We've all heard about drug lords like Pablo Escobar and their multi-million dollar businesses. But how did these underground empires really work? A drug cartel is not just about brutal murders and drug sales, but also about logistics, management, marketing, HR and even public relations. The BB team tells how the cartel business works from an economic point of view, and what laws of economics are ignored by the authorities, who declared a war on drugs many years ago and cannot win it.
Market conditions and pricing
Coca bush is a shrubby plant that is often used by the inhabitants of the regions where it grows for traditional medicine or as a brew for tea. Coca is prized by criminals for its cocaine hydrochloride content, a chemical that acts as an «insecticide» in the plant to protect it from being eaten by insects, but it has become widespread for its narcotic properties.
Coca leaves themselves cannot be used as a narcotic drug: their cocaine content is only about 0.2%. It takes between 350 and 600 kilograms of dried coca leaves to create 1 kilogram of the drug.
Coca farmers receive on average a little more than a dollar per kilogram of leaves from the cartels (prices here and further vary depending on cartels and regions), i.e. cartels pay farmers between 455 and 780 dollars for the material to produce 1 kg of cocaine.
Market conditions and pricing
Coca bush is a shrubby plant that is often used by the inhabitants of the regions where it grows for traditional medicine or as a brew for tea. Coca is prized by criminals for its cocaine hydrochloride content, a chemical that acts as an «insecticide» in the plant to protect it from being eaten by insects, but it has become widespread for its narcotic properties.
Coca leaves themselves cannot be used as a narcotic drug: their cocaine content is only about 0.2%. It takes between 350 and 600 kilograms of dried coca leaves to create 1 kilogram of the drug.
Coca farmers receive on average a little more than a dollar per kilogram of leaves from the cartels (prices here and further vary depending on cartels and regions), i.e. cartels pay farmers between 455 and 780 dollars for the material to produce 1 kg of cocaine.
The cost of cocaine, like other drugs, has a strong upward trend on its way to the final buyer. According to various reports, buyers pay between $70,000 and $120,000 for a kilogram of cocaine from a street dealer in the United States. If we take into account that on the way to the buyer the cocaine is usually diluted with various chemicals to make even more money, the price rises to $200,000.
It turns out that the average markup on cocaine is about 15,000%. A figure never dreamed of by a legitimate businessman.
Of course, not all of this is pure profit for the cartels: some of it goes to cover costs, labor and to the pockets of intermediary dealers. At the same time, the average Colombian farmer earns only a little more than 2 dollars a day. What is the reason for such a markup?
The main reason is the failed «war on drugs». In 1971, U.S. President Richard Nixon called drugs «the chief enemy of mankind» and launched a multi-year campaign to fight them. The central focus of this «war» was to try to reduce the supply of drugs by destroying plantations and hunting down dealers, which ended up being a big mistake.
This method of fighting ignores the main economic force, the law of supply and demand.
Drugs are a commodity with inelastic demand. Goods with inelastic demand will be bought regardless of changes in their price (such as necessities or hard-to-substitute goods).
Since drugs are addictive, they will be used despite price increases. This leads to the so-called balloon effect (sometimes called the «cockroach effect») — suppression of drug production in one place inevitably leads to new production even if the price to the end user rises, because the demand for drugs does not fall. The name draws an analogy to a balloon, pushing on it does not remove the air from it, but only moves it to another place.
It turns out that the average markup on cocaine is about 15,000%. A figure never dreamed of by a legitimate businessman.
Of course, not all of this is pure profit for the cartels: some of it goes to cover costs, labor and to the pockets of intermediary dealers. At the same time, the average Colombian farmer earns only a little more than 2 dollars a day. What is the reason for such a markup?
The main reason is the failed «war on drugs». In 1971, U.S. President Richard Nixon called drugs «the chief enemy of mankind» and launched a multi-year campaign to fight them. The central focus of this «war» was to try to reduce the supply of drugs by destroying plantations and hunting down dealers, which ended up being a big mistake.
This method of fighting ignores the main economic force, the law of supply and demand.
Drugs are a commodity with inelastic demand. Goods with inelastic demand will be bought regardless of changes in their price (such as necessities or hard-to-substitute goods).
Since drugs are addictive, they will be used despite price increases. This leads to the so-called balloon effect (sometimes called the «cockroach effect») — suppression of drug production in one place inevitably leads to new production even if the price to the end user rises, because the demand for drugs does not fall. The name draws an analogy to a balloon, pushing on it does not remove the air from it, but only moves it to another place.
Another reason for such high mark-ups is that the drug market is in a monopsony. Monopsony is a market condition in which there is only one buyer and many sellers. Under such conditions, sellers have no choice and have to sell goods for the amount offered by the monopsony (i.e. the buyer).
At the point of production, each drug cartel controls its own territory and all the farmers living in it. The farmers have no way of selling coca leaves to anyone other than the cartel to which they are affiliated, which is why the material for production is so cheap for the drug lords.
As a result, all government actions aimed at destroying coca plantations only hit private farmers and not the drug cartels, which continue to dictate their terms to them. This problem could be solved by introducing competing buyers into the coca market, but since it is still illegal in most countries, this is not possible.
Human Resources
A favorite saying of HR managers is: «People are the main resource of any company». And the word «any» is not chosen in vain, because this principle applies even to cartels. It is true that drug lords have much more problems with employees than ordinary directors.
The first problem: where to get new employees from, if you can't just advertise? You have to find a way to hire covertly while making sure none of them are undercover cops or traitors who will shoot you in the back. Tom Wainwright, in his book Narconomics, writes that just as ordinary employers look to universities and colleges for new staff, drug lords recruit from prisons.
At the point of production, each drug cartel controls its own territory and all the farmers living in it. The farmers have no way of selling coca leaves to anyone other than the cartel to which they are affiliated, which is why the material for production is so cheap for the drug lords.
As a result, all government actions aimed at destroying coca plantations only hit private farmers and not the drug cartels, which continue to dictate their terms to them. This problem could be solved by introducing competing buyers into the coca market, but since it is still illegal in most countries, this is not possible.
Human Resources
A favorite saying of HR managers is: «People are the main resource of any company». And the word «any» is not chosen in vain, because this principle applies even to cartels. It is true that drug lords have much more problems with employees than ordinary directors.
The first problem: where to get new employees from, if you can't just advertise? You have to find a way to hire covertly while making sure none of them are undercover cops or traitors who will shoot you in the back. Tom Wainwright, in his book Narconomics, writes that just as ordinary employers look to universities and colleges for new staff, drug lords recruit from prisons.
Indeed, prisons are a cartel HR manager's dream. A lot of people come out of them with criminal experience and often with no purpose and no possibility of normal employment. Therefore, it is in prisons that cartel agents recruit and train future employees, even before they are released. Seeking protection from the violent environment of Latin American prisons, joining a gang becomes a rational response for prisoners.
«We are not a gang — we are a labor union» — said cartel member Alejandro Saenz, who is serving time in a Mexican prison.
It was in prison in 1974 that the famous drug trafficker George Young, initially arrested for smuggling marijuana, met cartel representative Carlos Leder. This meeting subsequently changed the entire drug industry, in fact initiating a major export of cocaine to the United States.
But how can you be sure that your new employee will not let you down, or even turn you in to the authorities? It is precisely because of these problems that the organizational structure of cartels began to gravitate towards network freelancing. In this form of labor organization, workers are hired for one or several jobs, they do not know anything about the cartel or their colleagues, and they perform one specific task: transportation, selling goods, money transfers.
«We are not a gang — we are a labor union» — said cartel member Alejandro Saenz, who is serving time in a Mexican prison.
It was in prison in 1974 that the famous drug trafficker George Young, initially arrested for smuggling marijuana, met cartel representative Carlos Leder. This meeting subsequently changed the entire drug industry, in fact initiating a major export of cocaine to the United States.
But how can you be sure that your new employee will not let you down, or even turn you in to the authorities? It is precisely because of these problems that the organizational structure of cartels began to gravitate towards network freelancing. In this form of labor organization, workers are hired for one or several jobs, they do not know anything about the cartel or their colleagues, and they perform one specific task: transportation, selling goods, money transfers.
An example of such a business device is a smuggling company that in 2007 began exporting cocaine to England and made more than 1 million pounds a week. Looking at such sums, it seems that the process was operated by dozens of people, but the UK intelligence services found out that in fact the company consisted of only two permanent employees, and all the other people involved were freelancers. Of the 104 drug traffickers questioned during the year, only one said he belonged to a large drug business with a large headquarters. All others worked either alone or with one/few partners.
Industry trends
Like ordinary businesses, drug cartels have to constantly adapt to changing market realities. The legalization of marijuana in 23 U.S. states and gradual steps toward legalization in the rest have made its production simply unprofitable for cartels. Why buy the drug from a street dealer when you can buy it from a pharmacy? Therefore, drug groups that specialized in it began looking for a new niche in the industry.
The amount of marijuana apprehended at the U.S.-Mexico border in 2021 is down nearly 300% from 2020, reflecting a decline in black market production as well. At the same time, the amount of fentanyl at the border increased by more than 700% — that's the scary trend.
Between October 2022 and March 2023 alone, more than 6,000 kilograms of fentanyl were apprehended at the U.S.-Mexico border — an amount sufficient to kill the entire population of America.
Industry trends
Like ordinary businesses, drug cartels have to constantly adapt to changing market realities. The legalization of marijuana in 23 U.S. states and gradual steps toward legalization in the rest have made its production simply unprofitable for cartels. Why buy the drug from a street dealer when you can buy it from a pharmacy? Therefore, drug groups that specialized in it began looking for a new niche in the industry.
The amount of marijuana apprehended at the U.S.-Mexico border in 2021 is down nearly 300% from 2020, reflecting a decline in black market production as well. At the same time, the amount of fentanyl at the border increased by more than 700% — that's the scary trend.
Between October 2022 and March 2023 alone, more than 6,000 kilograms of fentanyl were apprehended at the U.S.-Mexico border — an amount sufficient to kill the entire population of America.
Fentanyl is a synthetic opioid similar in properties to morphine, but about 100 times more potent. So why have the cartels turned to it?
The goal of any business in production is to minimize costs, and cartels are no exception. The production of cocaine or heroin requires farms and large laboratories that require large investments. Fentanyl is easier and cheaper to produce.
It costs cartels an average of 10 cents to produce one tablet of fentanyl, while the retail price at dealers can be as high as $10 in the United States and as much as $60-80 in other countries. A markup of up to 80,000% can't help but attract manufacturers.
The growing popularity of fentanyl is well explained by the «iron law of prohibition». According to this law, illegal products tend to increase in strength. Over time, they become more potent, making them easier to smuggle across borders and to sell, as they require a smaller dose of the substance to achieve the same effect, which is harder for law enforcement to detect.
This phenomenon was first documented in the United States during Prohibition, when people began to switch to stronger alcoholic beverages. This was also the reason why cartels began to switch from producing light drugs to the highly potent fentanyl.
The goal of any business in production is to minimize costs, and cartels are no exception. The production of cocaine or heroin requires farms and large laboratories that require large investments. Fentanyl is easier and cheaper to produce.
It costs cartels an average of 10 cents to produce one tablet of fentanyl, while the retail price at dealers can be as high as $10 in the United States and as much as $60-80 in other countries. A markup of up to 80,000% can't help but attract manufacturers.
The growing popularity of fentanyl is well explained by the «iron law of prohibition». According to this law, illegal products tend to increase in strength. Over time, they become more potent, making them easier to smuggle across borders and to sell, as they require a smaller dose of the substance to achieve the same effect, which is harder for law enforcement to detect.
This phenomenon was first documented in the United States during Prohibition, when people began to switch to stronger alcoholic beverages. This was also the reason why cartels began to switch from producing light drugs to the highly potent fentanyl.
It is also gaining popularity among users for the same reason. The route of administration also plays a role: unlike marijuana or cocaine, almost all fentanyl is in pill form. Far more important, however, is the potency with which it is addictive. Fentanyl is about 50 times more potent than heroin, which means that even an extremely small dose can not only be highly addictive, but also extremely dangerous.
Fentanyl, because of its cheapness in production and potency, is often diluted with other drugs, so many users unknowingly switch to it as a result.
The illicit production and use of fentanyl causes hundreds of thousands of deaths each year. It has long outpaced all other drugs in the number of overdose deaths, surpassing cocaine, heroin and methadone combined.
Fentanyl, because of its cheapness in production and potency, is often diluted with other drugs, so many users unknowingly switch to it as a result.
The illicit production and use of fentanyl causes hundreds of thousands of deaths each year. It has long outpaced all other drugs in the number of overdose deaths, surpassing cocaine, heroin and methadone combined.
The fentanyl epidemic is a full-blown humanitarian crisis with serious consequences for society. In some regions, such as San Francisco, dozens of people die every day because of it.
Destroyed human lives are the worst consequence of this crisis, but it also entails economic problems for society. Some experts estimate that fentanyl distribution is responsible for more than 40% of all unemployment in the United States, causing huge losses to the economy.
These unemployed people are not economically useful to society and do not seek employment, while claiming social benefits and government payments. If drug dependent people are employed, they take 50% more paid sick leave, rarely stay in the same job, and are much more likely to be injured or die on the job.
How to «bankrupt» the cartels?
More than 50 years of the «war on drugs» is enough time to draw a disappointing conclusion: that it has not lived up to expectations.
Cartels continue to thrive and find ever more efficient ways to enter the market, and the number of overdose deaths is breaking all records. This is despite the fact that the US budget spent more than 1 trillion dollars on the «war».
But if a strict policy of destroying the supply of drugs is not effective, is there any other way to fight them?
Destroyed human lives are the worst consequence of this crisis, but it also entails economic problems for society. Some experts estimate that fentanyl distribution is responsible for more than 40% of all unemployment in the United States, causing huge losses to the economy.
These unemployed people are not economically useful to society and do not seek employment, while claiming social benefits and government payments. If drug dependent people are employed, they take 50% more paid sick leave, rarely stay in the same job, and are much more likely to be injured or die on the job.
How to «bankrupt» the cartels?
More than 50 years of the «war on drugs» is enough time to draw a disappointing conclusion: that it has not lived up to expectations.
Cartels continue to thrive and find ever more efficient ways to enter the market, and the number of overdose deaths is breaking all records. This is despite the fact that the US budget spent more than 1 trillion dollars on the «war».
But if a strict policy of destroying the supply of drugs is not effective, is there any other way to fight them?
In the 1980s, Switzerland was experiencing a serious heroin crisis, which led to an increase in crime, HIV and overdose deaths. The Swiss authorities did not resort to harsh methods of control, but introduced a «four pillar policy»: prevention, treatment, harm reduction and only then punishment.
The country has opened special distribution points where heavy drug addicts receive high quality drugs, sterile needles and injections under medical supervision. Social workers help them find housing and solve other problems. More than two thirds of all drug addicts find a new job: they no longer have to worry about finding a dose and can focus on their normal routine.
Thanks to the Four Pillars policy in Switzerland, since the end of the 20th century, the annual number of people trying drugs for the first time has fallen by 82%, the number of people infected with HIV has fallen sevenfold, and the number of overdose deaths has fallen threefold.
Thus, there are softer ways to fight without increasing crime and without spending trillions of dollars in pursuit of an unattainable goal. After decades of ineffective ways to fight the war on drugs, it is time to optimize global drug policy. Raising awareness of the problem can be the first step. Learn more about the fentanyl crisis that has already unfolded here.
The country has opened special distribution points where heavy drug addicts receive high quality drugs, sterile needles and injections under medical supervision. Social workers help them find housing and solve other problems. More than two thirds of all drug addicts find a new job: they no longer have to worry about finding a dose and can focus on their normal routine.
Thanks to the Four Pillars policy in Switzerland, since the end of the 20th century, the annual number of people trying drugs for the first time has fallen by 82%, the number of people infected with HIV has fallen sevenfold, and the number of overdose deaths has fallen threefold.
Thus, there are softer ways to fight without increasing crime and without spending trillions of dollars in pursuit of an unattainable goal. After decades of ineffective ways to fight the war on drugs, it is time to optimize global drug policy. Raising awareness of the problem can be the first step. Learn more about the fentanyl crisis that has already unfolded here.