the processing stage, getting 3 times yield they did originally, and so need only one third of the raw material for same output.

Mexican prisons run by inmates, and segregated according to affiliation. 'Smuggle' in whatever they like - prostitutes, birds for cock-fighting etc etc. Dominican Republic jails have maximum security section where gang leaders are held, preventing them from directing operations through lower level crims. And a lot of effort made to maintain family ties so that the crim has a support network when released.

In US and Britain, sending someone to jail costs more than sending a kid to Eton.

The more the state fails to meet prisoners' needs, the more gangs will step up to fill the gap. Making prisons safer reduces incentive for gangs to form for protection. Making them more comfortable reduces grievances which escalate into protests and attacks. Providing training gives them non-criminal options for when they are freed.

In Sicily the mafia charged 5% of construction contracts. They kept 3% and used the other 2% to bribe pols. And it suits businesses. Study of Long Island NY rubbish contractors found they were charging up to 30% more than other areas. They were even able to sell contracts, which the mafia guaranteed would be free of competition.

(London Times)

Tom Wainwright is a very clever chap. I know this because he says so. He's a senior editor at The Economist and "has a first-class degree in philosophy, politics and economics from Oxford University", the dust cover of this hardback tells me. So why, I wonder, has he given his book such a rubbish title?

Any attempt to cash in on the success of Freakonomics 11 years after it was published is lame. But let's be charitable. Let's assume brainy Tom wanted to call his book 'Everything you ever wanted to know about drugs but were afraid to ask', but his dullard publisher said no. Do that, and this book becomes great fun.

Wainwright travels through Latin America, the United States and Europe, talking to the people who make drugs and those who take them. Along the way, he reveals how drug barons run their illegal multi-billion dollar global businesses in much the same way as Fortune 500 chief executives run their legal multibillion dollar global businesses.

"Everything drug cartels do to survive and prosper they've learnt from big business... managing personnel, navigating government regulations, finding reliable suppliers and dealing with competitors," he writes. Indeed, at times, the only obvious difference between the illegal entrepreneurs and the legal ones is that the legal fellas are not called things like 'the Childeater'.

Just as the supermarkets use their scale and buying power to force suppliers to keep their prices low, thus boosting profits, the big cocaine manufacturers use their scale to force farmers to supply them with coca leaves at rock-bottom prices. As long as they remain monopolistic buyers of the leaves, the growers have little choice but to accept derisory terms.

McDonald's, the world's largest burger chain, is another inspiration. Cartels in Mexico, looking to expand rapidly, have adopted the franchise model it pioneered. They teach local franchisees how to sell drugs, guarantee high-quality supplies and allow them to use their fearsome name. In return, the cartels get control of more territory, plus royalties on sales.

Off-shoring - moving production to lower-cost countries - is commonplace among all global businesses these days and drugs cartels are no exception. They even choose which countries to move to by studying the same Ease of Doing Business surveys published by the likes of the World Bank that legitimate firms use. But they read the guides from back to front. It's those countries at the bottom of the list - with the greatest corruption, the worst regulation and poorest law enforcement - that are the most attractive to invest in. Guatemala is particularly appealing because its politicians and police are so easily bribed.

Like all businesses, recruiting the right calibre of employee is crucial. Big firms go to the institutions where they know they will find the best: top flight schools and universities. Drug barons do the same, for the same reasons, but theirs is a different kind of institution: prison.

Being dependent on one product is risky. Coca-Cola used to sell only sugary brown water, but now it flogs hundreds of different drinks. The cartels have diversified, too, building on their 'core competences'. In particular, they have leveraged their smuggling skills to begin smuggling people, not just powder.

Although - or more precisely because - they are murderous gangsters, drug barons take their PR every bit as seriously as C-suite executives. They use local 'advertising' - usually displaying the mutilated corpses of those who cross them - to threaten rivals. They also give generously and conspicuously to local causes, notably church projects, to try to secure the support of the local population. News management - that usually takes the form of intimidating journalists - helps to minimise negative press reports that could prompt police and army crackdowns on their operations.

Get your business model right and you can get very rich dealing drugs, very fast, provided you aren't murdered first. That is because the mark-up on drugs is better than on any other product. To make 1kg of cocaine, you need 350kg of dried coca leaves, Wainwright calculates. The cost is around $385. Once manufactured, the kilogram can be sold for around $800 in Latin America. Export it and its value immediately rises to $2,200. Smuggle it into the United States and its value leaps to $14,500.

By the time a big dealer in America gets his hands on it, it's worth $19,500. When the big dealer sells it on to lots of small street dealers, it's worth $78,000. The street dealers then dilute it to make it go further, taking the total final value to $122,000. The mark up from farm to nostril is 30,000%.

Small wonder the drug lords have annual revenues of $300bn and the leaders make Forbes magazine's list of the wealthiest billionaires on the planet. If their combined business were a country, it would be in the ranks of the 40 wealthiest.

There are so many well-reported examples of the smarts of the big cartels in this book that you end up with a sneaking respect for some of the most heinous entrepreneurs in the world, and you feel Wainwright does, too. Indeed, he describes the drugs business as 'exotic'.

True, he does put forward some ideas to tackle the drugs trade - mainly selective decriminalisation, demand reduction to drive down prices, and an international rather than a national anti-drugs strategy - but it feels rather half-hearted. What's more, if there are, as he calculates, 250m enthusiastic drug users in the world, it will be hard to persuade them to kick a habit that they clearly enjoy and that, statistics show, is unlikely to kill many of them.

(London Times 2)

Middle managers looking for a career change with excellent earning potential, great perks and travel look no further. Holidays, glamour and adventure: working for a drug cartel has it all. If you thought the people who ran them were thuggish cokeheads, think again. These businesses are as sophisticated as any multinational corporation.

So says Narconomics, a lively dissection of how to run a drugs cartel by Tom Wainwright, former Mexico correspondent at The Economist, who spent years meeting (and sometimes irritating) the lawmakers and lawbreakers of Latin America.

Viewed one way, Wainwright says, Narconomics is a business manual for drug lords. Viewed from another, it's a blueprint for how to defeat them. It's also pretty great PR for the industry.

This is an economics book for the Breaking Bad generation. According to Wainwright, drug cartels have essentially copied the same principles taught at business school to streamline their businesses (and earn rather a lot more in the process). Drug lords need to know about mark-ups, PR, offshoring, franchising, 'innovating ahead of the law', how to diversify into new markets . . . perhaps in a couple of years the drug dealers' experience will be a unit in a masters syllabus.

Having trouble with a nervy drug mule? The savviest operators, Wainwright tells us, don't shoot their head off, they use the same techniques HR departments do across the western world to smooth over issues with staff.

The people who run the industry may have names like El Comeninos, which translates as The Childeater, but the most successful cartel operators are using the same principles as Walmart and McDonald's to expand.

Wainwright reveals how the cost of cocaine rises from $385 per kilo at its point of origin to $122,000 at the retail end. The initiation ceremonies for people to enter gangs range from the violent to the bizarre: one involves being forced to repeatedly read the works of John Eldredge, a US author of Christian self-help books. Good business-to-business relationships are vital. When a bad batch of cocaine is delivered to a trafficker he does not send a henchman on the first plane to Rio to settle the score, he calls the supplier, who sends an 'engineer' to resolve the problem.

Narconomics is a fascinating account of a $300 billion trade, but not always in the way I expected. I was most interested in the culture clashes between Wainwright (first class, Oxford PPE), and the Mexican authorities. The best is when he asks Juarez's mayor whether the city's police are up to the job of monitoring the border, and the mayor spends the rest of their meeting passive-aggressively tapping away on his Blackberry. Wainwright has a thought-provoking thesis on the nature of cartels, but perhaps there's another book to be written, a much more entertaining one, about his quasi-Louis Theroux weird weekend experience.

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