Friday, 14 October 2016

Book review - Narconomics

Back in March I promised a review of Tom Wainwright's new book, "Narconomics: How to Run a Drug Cartel". I finished reading it last week, and although I'm not sure that it has fully equipped me to run a drug cartel, it certainly contains lots of interesting parts. Below I share some of the highlights (at least, to me).

Chapter 1 discusses the supply chain for cocaine, and simply reiterates the futility of governments targeting supply in the war on drugs. Here is one bit:
Because cartels depend on coca leaf to make their cocaine, governments have targeted coca plantations as a means of cutting off the business at its source. Since the late 1980s, the coca-producing countries of South America, backed by money from the United States, have focused their counternarcotic efforts on finding and destroying illegal coca farms. The idea is a simple economic one: if you reduce the supply of a product, you increase its scarcity, driving up its price... Governments hope that by chipping away at the supply of coca, they will force up the price of the leaf, thereby raising the cost of making cocaine. As the price of cocaine rises, they reason, fewer people in the rich world will buy it.
Wainwright then points out the main flaws in this argument. First, this is a giant game of whack-a-mole. Governments target coca producers in Peru, and production simply moves across to Colombia. When coca producers are targeted in Colombia, they move back to Peru. And so on. Second, the drug cartels are monopsonies - buyers with substantial market power. It is local farmers who grow the coca (not the cartels themselves), and since the farmers can only sell their illegal coca crop to the cartels, the cartels are able to dictate the price. So, even if coca eradication efforts are successful, they don't much affect the price that the cartels pay for the raw product. Third, even if the price of the raw material increases, it will have almost no effect on the street price of cocaine. Wainwright notes that the markup on cocaine is more than 30,000 percent (from farm-gate price to street price). So, even if government efforts managed to treble the farm-gate price of coca, the street price of cocaine would increase by only 0.6 percent - a trivial change. The takeaway is something I've noted before - targeting demand is likely to be more effective than targeting supply.

The second chapter looks at competition and collusion in the drug supply chain, and has a really interesting bit on gang tattoos:
The defining feature of El Salvador's young mareros is their head-to-toe tattoos. Like Old Lin, nearly all gang members sport body art declaring their allegiance to either the Salvatrucha or Barrio 18... Once a young man has become a member and has gotten his body covered in Salvatrucha tattoos, defecting to join Barrio 18 is out of the question, and vice versa. Even leaving the mara to start a new, noncriminal career is virtually impossible, as employers tend to be perturbed by job candidates who show up for an interview with skulls and crossbones etched on their foreheads. In economic terms, this means that whereas Mexican gangbangers are highly footloose, liable to change sides to work for whichever cartel seems to be stronger or higher paying, the labor market for Salvadoran mareros is completely illiquid.
I see this as gang tattoos acting as a form of credible commitment by the mareros. In a simultaneous game, where the marero chooses whether to be loyal or not and the gang must decide whether to trust the marero or not, the marero can make a credible commitment to be loyal by covering themselves in tattoos. Note that this is also a form of signalling - revealing private information about their loyalty to the gang - as only the truly loyal would go to the trouble of getting head-to-toe tattoos.

Chapters 3 and 4 talk about the human resource management issues of cartels, and their corporate social responsibility activities (yes, you read that right), while Chapter 5 talks about international outsourcing (or offshoring) and Chapter 6 covers franchising. I didn't find too much of particular interest in those chapters, though the chapter on franchising did raise some questions for me about whether international terror groups are also undertaking a form of franchising.

Chapter 7 covers the legal highs industry, with particular reference to New Zealand, and Chapter 8 talks about digital disruption. In the latter chapter, I found the discussion of drugs as a 'network good' of interest. Network goods are goods that can only be bought or sold if you belong to a particular network. Here's one bit:
Under these conditions, life is good for the established dealer. A key feature of network markets is that they tend to work strongly in favor of incumbents, who have had time to build up the biggest and strongest networks. Picture the stable, longtime drug dealer, who has been supplying the same city for years. He knows the importers. He has a long list of clients. He may even have contacts in the police whom he pays to turn a blind eye to his business. Now picture the young up-starts, someone who spots that the local market is uncompetitive, with watered-down drugs being sold at high prices. It ought to be easy to enter the market and win some business. But entering the drugs markets - a network economy - isn't so easy. Buying wholesale quantities of illegal drugs requires a rare set of high-level contacts. Selling them in smaller quantities requires a second, larger set of potential buyers. Without a network to buy from and sell to, the new dealer won't get far (and that is before even thinking about the possibility that the established dealer may not take kindly to someone else operating on his patch).
Of course, digital disruption means that whole new networks are being created online, and the chapter talks about the marketplaces on the 'dark web'. Chapter 9 talks about the diversification of the cartels, including from drug smuggling to people smuggling. Chapter 10 talks about the legalisation of cannabis in several U.S. states, and how that is affecting cartel business.

Wainwright concludes with what he sees as the main mistakes in official efforts to tackle the drugs industry: (1) the obsession with supply (see above); (2) saving money early on and paying for it later (prevention is much cheaper than cures, but cures win votes); (3) acting nationally against a global business (see the note on whack-a-mole above); (4) confusing prohibition with control (simply making something illegal is not a solution in and of itself).

Overall, I found this to be an excellent, well-researched book that maintained my interest throughout. I recommend it to anyone who wants to know more about the drugs trade, and how the economics (and business management) concepts we teach in business schools applies in that industry.

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