Illegal economics of Mexico

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Illegal economics of Mexico

Prokhorenko Veronika Igorevna

Financial University

Moscow,Russia

In this article I would like to show formal economic analyze of the impacts of the drugs traffic industries in Mexica by analyze and gather quantitative data. My analize represents quantity of drugs-trafficking employes, the number of investings and cash created by the drug-trafficking industry, the monetary costs of violations and corruptioning, the estimated loses in foreign investing, and the costs created by locally drug abuse. While some says that in some small and less deversified rural communas, drugs-trafficking cash flows might helping a lower stage of poverty and underdeveloping,it has been concluded that the illegal drugs industry sets economic losses of about 4.4 billions $ in a year. Such a high figure is certainly getting worse Mexican economic growth and development.

economic mexica drug criminal

“Sinaloa is and has always been a state where the money comes from drug traffic. Where else can it come from? The fishing and agricultural industries are broken. We cannot even get money from the mineral industry because people do not want to work there anymore. Drug smugglers pay miners ten times more just to take care of drugs (…).What are we going to do if there is no other place to get money?” Reader of El Debate newspaper (“Serб el lavado…” 2007)

Everybody knows that the drugs trade of Mexica shows one of the biggest industry in the state, to sum up for as much as $990 millions $ annualy. In 2012 drugs seizuring was more than $207 millions of cash, the revenue of Zhen Yien Gone, a powerful drug contrabandist, is approxemately equevalent to whole budget of Mexicas Generall Attorny Offices for 3 months (C_DHCU 2012) and is the biggest seizure of drugs revenue of the whole world (Shenon 2013).

Cause drug-trading creates such a big amount of cash in Mexica raise some interesting and significant questions of the rationalicy and efficency of that country's effort to reduce a criminal industry. If as it was counted and analised (Chabate as cited by Бnderson 2012)- drugs-traffic is one of the most popular and efficient industry in the state,we should think carefylly before closing this branch down.Nevertheless, drugs money are also money and drug-traffic is also one of the industries, which creates big capital flows in a state, creates employment, florish consumption and provides resourses to another legally industry [for example, the construction industry of many cities are boosted by the exotic housing preferences of drug smugglers (Lуpez 2007)]. To conclude, does Mexica have more advantages or more disadvantages because of such a successful -but not legal- industry as part of its economics?

To help answer this we have to calculate: How many $ flows into the Mexica economics and how does this flows helping economics growths? Who are the winners of this industry? How do the poor and isolated peasants fair? How are violence, corruption and drug abuse affecting the productivity of the Mexican economy? How much is the country losing by being perceived internationally as the home of world famous drug dealers and corrupted politicians?

First, I will try to evaluate the economic costs and benefits of the Mexican drug industry to determine whether or not it is rational to oppress it. Also, analyze the profit and revenue gained with its productivness chains.

The main hypothesis of this RAR is that Mexico's effort against the illegally drugs trade is worth the costs because, even accountings for all of the economics benefit created by drugs trafficking (employment, cashes flows,investments), extensive negative externalities (corruptioning of the state, violences ,homicides, productivities losses, and increase demand)1 produced by drug industry generate an agregate negatively impacts. The RAR also states that, neverteless in the aggregate drugs trafficking have had a negative economics impact, drugs flows may be beneficial for local, less deversified economies such as Mexicas rural communities dedicated to poppy and marihuana productions. There are no surprises since drugs contrabandists shows a crucial source of employment, income, and consamption.

Mexica's drugs-trafficking industry is a highly profitable, effective business. Concentrated in the productions and distributions of 3 mainly product -marihuana, cocain and heroine Mexican smugglers are involved in the traffic of other illegal substances as well. However, since such substances represent a very small share of the total production, the present work will not focus on them. Future research would be needed for understanding the dynamics of other illegal-drug markets, such as methamphetamine. -, this industry is the major exporter of prohibited drugs to the USA. Curently, aproximately 75% of all drug bought in USA came through Mexica (Paya 2006). These accounts for as much as 75 % of the total cocaine purchased, between 25 and 35 percent of the heroine, and up to 78 % of the imported marihuana Recent data has shown that 50% of the marijuana consumed in US is growth in American soil, principally in particular houses (Fernбndez de Castro 2007) As will be explained below, the consumption of homemade marijuana has reduced the demand for Mexican marijuana, yielding important decreases in Mexican illicit drug profits. (Andrease 1997).

From of the 3 Mexicas products, marihuana is not only the most popular in demand, but also, not surprisingly, presents the most competetive markets.

The next most significant Mexicas drugs product in number is the most crucial in term of profit: cocain. Mexicas cocain profit only comes from transhipment service, not from growing or procesing. What is more, the cocain leaves are grown in the Andeane region of South America and Mexicas cartels are only responsible of transition of the drug in to the USA. Despite of the fact that Mexicas cartells don't participate in the whole cocain productions chains, cocain is still very profitable because Mexica is controling almost all of USA markets. In other words, controling the USA market mean control of the global market: about 90% of world's cocaine production is consumed in US, most of all in cities as New-York where consumption estimates at a rate of 90 cocain lines per 1,500 inhabitats /day (UNOCD, 2008b). It is important to note, however, that cocaine use has been declining generally in the past 10 years in the U.S., while it has been rapidly increasing in Europe (ONDCP, 2006).

Finally, next Mexicas drug product, heroin, is not only transferred but also is raised in Mexicas fields. Inside Mexica, the most important region for the production of heroin is the so-called “golden triangle” created by the states of Sinalao, Chehuahua and Duranga. Heroin from this region of Mexica had captured about 34% of the USA market (Andrease 1999). Nevertheless, comparing with the cocain and marihuana industries, Mexica is a relativly little supplier. According to the latest estimations, Mexica only supplies about 3.08% of the all world consumption (ONDC_P 2008); the heroin market is always ruled by countries such as Afghanistan.

It is pretty clear that the exact amount of revenue created by these 3 drugs product is unknown, it is obvious that illegal drugs are very profitable. According to the Drug Enforcement Administration (DEA 2005), a metric ton of pure crack cocain had a mean retail market value of 147.11 million dollars, a lot more than the value of the same amount of 24-karat gold. Heroin is even more expensive. A pure metric ton is worth 526.90 million dollars. Multiplying this quantity by the 13.8 tons bought yearly in the USA yields a more or less clear estimate about how much USA citizens are spending on illegal-drugs: 6.5 billion dollars.

The most precise and accurate measure of the Mexican drugs industries profits can be connected to Res Nestaress (2004). He considered deviations in prices, demand, and possible losses due to seizures based mostly on USA illegal-drug consumption (plus Europe and Canada). This analyzis yields an estimation of profits to be between 4.3 and 9.93 billion dollars.

Briefly speaking, Mexicas drugs business could be characterized by a billion-dollar illegal industry that produces and transfers marihuana, cocain and heroine to the USA. Calculating the profit of that business is difficult particulary due to differences in local price-lists and in the quality of the final product, price discrimination and lack of information about the distribution of profits. However, no matter how much controversy there is between different estimates, the profitability of drug business is understandable. In fact, the drug industry is among the top one hundred business of Mexico, doing better than worldly recognized enterprises such as American Express Mexico (CNN 2008). How this highly profitable business effects the Mexicas economics would be estimated in the next sections of my RAR.

The economic benefits generated by the drug industry

The producing of illegal drugs, demands a seria of activities and processes to transfer raw materials (coca, marihuana leaves, poppy) into the final goods which can be consumed and that can be delivered to cosyumers. The production chain goes through several levels, including growing, manufacturing, transporting and distributing. As the product passes through each of these stages, it gets added value and creates economic benefits that impact the Mexicas economy in a general way. These economic benefits can be located in three main categories: employment, cash flows and investments Although these three indicators are related among each other, they will be discussed separately in order to delve into the analysis. .

Out of the three, employment maybe is the most visible outcome. Also, agricultural employment connected to drugs industry has increased over the last 10 years. In the mid 1980s, it was estimated that at least 50,000 agricultural workers were “narcotics entrepreneurs” (Crage 1990); by the 1990s the estimate had risen to 250,000 (Torro 1995). The last available estimate counts roughly 300,000 peasants are employed in drug production (Andrease 1999).

The very nature of the drug industry makes it a labour extensive industry. The probability of fraud (stealing) happens to be very frequantly thanks to the nature of an illegal market: without any legal property rights, the costs associated with stealing are significantly reduced.

Moreover, poppy demands a big amount of labour power in order to be harvested. The process of harvesting and preparing poppy gum must be performed by hands, without the help of any modern agri-cultural technologies.In this way, unsurprisingly, as with any craft, poppy gum production demands a lot of labour).

Despite of many perspectives made by the labor-intensive drug business, the more compelling reason to get into the business of producing drugs is a very simple one: high revenues. While one kilogram of corn has a market value of 5 pesos, drug contrabandist pays up to 15,000 pesos for 1 kilogram of opium. In fact, marihuana is 7 times more efficient business than vanila (the most well-paid agricultural product of Mexica), and 17 times better than almond (the second-best legal product) (Reso Nestarres 2005). Agricultural salaries and other labor benefits are also much better in the illegal market. Peasants are paid a lump sum fee of 500 thousand pesos (around 50 thousand dollars), 400 pesos for each day of labor, and -and even more attractive- contrabandist usually offers to peasants a service of “social security” by paying some proportion of the merchandise value if the harvest got ruined by natural unpredictable conditions. In contrast, a corn merchant offers a lump sum fee of only 12 thousand pesos with a daily salary of 53 pesos and, of course, no social security (Mendez, 2008) Facing these numbers, the fact that Mexico produces more marijuana than corn? seems not surprising. In 2007, the Agricultural Tribunal acknowledged that, out of the total 31 million hectares designated to agriculture in Mexico, 9 millions were used for the production of marijuana and poppy (Mendez, 2007). .

The advantages created by the drug traffic business in the form of employment generation dont end in the agricultural market. By the way, the drug industry demands more workers at other levels of the productive chain. Besides peasants, other common drug-related occupations include chemists, lawyers, managers of laboratories, merchants and transporters. Another the most significant branch of the drug-traffic industry -in conditions of the number of employment generation- is “private security and vigilance.” Writing these notions I mean the agents employed by the drug business in order to guarante not just the appropriate completion of trade contracts but also to protect and give personal security to drug contrabandists This scheme of private security has been well documented in other criminal organizations such as the Sicilian Mafia (Van Duyne 2003). . To sum up, drug industry, like any business, demands some level of security in order to get rid of the risk connected with trade. Drug contrabandists had to make a parallel system of contract enforcement because it is impossible for them to take benefits of the official institutions in charge of guaranteeing the compliance of contracts.

An other advantage that the drugs brings to Mexico is its capacity to generate a significant amount of cash flow. As seen in the previous part of my RAR, drugs traffic creates about 9.9 and

3.3 billions $ in a year, stimulating economical activity, for example, thousands of peasants grow expensive crops, young urban vigilantes get a monthly salary, corrupt law enforcement double or triple their income, and etc. Nevertheless, the real economic influence on this stream can be much less then predicted because of its very uneven distribution.

The biggest share is in the hands of the leaders of the cartel (Heyman 2008, Reuters and Ronfeldt 1991) that may never reinvest in Mexico, but instead put it in the world-wide banks which have secret/private accounts. Cartel is a family-based economical organization created by drug trafficking. There are 7 different cartels that control the drug trade in Mexica: Arelano Felix Chapa Gutsman, Osel Cardenaz, Amecua Contreraz, Carilo Fuentez, Valencia and Pedro Diaz Parada. Each cartel is seven extended families distributed in Mexica, each with a specific area of influence. Interview with drug trafficking contrabamdists indicated that about 13.3% of the total income is kept with the leaders of the cartel (Sarmento 1992). That means that cartels earn between 387 and 1.13 billion dollars a year. A very conservative estimate of Li (1990) estimated that 50% of the profits of the cartel leaders "The never return to the country. I am using this estimate to calculate the total amount of dollars that flow into the Mexican economy. Drug trafficking creates flows that go from 8 9 to 2.5 billion dollars a year.

The last way how the drugs business benefits the economy- it is attracting investments. As Mari Aranga shown (quoted by Lee 1990) by making an interwie with top and medium Colombian drug contrabandists level, portfolio traders usually consist of real estate (43%), cattle (nearly 25%) and another forms of legal trade (about 13 %). It is also proved by the documents that the demand by contrabandists for luxury housing constructioning business benefited the economy significantly (ONDP 1987, 1991) So there is a demand in these services, and the increase in demand for construction materials. Barahas Andrad (2008) presented the investment profil for the Mexicas cartels. Obviously, the Mexicas traffickers do build churches and extravagant mansions. That tendency generates economic benefits for a lot of local construction companies that increase their sales and profits, serving drugs lords.

In addition, there is also an evidence that the advantages are not only coming from the high and mid-level drug holders. Even the peasants which occupied a low status in the hierarchy of drugs industry, according to reports, invested their money in production assets. According to one farmer: "Some give a good use for the income received from the growing of poppy. Some build houses, buy cattle, animals] (...)" (Mendez Fernandez and Ronquilo, 2007) .

To sum up, employment, capital inflows and investments rate are the main economic benefits of the drug-traficking business. It generates a work places for nearly 470,000 people, mostly in agricultural production and security. Agricultural workers are especially benefited from the drugs production, because they have just a few alternative sources of employment left. Drugs industry also creates important flows of capital that seepage for all those attracted in the industry.. Part of the profit goes back into Mexica in the form of legal investments, but another part stays in worldwide banks. It is clear that these investments create multiplier effects in the economy that, in the best scenario, promote economic growth. However, the exact share of profits that return to Mexico is unknown.

The negative impact which violations has on the economic stability has been well documented. In fact, there are some ways in which the results of violations that affects the direct and indirect financial costs: loss of productivity connected with death or injury, loss of human capital t, and the costs of medical care and legal services (2008b UNOC). Moreover, psyhological harm asociated with violent experience have an important impact on the economics. Fear of violence may force people to abandon the social interactivity in order to protect themselves. This is reflected in some very specific ways. There are many costs involved in living a life built around avoiding criminal vulnerability. A lot of people simply refused to go out on night or to use public transport, which can limit access to productive activities and education.

Violence also promotes migration. Research of Sinalao migration flows -one of the main centers of the drug trade in Mexica presented that violations that caused drug-related migration has generated at least 370,000 citizens, living ghost cities throughout the region .Although it is sophisticated to calculate how does violation affects economic development.According to Londono and Guerero, total economic losses of 13.2% of Mexica's GDP.Of course, not all violence and crime are related to drug industry. If we assume that only part of the crime related to drugs, the total cost of the drug is 0.44 to 1.44 billion dollars a year.

Secondly is the drugs industry, and it can be considered a negative externality, because it contributes to corruption. Drug trafficking is well known for the destruction of government at all levels in the government hierarchy. Communication between people and the Mexican police, prosecutors, judges and politicians no secret (Sarmiento 1991, Blancornaleras 2002, Fernandez Menendez 1999, Menendez Fernandez and Ronquillo 2006, Shelley 2001 and Shaba, 2006). In fact, it has been documented that a significant portion of the proceeds of drugs is in the hands of corrupt politicians (Corchado 2005). Even the President Calderon acknowledged that organized crime is trying to extend its authority to the political arena, or financing, intimidation or questioning the electoral process.

Corruption also generates additional negative externalities, such as the vicious circle of increasing crime (Beltran and Salcedo-Albarбn 2007), reduction of the free press (Kaufman 2000 Corchado 2007), reducing the performance of the government (Kaufman, 1997), and even distortions in government social spending (Mauro , 1995).

Finally, there is a third way in which the drug trade negatively affected the Mexican economy: creating local demand for drugs. The negative impact of drug abuse becomes especially clear when the inevitable side effect of the growth in consumption is taken into account (ONDCP 1998). This increase is due to the fact that drug smugglers tend to pay their employees in the form of (ONDCP 1994). Payment with goods not only opens the door to increased demand, but also avoids the complex process in order to clear the money to get it back from the United States.

Conclusion

This analytical work has analyzed the costs and benefits generated by the drug industry in Mexico. Such an analysis was needed in order to rationalize the debate of whether the Mexican government should continue its war against drugs, or should better accept that the drug industry was beneficial for the economy.

In general, drug traffic inserts into the economy generating both positive and negative impacts. On one hand, the benefits of drug industry can be clustered in three big categories: employment, cash flows and investment. According to my estimates, the drug industry employs 468,000 people and is responsible for annual cash flows and investments of 2.5 billion dollars. On the other hand, drug traffic brings negative consequences to the economy because it increases violence, corruption and local drug abuse. According to my estimates the cost of violence is equivalent to 1.07 billion dollars, investment losses accounts for other 1.3 billion, drug abuse generates a loss of 0.68 million dollars, and other costs may have an impact as high as 1.5 billion dollars.

Taking these multiple factors together, the illegal drug industry has a negative impact in Mexican economy.

Although in the aggregate drug traffic is generating negative economic consequences for Mexico, it is important to acknowledge that drug traffic cash flows are in fact helping some Mexican communities to somehow alleviate a grinding stage of poverty and underdevelopment. In fact, for almost all drug-producing communities, the drug traffic industry seems to be the only source of income. What policy implications does this have? The most obvious one relates to increased employment efforts in impoverished regions within Mexico. Our analysis has confirmed the longheld notion that most actors in Mexico's drug economy participate in such a business because of the lack of economic opportunity - not a unique phenomenon in the drug-producing world (eg

Afghanistan). This has special implications for the US since the current state of widespread calls for alien migration back to Mexico action might trigger an increase in drug production. If the economic situation of these communities does not improve, getting involved with the illegal-drug industry will remain to be very attractive. Of course the best employment programs can not function in an environment of corruption. As briefly discussed above, this remains a major issue holding back Mexico from achieving greater economic and social success. The international community must continue to pressure Mexican leaders for more transparency in government. This includes monitoring money laundering activities more closely.

Greatly reducing the drug trafficking industry in Mexico may seem like an insurmountable, naпve goal in overall drug control. But previous successes of sharply reducing that business in other countries - like Thailand, Laos, and Colombia - offer a glimpse of hope. Doing so would require a rededicated, multi-pronged effort consisting of poverty relief, alternative development, and anticorruption measures from the United States and other countries. This might require great cost, but the price of doing nothing would probably be more.

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Appendix

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