Investment decisions are powered by fear and greed. Prodigious risk can be mirrored by enormous reward, and few markets exemplify this more dramatically than the illicit cocaine trade.
The drug starts out as leaves of the coca plant, of which around 530 kilograms are needed as the agricultural input for a kilogram of cocaine. For this quantity of leaves the farmers of Columbia, Bolivia, Ecuador, Argentina and Peru are paid around A$950. It’s a pragmatic crop for poor farmers; for example in Peru it is more than twice as profitable as cacao or coffee.
The leaves are turned to paste, crystalised and converted into a kilogram of pure cocaine, which can be had for as little as $3000 in the jungles surrounding the illicit labs that process it. By the time that kilogram is being sold in Australia it has been cut to one-third purity, thus is three kilograms and retailing for $1,200,000.
Australia has the second-most expensive cocaine in the world at around $416 per gram retail, with Kuwait picking up the gold medal at $458. The drug is so expensive here because we are a relatively small market, distant from producers, with tight border security and tough penalties to deter importation.
Local production is not an attractive option; for while the chemistry is rudimentary, growing conditions are specific, thus limited. Because more than 500 kilograms of leaves are needed for just one kilogram of cocaine, requiring almost two hectares, vast plantations are essential for production in any serious volume, and with limited appropriate terroir in Australia, crops would be easily identified. There is an indigenous plant, erythroxylum australe, with foliage that contains meteloidine, an alkaloid rather like the benzoylmethylecgonine in coca leaves, but on balance, it’s easier to import than produce.
Globally the average retail price of cocaine is $108 per gram. Prices vary with market value, scale, proximity and risk. In Columbia, a gram costs less than $5 while in Britain it is $86, and $87 in the United States, although this fluctuates considerably as markets get more distant from the Mexican border.
Between 14 and 21 million people are estimated to use cocaine, making it the second-most popular drug after cannabis. The heaviest per capita users are Scots, who nose ahead of Americans and the Spanish, while Australians hoover up considerably more than the British, placing those countries in fourth and fifth place respectively. Restrained Singaporeans are least likely to indulge.
With its large population, wealth and high consumption, the United States is the most valuable market, snorting 37 per cent of global supply, but it must all be imported. Exporting techniques vary. US police forces have seized around 200 Cessnas carrying the drug. One aircraft was being pursued over Homestead, Florida in 1994, so ditched its cargo. A 34-kilogram bag of cocaine fell directly into a back yard where chief of police Curt Ivy was chatting with the Neighborhood Crime Watch about what to look out for in their quiet community.
Always looking for bigger and better ways to move the drug, criminals have deployed at least two 747s, each with a payload of 13 tons. Other strategies to transport the high-value product include tunnels, catapults, sandbag bridges over rivers and, increasingly, drones with GPS trackers for the convenience of gangsters picking it up.
Drug mules can only swallow and subsequently pass around one kilogram, so they use innovative techniques to sneak larger quantities through customs. In 2009 Chilean police arrested a woman heading to Spain with suitcases made from—rather than full of—20 kilograms of cocaine. When moved in bulk through border security, cocaine has been mixed with wine, whisky, pulp fruit and coffee, soaked into jeans or dried into fish.
The scale of the industry is enormous; the UN World Drug Report of 2010 found it represented around 0.15 per cent of global GDP. As a globalised enterprise with revenues estimated at $122 billion, it had greater scale than 123 of the 184 countries surveyed by the World Bank.
Industries always have market leaders and the late kingpin Pablo Escobar was unquestionably one. Before his death in 1983 he had risen from car thief to kidnapper and finally to drug lord with revenues of nearly half a billion dollars a month. He reportedly spent $2500 a month on rubber bands to stack his money, and 10 per cent of the cash was written off because rats nibbled at it. He had 16 planes as well as a Lear Jet, six helicopters, two remote submarines and a fleet of boats, one of which could send 25 tons of cocaine to eager buyers.
Cocaine comes essentially in two types: powder and crack. Powder is expensive and frequently associated with the high life of the elite, while crack is cheap and commonly linked with prostitution and street crime. The drug raises dopamine levels 250 per cent, making it seem five times more rewarding than the 50 per cent increase delivered by food, and two and a half times better than sex, which only manages a 100 per cent boost.
In 2008 the UN reported that 18 per cent of users in the United States were dependent, making it the second most addictive drug after heroin. More recently studies have shown that cocaine causes around 5000 deaths in the United States annually, or about one-third of the number of deaths caused by either guns or painkillers.
Despite the many negatives, cocaine, often called nose candy, Peruvian Marching Powder, White Lady, Stardust or simply Charlie is not without inspirational upside. Robert Louis Stevenson wrote The Strange Case of Dr Jekyll and Mr Hyde in just six days fuelled by it. Horror scribbler Stephen King kick-started much of his writing from 1979 to 1987 with the powder. The late David Bowie and Queen used cocaine and wine for 24 hours, the creative result being Under Pressure.
With manufacturer pricing at a scratch over $3000 per kilo and Australian users paying 400 times that sum once it has been imported and cut to reduce purity and increase volume threefold, there is, to use a banking term, considerable arbitrage.
Banks have enjoyed many profitable associations with the industry. HSBC was fined $700 million for facilitating transactions for Mexican drug traffickers and Al Qaeda. Between 2004 and 2007, US bank Wachovia ‘failed to monitor’ transactions to drug gangs worth US$376 billion. ABN AMRO, Barclays, Credit Suisse and ING have all reportedly been implicated in similarly ethically inappropriate dealings. In 2009 Antonio Maria Costa, the head of the UN’s Office on Drugs and Crime, said profits from criminal organisations had been the only liquid assets available to allow some banks to avoid failure during the crisis of the previous year.
As with many other industries, the largest margins lie in distribution rather than manu-facture, so participants in the early offshore stage of cocaine trafficking seek the profits of vertical integration and move into transportation and wholesaling. Product delivery to consumers is a high-risk enterprise; an estimated 32 per cent of cocaine is intercepted, and this needs to be factored into the business model, as do seizures of the expensive craft and cheaper people who transport it. The extraordinary profits, illegal nature and lack of moral compass of many players in the industry make intimidation, bribes and extreme violence common, so facilitating this must be costed into retail pricing too.
Cartels such as the Mexican Los Zetas deter would-be opponents, turncoats and com-petitors with killings, torture and decapi-tations that they frequently film and upload to YouTube. Mouths can be stuffed with severed genitalia, heads rolled across the floor of busy discos: once they even took the trouble of removing a face and stitching it to a soccer ball.
Pablo Escobar paid assassins between $100 and $3000 to kill police, hiring Israeli and British mercenaries to train his team who themselves only had a life expectancy of 22. He offered huge bribes to those who stood in his way, with a promise of plato o plomo—the silver of money or the lead of a bullet. Unsurprisingly many opted for the less terminal option, and his network thrived.
When threatened with extradition to the United States, Escobar declared virtual war on his government. He killed two ministers, blew up the headquarters of their intelligence organisation and a Columbian airliner. He united with right-wing death squads and paramilitary groups to unleash unrelenting ferocity, ultimately surrendering to live in a luxurious prison that he designed and built himself. Escaping even from this, he was finally tracked down by police, surrounded by hundreds of them, and shot. He is believed to have caused more than 20,000 deaths in Columbia alone, and many more around the globe.
Cartels hold no monopoly on violence. From the Camorra syndicates in Naples that in 2004 killed 140 people in a single feud, to the 3000 killed in Juárez in 2014 and even the outlaw motorbike gangs or Mafia-aligned distributors in Australia, murder is an effective and commonplace strategy.
Profits from the trade spread beyond criminals and corrupt officials supposedly combating the industry. Just as heroin from Afghanistan helps fund the Taliban, cocaine has helped fund terror groups FARC in Columbia and Shining Path in Peru.
Britain’s National Crime Agency claims cocaine users are ‘feeding an industry which funds the exploitation of impoverished people, which routinely uses death, violence, and destruction’. Interestingly the agency also highlights the environmental damage wrought by drug labs in the jungles, presumably because research shows this elicits greater concern from many than the criminal and oft-fatal consequences of violence, or addiction for strangers.
What then, is the answer? I lean towards controlled legalisation; more specifically a variant of the Portuguese model in which users are not subject to criminal charges, but instead receive education and, in cases of excessive use, counselling. However, rather than illicit product, we might consider a highly regulated legal supply chain—from sanctioned manufacture through to pharmacy distribution—to minimise oft-harmful additives and monitor hazardous levels of use individually. Availability of consistently safe, legal coke should take away most of the incentives that attract criminals to the industry. And it may help make it uncool too; few things counter edginess as effectively as dreary bureaucratic ambivalence.
Despite some reductions in supply in the 1990s, the war on drugs has manifestly failed. Prohibition is attractive to governments because it demonstrates political resolve and simultaneously passes the buck to police; however, it is invariably unsuccessful. The limited benefits it delivers seem to make little sense when weighed against the community damage and criminal advantage that attend restriction.
Impure product, forced addiction through provision of free crack until dependence kicks in and profits that make extreme violence and high-risk importing economically pragmatic combine to cause death or incarceration for many industry participants. Addiction, poverty or career collapses impact about one in five users. There’s a petty crime wave that is terrifying numerous homeowners and topping up prisons, with many inmates being addicts or minor dealers while, with intermittent exceptions, their felonious bosses remain free to flaunt their Lamborghinis.
Controlled legalisation of the industry is politically problematic and risks increasing acceptance and usage of illicit drugs, although evidence from the Netherlands and Portugal suggests it may well not. However, allowing government to sanction and control both purity and distribution while attempting to better regulate usage would surely increase safety in the industry, to users and the broader public.
Control, monitoring and health education could be self-liquidating as the taxes raised would be considerable: high prices are important, as we know from tobacco, and addictive products are extremely price elastic. Perhaps most importantly the strategy should substantially reduce incentives for criminal involvement and profit. Given that the illegal industry doesn’t seem to be going anywhere in a hurry, to me that doesn’t seem like a bad place to start.