Day 6

How drug cartels are like big box stores

Journalist Tom Wainwright argues drug cartels have figured out how to make profits much like big box stores and franchises - and that it's helping them win the war on drugs.
Weapons are displayed on the floor before being presented to a judge as evidence during a trial against nine alleged members of the Zetas drug cartel in the Supreme Court of Justice in Guatemala City, January 30, 2014. The nine are accused of killing 27 people during a territorial dispute on May, 2011, in La Finca Los Cocos (the farm of Los Cocos) in the Peten Region, about 275 miles, (440 km) north of the capital, according to police investigations and local media reports. REUTERS/Jorge Dan Lopez (GUATEMALA - Tags: CRIME LAW) - RTX181K4 (Jorge Dan Lopez/Reuters)

In his new book Narconomics: How to Run A Drug Cartel, Britain editor for The Economist,Tom Wainwright argues that drug cartels have taken cues from big corporations like Wal-Mart and McDonalds, on everything from creating brand value to outsourcing. He also says governments are getting the economics of the drug trade wrong when it comes to the war on drugs. Here's his conversation with Brent.

BRENT BAMBURY: Tom Wainwright, you visited the three countries where cocaine originates: Bolivia, Colombia and Peru. And governments there are aggressively destroying coca plantations. It's a kind of ground war that's trying to damage the cartels and the cocaine business. But the price of cocaine hasn't changed in twenty years. So why isn't this ground war working?

TOM WAINWRIGHT: Well on the face of it looks as if it's working rather well. When you go there and you see these guys in action ripping up the coca plants and dumping weedkiller on them. But the trouble is, the price in the United States and Canada are and year hasn't really changed much at all. And the reason is that the coca itself, although it is the principal ingredient of cocaine,  it doesn't really actually make much of the final price.

Picture the art market. If you want to drive up the price of paintings. You might say well paint is the main ingredient of painting so let's try and double the price of a box of paint. If you did that and a box of paints cost one hundred dollars rather than fifty dollars, you wouldn't expect the price of a million dollar painting to double to two million dollars right? The real value of cocaine lies in the fact that it smuggled thousands of miles. The actual raw ingredient isn't really where the value lies. Even if you do manage to increase the price of drugs. Demand on the whole stays pretty pretty steady. The consumption doesn't really change. And so all you really end up doing is increase the value of the criminal market. That's why I think it would be much better to focus on the demand side because if you can cut consumption if you can persuade people not to take those drugs, then they'll take fewer of them. And it will drive down the price. 

BB: Some of the economic models that you create to describe the supply side are pretty interesting. You compare the relationship between the growers and the cartels to the business model of Wal-Mart. Why is that? 

TW: If you look at Wal-Mart you find that even if there's a big interruption to the supply of one of their products -- so let's say the harvest for apples fails, miraculously the price of apples in the store tends to stay pretty much the same. And the suppliers complain that they are the ones who really suffer. And the reason, it's claimed, that this happens is that Wal-Mart has what's called a monopsony. So effectively a monopoly on buying these products. And what this means is that the farmers can't offer the product to anybody else at a higher price. Wal-Mart is really the only buyer in town and so they have to continue giving the product to Wal-Mart at the price that Wal-Mart demands. Something vaguely similar is happening actually in the cocaine business.

In the areas where coca leaf is grown you find a single cartel or a single armed group is the only buyer of coca leaf in town and so if there's an interruption to the supply, the coca farmers aren't able to increase their prices because there's only one buyer and that means that the people who suffer from the efforts to destroy coca crops and not the drug cartels. It's the farmers in places like Bolivia who grow the stuff and earn a dollar a day. 

Robes with Maltese crosses, guns, munitions and Knights Templar paraphernalia are shown after a training camp was discovered following a firefight between Mexican army soldiers and gunmen in the woods near the town of Santa Gertrudis in July 2011. (Associated Press)

BB: You find lots of parallels to respectable business practices in the cartels' business models.  The Zetas are one of Mexico's most and notorious cartels. And you compare their growth to that of McDonald's restaurants. So what makes those two similar? 

TW: Well quite often you find when the Mexican police raid a branch of the Zetas, they go in and they find all this branded stuff. It's incredible. The Zetas have these baseball caps with the letters Z on them. And I should say that Zeta is just the Spanish for the letter Z. And so that's their logo. And so they find the branded baseball caps and t-shirts they find all kinds of things like this and the way the gang has spread is very similar to the way in which any other franchise spreads. The main headquarters licenses the brand -- the name Zetas to local criminal groups. And those criminal gangs can use the name. Which helps them a lot in their extortion efforts. And in return these groups return a share of their profits to the main main headquarters and that's how they manage to grow so quickly.

BB: You went to Juarez, Mexico at the height of the violence there.  And you say that the cartels there were warring over control of the border crossings to bring drugs by land into the world's largest market for these drugs which is the United States. So the human cost is extremely high. How would you change that?

TW: People are coming up with various different ways of trying to tackle the drug problem and one of the most interesting ones at the moment actually is what's going on in a few American States and in Uruguay and soon, we're told in Canada or and that's this experiment with legalization. The idea there is to take the market out of the hands of the cartels. And in the case of Mexico for instance there are some cartels which rely on marijuana for nearly half of their revenues. And by legalizing the drug and putting it in the hands of ordinary businesses that market has been removed from those cartels and we're already actually seeing evidence that the Mexican cartels are really suffering as a result of this. If you go to places like Tijuana which is right on the border with the United States, the police there are more frequently finding very very large dumps of marijuana stashed there which it seems the cartels are having difficulty selling north of the border. One observation that I made during the book is that people think that they can reduce the risk of violence spilling over into the United States by closing down border crossings. In fact I think the economic logic suggests the opposite. If you have more border crossings. Then it means that the premium on controlling each one is greatly reduced and so the need for cartels to fight over one city or another is diminished.

DATE IMPORTED:August 10, 2010Military officers count money seized during an operation at a military zone on the outskirts of Monterrey August 10, 2010. The army seized $27,211 and 16,539,690 million pesos ($1,306,290) in drug money, three vehicles, jewellery, weapons, 200 kilos of packed marijuana, a minor quantity of cocaine and eight detainees during an operation in the suburb of Guadalupe, according to local media. REUTERS/Tomas Bravo (Tomas Bravo/Reuters)

BB: In Mexico, you argue that cartels win over locals by carrying out acts of corporate social responsibility. Can you tell me about the cleaning lady that you met Mexico City and how she got involved with a cartel? 

TW: This was a lady who was in her perhaps seventies or eighties nd she wasn't the kind of person that you would normally expect to be involved in organized crime at all. She was a very kind of friendly, cozy kind of person. And when I went to interview her and she told me that she was planning to have somebody murdered. And I said why are you doing this what's going on? The problem was that in her neighbourhood there was a gang of criminals that was going around robbing people's homes and beating people up and in some cases killing people. And local people had gone to the police and said look, you've got to do something about this. You've got to stop these guys. And the police were corrupt they were inefficient they were lazy they did nothing. And so the local drug cartel stepped in and said 'hey look we're quite good at sorting out this kind of thing you know we can take care of this problem'. And there last I heard, they were about to take care of it. This is the kind of thing that the cartels sometimes do to try and win over the support of local people by, for instance, building churches and building sports fields and things. It helps to persuade some people that they're not all bad and it's important to be clear that they are very much all bad. 

BB: But for people in poverty the cartels are extremely attractive. Especially young people. Tell me about the young assassin that you met in Guatemala. 

TW: Sure well I was in Guatemala looking at the way in which some of these cartels do a kind of off-shoring and seeking cheaper places to do business. And this was a guy that I met he was I believe about eighteen years old although he looked so much younger. He'd been suffering from malnutrition which had stunted his growth. And I remember as he was describing to me his job, which was working as a hit man, I saw that he was wearing children sized shoes with velcro straps. It was the most extraordinary contrast of innocence and terrible experience. And the way that the cartels had taking advantage of this guy really illustrated the way in which they move into countries where the cost of employing people to do this kind of work is low where the rule of law is very very weak.

BB: A chapter of your book is devoted to to another parallel drug selling system and that's the dark web on sites like the now defunct Silk Road. Tell me how those sites have had an impact on the business and the the practices of the cartels. 

TW: In just the same way that for instance has made life much harder for book stores, the dark web and sites like the Silk Road has made life much harder for street drug dealers. They offer drugs at lower prices and they offer them a higher quality. And there's this sort of feedback mechanism where when you go on to the site, they look a lot like a site like e-Bay for instance. People can leave reviews of the products and to the established dealers this represents a big new competitor because for many people it's going to seem easier to buy drugs online like that and safer and more reassuring than it is walking down a dark alley with a stranger. And so I think the cartels actually have a real threat on their hands with this. 

BB: In April the UN's going to host a special assembly about fighting the global trade in drugs. What's one immediate thing that you think governments could do to disrupt the cartels right now and to make things safer. 

TW:  Well the big step would be legalization but I think for countries that aren't ready to do anything quite like that there are lots of smaller things that they could do. And one of those really lies in prisons. That's one of the most extraordinary experiences that I had when I was reporting this book. I went to visit one of the leaders of one of the main drug dealing gangs in El Salvador. He was in jail at the time although it wasn't stopping him from running his business it seemed. And he was one of these extraordinary guys covered in tattoos literally from head to toe. And we sat down and we talked business. And he was complaining that one of the great problems for him is with human resources -- that they find it very difficult to hire new people because of course, they're continually losing employees to to murder or to arrest.

But fortunately for them, we've invented these things called prisons which are collections of unemployed young men with criminal records and absolutely nothing to do, who were there at the disposal of the cartels. And if you're not a member of one of these gangs when you go into prison then you certainly will be by the time you leave. And so I think one area where governments could probably do more is to make these prisons less conducive to a gang joining. And the way to do that is to make them safer so people don't need to join gangs for their own protection. 

BB: Tom Wainwright, thank you for being with us. 

TW: Thank you very much.