Narconomics summary and review

Narconomics: How To Run a Drug Cartel, by Tom Wainwright (UK/US)

Tom Wainwright’s aim is to analyse the cartels as if they’re international businesses, and it’s a good fit. There is an abundance of concepts like supply and demand, monopsony, competition, principal-agent problems, vertical integration, mergers and acquisitions – you can learn a lot of economics in this book. But its perspective is a bit geographically limited at points.

A monopsony is when a single party controls a dominant share of the demand for a good, and thus can push the price down by negotiating hard with suppliers. Drug cartels (Wainwright uses the term fairly freely to refer to drug traffickers) often have monopsony power over poor farmers in Latin America. When coca crops are destroyed by authorities, that should increase the price in a properly functioning market (supply has dropped) — but the cartels simply say no and force the price down. This is, incidentally, one reason why tackling the drugs market this far back along the supply chain is not a winner: it doesn’t really increase consumer prices. Wainwright suggests subsidies for other crops instead — at least then the cartels would have to raise their prices.

Another helpful business analogy was off-shoring: companies moving their operations to a different country to boost their profits in some way (for example, through cheaper labour). In the same way, cartels have been keen off-shorers when necessary. Wainwright details how drug operations have moved from Mexico to Honduras, mirroring other industries like clothes manufacturers. One of the most common reasons for moving parts of the business is pressure by law enforcement in a particular country. Narconomics dubs this the ‘balloon’ or ‘cockroach’ effect: squeeze in one place, and another part will bulge. For this reason, the book recommends better coordination of international efforts against the drugs trade, so that all parts of the balloon can be squeezed at once.

Management of drug cartels can be hard. Each cartel employee has ample opportunity to steal product or skim profits, at the expense of the overall business. Principal-agent problems abound. At least one group, La Nuestra Familia (a prison gang which deals in drugs and commits other crimes inside prisons and out), has created mechanisms to allow people to report bad behaviour by immediate superiors without reprisal. Additionally, it can be hard to run an organisation smoothly when only one man is in charge. La Nuestra Familia were forced to kill their leader when he was caught with his hand in the group’s till and refused to go quietly. They then replaced its single leader with a three-man group who make decisions by a two-thirds majority.

Another focus of the book is prisons. Spending time on the inside is supposed to be a punishment for criminals, but prisons in Latin America are often insecure, practically run by cartels, offering them a ripe recruiting ground. Prison reform – better pay for prison staff, job training for inmates, paid work opportunities – can reduce recidivism and recruitment by gangs within prisons, such as at a polished institution Wainwright visits in the Dominican Republic.

The implication of this is that if one can hamper cartels’ recruitment by limiting the flow of apprentices coming through prison, one can tighten up the criminal labor market. For one thing, this will force criminal organizations to pay their employees higher wages, cutting into their profits. It will also deter them from violently quarrelling with the employees they have. One can only treat members of staff as disposable if there is a steady stream of replacements lined up.”

Wainwright is more bullish on the supply side this time apparently! These measures make sense, but it’s difficult to imagine this being a decisive factor in the drug war. The argument in favour of it, then, rests on its impact on local communities, which are ravaged by the drug trade.

As an aside, I was struck by this line about language in prisons, included in context here:

The elaborateness of the Familia’s rules, which run to six articles and dozens of subsections, may say as much about the boredom of prison life as it does about the gang’s organization. (The same is probably true of some of its other more Boy-Scoutish activities, which supposedly include making bombs out of match heads, writing secret messages in urine, and communicating in Náhuatl, the ancient language of the Aztecs.)”

Is this a sneer? Nahuatl is spoken by 1.7m Mexicans today, which doesn’t seem very ‘Boy Scoutish’. The language is a symbol for those identifying as Chicano, and they are the primary basis for the Familia. I managed to find what I think is Wainwright’s source, going by the book’s citations:

Communication is costly since correctional officials are continually attempting to intercept communication between gang members. NF use of the Aztec language, ‘‘micro writing’’ of letters less than a quarter of an inch, codes and ciphers, messages hidden in artwork, and relaying lengthy messages via paroled members are several costly methods resorted to. Citing an Associated Press article, Fuentes notes that some resourceful inmates ‘‘are taught to write coded messages with their own urine on the backs of innocent-looking letters or drawings before mailing them to outsiders. When the urine dries, the contents of the message remain invisible to the naked eye until the recipient holds the paper to heat and its secrets are revealed’’ (Fuentes 2006: 93). Vesting decision-making authority with individual Captains allows the organization to obviate high communication costs.”

The Fuentes book seems to be the original source, and it isn’t readily searchable online. But this strikes me as more like ‘ingeniously using an ethnic identity to communicate in a secure prison’ than ‘Boy Scoutish’. Perhaps I’m misreading Wainwright here and he’s not sneering, but if someone described my native language like this, I wouldn’t be impressed.

Despite the harm the drug trade causes to communities and countries, many individual drug cartels and their leaders are downright popular in some places. El Chapo has enjoyed the support of a local march, reports Wainwright, and ‘Mexican drug traffickers are celebrated in narcocorridos, bouncy trombone-and-accordion ballads that tell of their exploits and their skill in outwitting the police.’ There might be underlying anti-government sentiment in Mexico that contributes to this kind of glorification, but the cartels do a lot of PR work of their own to burnish their image. Additionally, some people genuinely benefit from the presence and activity of cartels, whether through simple kickbacks and employment, or provision of public services, such as a semblance of law and order in the state’s absence. In 2020, that included COVID-19 assistance.

The political economy of drug cartels in parts of Latin American, therefore, means that it’s a tough ask for a government to get rid of them. ‘…the larger the constituency of people who feel they have something to lose if the cartel goes down, the less likely that is to happen.’ Communities where cartels operate are stuck in a kind of trap. There are likely long term benefits of kicking the cartels out (a decline in violence, for instance) but getting there requires a lot of effort, and might only succeed in upsetting an equilibrium that provides at least some benefit to the local population. Reminiscent of Caplan’s idea trap or Ian Bremmer’s J Curve.

Has there been a revolt of the public against the cartels, à la Martin Gurri? If so, it’s not been obvious. There was a Mexican protest movement in 2011 that criticised both criminals and politicians, which confirms (as if we needed confirmation) that the criminals are essentially part of the governing establishment there. This coincided with protests in a series of other countries, most notably the Arab Spring. So in that sense there was a crack in the cartels’ hold over the country, but I can’t find any evidence of more widespread change. Government figures show a recent increase in deaths from the war, following a dip in the middle part of the 2010s. Deaths are not the only metric, and some instability might be required in order to achieve more stability in the long run, but it doesn’t seem like there’s open revolt against the cartels, or any real change.

One issue I have with the book, especially earlier parts, is that it does what I now realise all Economist writing does (Wainwright works for the newspaper). It analyses things well up to a certain level, and then doesn’t go any further. I don’t really want an answer that’s so technical and nuanced as to be boring, but I think things will probably get complicated and messy if you go a bit deeper, and I’d love to read that. Grappling with uncertainty and contradiction is what’s so great about certain blogs. There is more of that in later parts of Narconomics, and maybe I’m being a bit harsh. There are things you can do in a blog that you can’t really do in a book. I knew that a blog could be a constantly mutating and changing corpus, which has its benefits, but I didn’t appreciate that there’s a level of depth that you sometimes don’t get in books (even if they’re written by someone from the Economist).

The two big changes to the narcotics industry are the internet and legalisation, and Wainwright devotes a chapter to each. The basic storyline in each one will likely be familiar to you. The internet allows easier access to drugs, via the Dark Web. Legalisation of marijuana has increasing momentum behind it in the US, and if you travel to the right state you’ll see lots of billboards advertising it for ‘medical purposes’, if not recreation.

The book draws out more interesting details however. The ordinary drugs market online does not function like an open market, in which buyers and sellers can compare prices and goods and make use of the price mechanism. Instead, transactions happen in secret, and personal relationships are important; this is the ‘network economy’ (easily confused with the internet economy!).

Of course, the internet upends this. There is no waiting, comparison is possible with a few clicks, trust can be established via feedback systems… in short, it becomes much more like a regular, open market. The old-fashioned network economy is threatened by this new model — although many of the internet buyers may well be local dealers buying wholesale.

This has important consequences for law enforcement. Previously, the mid-level broker, sitting between big wholesalers and street-level dealers, was the best type of target for cops. Dark Web marketplaces now fill that role. Now it’s informal dealers who pass drugs to their friends who should be focused on if the network is to be disrupted, as the websites are nigh-on impossible to stop. (He uses this paper on high school relationships and infections. Potential infection transmission chains are formed out of many people who have just a few relationships, rather than being entirely down to a more promiscuous subset. Stopping these lower risk actors could easily disrupt the network, apparently. This was a nuanced and interesting part of the book.)

So what is to be done? Wainwright is in favour of legalization: ‘if you really want to get drugs under control, to put the cartels out of business and protect the public, prohibition is not an effective way to do it.’ One helpful piece of evidence he provided was on the elasticity of demand for drugs:

One survey of the evidence in the United States quoted studies suggesting that the elasticity of demand for marijuana was about -0.33, meaning that a 10-percent rise in price would lead to only a 3.3-percent drop in demand. Other studies that measured the likelihood of drugs showing up in the urine tests of arrestees found an even weaker relationship: -0.17 for cocaine and -0.09 for heroin, meaning that for every 10-percent increase in the price of cocaine, the number of people testing positive fell by only 1.7 percent, and that in the case of heroin, the effect was less than 1 percent.”

Price increases won’t change people’s behaviour much, then. I wonder, however, about countries that are even stricter than the West. Singapore has a rather strident drug laws. ‘Rather strident’ here means that they execute people if they’re found in possession of a certain amount of drugs. Singapore’s ambassador to the US is bullish about their success on drugs, while this article is critical. I’m not convinced that this is necessarily the policy we should go for in the West – successful policies in a fairly unique city-state of a few million people might not scale very well, and it would be pretty tough to introduce much harsher laws from the West’s starting position.

Wainwright discusses New Zealand’s narcotics FDA, which he suggests might have worked except it had a bad starting position:

…the reform came too late. Most of the least harmful highs had already been banned years before. The ones still on sale were true “Frankenstein” drugs, repeatedly modified in order to get around previous bans, to the point where many of them did users far more harm than good.”

A proper examination of drug policies deserves a slightly wider lens than Wainwright used here. Perhaps I will write a future post on this.

Wainwright also discussed the prospect of a programme that treats people severely addicted to heroin in government-run clinics:

By removing these heavy users from the market, the program took away the industry’s most valuable customers, making the heroin market far less viable in terms of demand. At the same time, it struck an unusually deadly blow against supply… Legalizing heroin—through a strictly limited, doctor-run program—has made the drug far harder to access than banning it ever did.”

This is similar to alcohol addiction, as it’s the heaviest drinkers who pose the biggest problems to healthcare services and the public purse. I would much rather see a legalization proceed like this, with tightly controlled clinics, than let Philip Morris or the Big Weed equivalent retail drugs to consumers with no barriers.

An interesting political economy implication of legalisation is further off-shoring:

Just as NAFTA has led to the sprouting up of factories in Mexico assembling televisions and refrigerators to be exported to the United States, cannabis warehouses would surely move south of the border, to take advantage of low rents and wages. …And so legalization may turn the cannabis industry full circle: from illegal production in Mexico, to legal production in the United States, and eventually back to Mexico. The only difference will be that the Mexican cannabis farmers will be working for Philip Morris and the like, rather than for the drug cartels.”

A key message of the book is that supply-side policies targeting activity in Mexico are ineffective, hence the need for work on the demand side in destination countries, with methods such as the heroin clinic mentioned above. But Western countries don’t want to bring action on drugs here; they’d rather keep the spotlight on Latin America and other developing countries. This is pretty hypocritical and should change, although I don’t think the political logic is easy to change. It might be possible to make some marginal improvements, however:

Imagine that our small town begins a policy that succeeds in discouraging people from taking drugs: a public-health campaign; better leisure facilities for teenagers; rehab for addicts; take your pick. Demand drops. At this point, the dealers are likely to react by cutting their prices as they fight among themselves for the smaller pool of customers. So both consumption and prices fall, meaning that the criminal market is reduced on two fronts.”

Narconomics also discusses the prospect of making people woke on drugs: ‘Buy cocaine in Europe or the United States and it is an uncomfortable certainty that you have helped to pay for someone to be tortured to death in a place like Reynosa. People ought to know this.’ If people can be green-pilled on plastic straws or almond milk, maybe they can be on narcotics too. Perhaps we need a meme-able Netflix documentary on the tragic human stories behind drug trafficking? It would fit with other trends around healthier lifestyles, and it might help to tackle the last link in the drug supply chain – people who pass drugs to family and friends. It probably won’t stop finance-bros in hedge funds from snorting cocaine though. And has anyone tried this for Xinjiang, or Iran? Oh wait, kind of. Consumer-focused strategies like this have their limits.

In conclusion, this is a helpful book for learning about business, economics, and the drugs trade. But its primary geographical focus on Latin America, while illuminating, feels like it limits the book’s perspective. I want to read about smuggling in the Golden Triangle, dealers getting executed in Singapore, and Africa’s first narco state. Perhaps I’ll discuss those in future posts.