The economics of drugs

By chillinwill · Jan 3, 2010 ·
  1. chillinwill
    The Government Action Plan on Methamphetamine is working by at least one measure – price. A gram of P, according to one Auckland drug dealer, now costs around $800, whereas a year ago the same amount set users back about $300-$400.
    View attachment 12349
    The doubling in price tells a supply side-story. Prime Minister John Key launched the plan in early October and, among other measures designed to restrict supply, made the important precursor drug, pseudoephedrine, prescription-only.

    Also, in the two months to early December, Customs intercepted a total of 230kg of pseudoephedrine at the border. When commodities become scarce, consumer demand drives the price up.

    The government is, says Key, winning "the fight against P".

    But if "we" are winning the fight, what will success entail? An exhaustive account of the global cocaine trade (The Candy Machine, How Cocaine Took Over the World, by Tom Feiling) suggests all of the efforts by government and its agencies will make not a jot of difference and may even generate a worse social outcome.

    It will not mean an end to drug-related crime – when costs become prohibitive, crime rates usually soar as users resort to desperate measures to acquire cash to feed their dependency, as Feiling shows. Look to the burglary and robbery figures for the March 2010 quarter. Nor will success strangle an important revenue stream for gangs, many of which are major suppliers of methamphetamine.

    What usually happens is consolidation into larger, more sophisticated operations. Merger and acquisition is just as much a feature of illegal drug businesses as the world of Proctor & Gamble or Merck Sharp & Dohme.

    Large organised criminal organisations, after all, are the only entities with sufficient market heft to handle the rising financial and human costs associated with drug dealing, whether in New Zealand or the US.

    The scarcity and rising cost of P doesn't mean an end to drug use – history shows other drugs, potentially more harmful, become available, such as cocaine. Anecdotal reports suggest cocaine in New Zealand, traditionally the drug of the corporate and entertainment elite, is becoming more widely available and cheaper, per gram, than P.

    Feiling, a London School of Economics graduate, is not surprised at the news from New Zealand. In 2004, 588 tonnes of cocaine were seized by global authorities, the fifth consecutive yearly record-setting bust. In 2006, the total was 492 tonnes. It is estimated these hauls represent about 40% of global cocaine trade. New Zealand may be a tiny market but there's a lot of cocaine to go around.

    However, a police spokesman rejects this assertion. Cocaine remains a tiny part of the New Zealand drug economy, which is dominated by cannabis, methamphetamine and homebake (a kitchen-cooked substitute for heroin). Methamphetamine, or P, is the primary focus of enforcement, he says, and there are few fears supply of other drugs is increasing to fill the gap caused by P scarcity. Its price supports this view; if cheaper cocaine was supplanting P, the cost would not have doubled in less than a year.

    Dr Chris Wilkins, Massey University senior researcher, says there's been slight increase in New Zealanders' "lifetime" cocaine use but this is likely to be consumed in the UK or Australia. Kiwis are, however, increasingly using Ecstasy, possibly because of the perception it is a safer drug. Prohibition and "moderate" enforcement is the best method of managing the drug economy, Wilkins says.

    But the market always finds ways to circumvent regulation, prohibition and its enforcement, Feiling counters. Consumer demand can never ultimately be denied.

    For instance, when the government banned party pills containing the active substance, BZP, demand for Ecstasy and methamphetamine (the drug the government is promising to stamp out) went through the roof.

    "I went from selling 5000 pills a month to 5000 pills a week," a 52-year-old drug dealer explained to a newspaper about the impact the ban had on his operation, which had generated up to $12 million in revenue.

    Wilkins says the BZP ban has driven increased use, although he suspects leftover party pills are being passed off as Ecstasy.

    For Feiling, the failure to combat the supply or demand for drugs is an economic story, one that illustrates the futility of prohibition and the many tragic, unintended consequences stemming from "another war on another abstraction".

    It also comes with a hefty bill, footed by the taxpayer. In the 1970s, the administration of President Richard Nixon, who first coined the phrase, War on Drugs, spent $US16m a year; in 2007, the annual cost of drug policy was $US18 billion.

    An economics paper by Harvard University's Jeffrey Miron (The Budgetary Implications of Drug Prohibition) estimates federal and state governments would save $US44.1b from drug prohibition enforcement if drugs were legalised. Tax revenue would realise $US32.7b from the sale of marijuana, cocaine, heroin and other drugs.

    "A lot of economists have been attracted to the idea of legalisation without even knowing much about drug culture or how best to manage the problems that come from drug use – they see it purely from an economic point of view," says Feiling, on the phone from the UK.

    "When I've come out with this conclusion – that we should legalise cocaine – I also had to divorce myself from a lot of the other [intellectual] currents that have led people to that conclusion. Decriminalisation still leaves that criminalised market place, and that's the source of the really big problems – the violence and corruption and so on." Even so, legalisation remains a dim prospect.

    "A slight decline in drug use is taken as evidence that government policies are finally working; a slight increase is taken to mean that not enough is being done," Feiling writes. "Both scenarios demand more funding. The war on drugs has become a war without end."

    Yet prohibition doesn't work, famously creating several criminal empires between 1919 and 1933 when the US banned booze. Exacerbating the social chaos caused by illegal drug economies is the intersection of drug policy, economic conditions, social attitudes and foreign policy goals.

    During last century's early decades, for instance, the crackdown in the US on cocaine and opium was driven by virulent racism against blacks and Chinese, which in turn was informed by harsh economic conditions and high white unemployment.

    The press excoriated the two drugs, leading to a 50% drop in consumption. Instead, people started smoking pot and using synthetic drugs such as methamphetamine and heroin.

    In the 1960s, methamphetamine was the devil's drug and policing efforts, Feiling shows, led to a revival in the use of cocaine. The 1980s saw the scourge of crack cocaine devastate American urban centres.

    Its genesis, Feiling argues, lay in the global economic crisis which ravaged Latin America and the Caribbean, major sources and conduits for drug trafficking, plus anti-marijuana policing efforts, US urban unemployment and the Cold War.

    Aerial spraying of marijuana crops saw Colombian and Bolivian growers switch to coca, which became the key commodity to their economies. Meanwhile, the CIA, in an effort to fund Nicaraguan rebels, allowed the Contras to traffic cocaine to the US, with secret government approval, Feiling writes.

    The price of street cocaine more than halved at a time when marijuana prices were rising due to scarcity.

    At the same time, deindustrialisation saw Chicago lose 60% of its manufacturing jobs; in New York it was 58% and 64% in Philadelphia. This created the urban environment in which the drug economy could thrive: plenty of buyers and plenty of sellers for an increasingly cheap commodity.

    This had the effect, one major dealer told Feiling, of making crack, the combustible crystalline version of the drug, the "McDonald's of cocaine". By 1991, there were 1.8m drug sellers in the US.

    Eventually, the US congress allowed direct funding of the Contras and the CIA ceased its involvement in cocaine importation but, Feiling contends, the genie was already out of the bottle.

    Drug use and crime rates did drop in the late 1990s, leading the Clinton government to claim credit. Others, such as Freakonomics authors, Steven Levitt and Stephen Dubner, ingeniously posited that increased access to abortion led to a reduction in violent crime.

    Feiling points to the commodity prices of illegal drugs. Cocaine was increasingly expensive and marijuana available and cheap.

    The bitter fruit that US drug policy has yielded is this sobering fact: Americans make up a quarter of the world's prison population – more than all those jailed in Europe – and half a million of them are serving drug-related sentences.

    Use of illegal drugs in New Zealand will continue, irrespective of the fight against P. The question is how much collateral damage will be incurred along the way.


    Coca leaves, from which cocaine is derived, have been chewed by South Americans, from Chile to Guatemala, since 2100 BC. It yielded more vitamin B, calcium and iron than any other Andes plant.

    Whereas European and British conquerors introduced New World intoxicants such as tobacco, chocolate and coffee to a grateful populace, coca was disdained, it is said, since civilised man did not chew leaves like a lowly ruminant beast.

    They were quick to employ its use in exploiting the Latin American workforce, however, as the drug combated hunger and tiredness. When a European chemist synthesised its active properties in 1859, it was quickly commercialised into a variety of invigorating tonics.

    By 1900, pharmacies stocked 70,000 different products containing psychoactive substances such as cocaine.

    The modern cocaine story is largely an American story because it was the US government that set the framework for drug prohibition with its drafting of the United Nations Single Convention on Narcotic Drugs in 1961. Just as it successfully sold a singular economic vision for deregulated global financial markets, the US persuaded the international community its drug policies were best.

    The result was a sort of Washington Consensus but for drugs and, some would argue, with equally disastrous outcomes.

    Tom Feiling, the author of The Candy Machine, clears up a number of public misconceptions about cocaine abuse. Crack – that terrifying and supposedly super-powerful cocaine derivative – is in fact cocaine in its raw crystal form, prior to crushing and dilution with non-psychoactive substances.

    The difference was the method of ingestion – smoked in a pipe. Similarly, P is raw crystal methamphetamine that is smoked instead of snorted, not some demon drug that drives its users insane (what does that is the lack of sleep, as anyone who's tried to stay awake for six days on the trot will tell you).

    Both drugs deliver a quick but short-lasting high, encouraging users to chase the next euphoric inhalation, which in the wrong, usually urban, environment can create severe social problems.

    Neither drug is, technically speaking, an addictive substance such as heroin, tobacco or alcohol, says Feiling, on the phone from the UK. Users who go cold turkey experience measurable physical symptoms directly related to the body's craving for the drug that's been denied.

    Cocaine and methamphetamine instead create a psychological dependence, which is no more devastating for the lack of physical symptoms, he says.

    Nick Smith
    January 3, 2010
    Sunday Star Times

    Share This Article


To make a comment simply sign up and become a member!