Crooks already know these tricks. Honest men must learn them in self- defense. —“HOW TO LIE WITH STATISTICS,” DARRELL HUFF Contents INTRODUCTION Cartel Incorporated CHAPTER 1 Cocaine’s Supply Chain: The Cockroach Effect and the 30,000 Percent Markup CHAPTER 2 Competition vs. Collusion: Why Merger Is Sometimes Better Than Murder CHAPTER 3 The People Problems of a Drug Cartel: When James Bond Meets Mr. Bean CHAPTER 4 PR and the Mad Men of Sinaloa: Why Cartels Care About Corporate Social Responsibility CHAPTER 5 Offshoring: The Perks of Doing Business on the Mosquito Coast CHAPTER 6 The Promise and Perils of Franchising: How the Mob Has Borrowed from McDonald’s CHAPTER 7 Innovating Ahead of the Law: Research and Development in the “Legal Highs” Industry CHAPTER 8 Ordering a Line Online: How Internet Shopping Has Improved Drug Dealers’ Customer Service CHAPTER 9 Diversifying into New Markets: From Drug Smuggling to People Smuggling CHAPTER 10 Coming Full Circle: How Legalization Threatens the Drug Lords CONCLUSION Why Economists Make the Best Police Officers Acknowledgments Notes Index Photographs appear following p. 124. Introduction CARTEL INCORPORATED “Ladies and gentlemen, welcome to Ciudad Juárez, where the local time is 8:00 a.m.” On a chilly November morning on a runway in the Mexican desert, one passenger onboard Interjet Flight 2283 is fiddling nervously with a small package hidden in his sock, wondering if he has made a terrible mistake. Juárez, a brash border city of scorching days and freezing nights, is the main cocaine gateway to the United States. Shoved up against the metal fences of the Texas border, exactly halfway between the Pacific and the Gulf coasts, it has long been a smugglers’ hangout: a place where illicit fortunes are made and blown on fast cars, gaudy mansions, and usually before very long, spectacular mausoleums. But the nervous passenger, now blinking in the morning sun as he walks to the terminal, noting the camouflaged, balaclava-wearing marines guarding the exit, is not a drug mule. The passenger is me. Inside the terminal I find the nearest bathroom, lock myself in a cubicle, and pull out the package, a small, black, electronic gadget, about the size of a cigarette lighter, with a single button and an LED light. A few days earlier, in Mexico City, it had been presented to me by a local security consultant who feared that the naïve young británico before him might get into hot water on his trip to Juárez. Now, at the time of my first visit, the place has recently earned the title of “world’s most murderous city,” thanks to the deadly game of hide-and- seek being played by rival cartel hit men across its colonial downtown and cinderblock slums. Roadside executions, mass graves, and inventive new forms of dismemberment fill the local newspapers and television reports. Inquisitive journalists, in particular, have a habit of disappearing into car trunks, mummified in masking tape. Juárez is not a place to take any chances. So what I should do, the consultant had explained, handing me the device, is press the button when I arrive, wait for the LED to come on, and keep the gadget hidden in my sock. As long as the light is blinking, he will be able to track my whereabouts—or at least those of my right leg—should I fail to check in. In the cubicle, I quietly take out the tracking device, turn it over in my hands, and press the button. I wait. The light remains dead. Puzzled, I press it again. Nothing. Jabbing, hammering, holding the button down: whatever I do to try to coax the device to life over the next few minutes, the light refuses to blink. Eventually I stick the useless thing back in my sock, gather up my things, and make my way warily out onto the streets of Ciudad Juárez. The gadget is dead, and I am on my own. • • • This is the story of what happened when a not very brave business journalist was sent to cover the most exotic and brutal industry on earth. I arrived in Mexico in 2010, just as the country was starting to ramp up its war on the narco-cowboys, who, with their gold-plated Kalashnikovs, had reduced some parts of the country to a state of near anarchy. The number of people murdered in Mexico in 2010 would reach more than twenty thousand, or about five times the figure recorded across all of Western Europe.1 The following year was to be more violent still. News bulletins featured little else: every week brought new stories of corrupted cops, assassinated officials, and massacre after bloody massacre of narcotraficantes, by the army or each other. This was the war on drugs, and it was clear that drugs were winning. I had sometimes written about drugs from the point of view of the consumer, in Europe and the United States. Now, in Latin America, I was confronted with the narcotics industry’s awesome supply side. And the more I wrote about el narcotráfico, the more I came to realize what it most closely resembled: a global, highly organized business. Its products are designed, manufactured, transported, marketed, and sold to a quarter of a billion consumers around the world. Its annual revenues are about $300 billion; if it were a country, it would rank among the world’s forty largest economies.2 The people who run the industry may have a sinister glamour about them, with their monstrous nicknames (one in Mexico was known as El Comeniños, or “The Childeater”). But whenever I met them in person, their boasts and complaints tended to remind me of nothing so much as those of corporate managers. The head of a bloodthirsty gang in El Salvador, who boasted to me in his baking prison cell about the amount of territory controlled by his compañeros, spouted platitudes about a new gang-truce that could have come directly from the mouth of a CEO announcing a merger. A burly Bolivian farmer of coca, the raw ingredient of cocaine, enthused about his healthy young narco-crops with the pride and expertise of a commercial horticulturalist. Time and again, the most ruthless outlaws described to me the same mundane problems that blight the lives of other entrepreneurs: managing personnel, navigating government regulations, finding reliable suppliers, and dealing with competitors. Their clients have the same demands as other consumers, too. Like customers of any other industry, they seek out reviews of new products, increasingly prefer to shop online, and even demand a certain level of “corporate social responsibility” from their suppliers. When I found my way into the hidden “Dark Web” of the Internet, where drugs and weapons are anonymously bought with Bitcoins, I dealt with a trader of crystal-meth pipes who was as attentive as any Amazon representative. (Actually, I take it back. He was far more helpful.) The more I looked at the worldwide drug industry, the more I wondered what would happen if I covered it as if it were a business like any other. The result is this book. One of the first things I noticed when I started looking at the illegal-drugs industry through the eyes of an economist was that many of the impressive- sounding numbers quoted by the officials in charge of fighting it simply don’t make sense. Not long after I arrived in Mexico, a giant narcotic bonfire was set alight in Tijuana. Soldiers lit the kindling and stood well back as 134 metric tons of marijuana went up in thick, pungent smoke. The stash, which had been discovered hidden inside six shipping containers in a warehouse on the edge of the city, represented the biggest drug bust in the country’s history. The goods had been ready for export, tightly packed into 15,000 parcels the size of sandbags and branded with logos of animals, smiley faces, and Homer Simpson cartoons, which traffickers use to denote where their products are to be sent. After the packages had been tested, weighed, and photographed, they were piled high, hosed down with diesel, and ignited. A crowd looked on, as machine-gun- toting soldiers made sure that no one got downwind of the mind-altering blaze. General Alfonso Duarte Múgica, the Mexican Army’s commander in the region, proudly announced that the smoldering stash had been worth 4.2 billion pesos, then equivalent to about $340 million. Some US newspapers went even further, reporting that the haul was worth more like half a billion dollars, based on what the drugs could have fetched in the United States. By any reasonable analysis, they were both wrong by a mile. General Duarte’s calculation seems to have been based on the assumption that a gram of marijuana can be bought in Mexico for about $3. Multiply that by a hundred tons and you come up with a total value for the stash of around $300 million. In the United States, a gram might cost more like $5, which is where the half-billion estimate comes from. The logic sounds reasonable enough, even if the numbers are very rough. But it is ludicrous. Consider another fiercely addictive Latin American export: Argentine beef. In a Manhattan restaurant, an eight-ounce steak might cost $50, or 22 cents per gram. By General Duarte’s logic, that would imply that a half-ton steer is worth over $100,000. A steer has to be slaughtered, butchered, packed, shipped, seasoned, grilled, and served before it is worth $50 per slice. For this reason, no analyst of the beef industry would calculate the price of a live steer mooching around on the Argentine pampa using restaurant data from New York City. Yet this is effectively how the value of heroin seized in Afghanistan or cocaine intercepted in Colombia is sometimes estimated. In reality, drugs, like beef, have to go through a long value-adding chain before they reach their final “street price.” A gram of marijuana might fetch $3 in a Mexico City nightclub, or $5 in an American college dorm. But hidden in a warehouse in Tijuana—yet to be smuggled across the border, divided into retail-size quantities, and furtively marketed to consumers—it is worth much less. The best estimates available suggest that the wholesale price of marijuana in Mexico is about $80 per kilo, or just 8 cents per gram.3 At this price, the stash in Tijuana would have been worth more like $10 million—and probably less, because no one hiding 100 tons of an illegal product would be able to sell it by the kilogram. The Tijuana seizure was a whopper, and heads no doubt literally rolled in the cartel that lost it. But the $340 million blow to organized crime that most newspapers reported was a fantasy: the loss incurred by the criminals who owned the drugs was probably less than 3 percent of that amount. If assumptions about the value of a single big warehouse of Tijuana marijuana could be so wildly wrong, I wondered, what else might be found out by analyzing the drug trade from a completely different perspective, applying basic economics? Look again at the cartels, and further similarities to legitimate businesses become clear. Colombian cocaine manufacturers have protected their profits by tightening control of their supply chains, along the same lines as Walmart. Mexican cartels have expanded on a franchise basis, with the same success as McDonald’s. In El Salvador, the tattooed street gangs, once sworn blood-enemies, have discovered that collusion can sometimes be more profitable than competition. Caribbean criminals use the islands’ fetid prisons as job centers, solving their human-resources problems. Like other big firms, drug cartels have begun to experiment with offshoring, bringing their problems to new, more vulnerable countries. They are attempting to diversify, just as most other businesses do when they reach a certain size. And they are being buffeted by the move to online shopping, exactly like other high-street retailers. Applying economic and business analysis to drug cartels may seem outrageous. But to fail to understand the economics of the drug trade—and to go on quoting fantasy figures such as the half-billion-dollar bonfire in Tijuana—has condemned governments to pouring money and lives into policies that do not work. The world’s taxpayers spend upward of $100 billion a year combating the illegal-drugs trade. The United States alone shells out some $20 billion just at the federal level, making 1.7 million drug arrests a year and sending a quarter of a million people to prison.4 In countries that produce and traffic the drugs, military offensives against the industry have contributed to a dizzying body count. Mexico’s murder rate, though fearsome, is not as high as that of some of the other countries that lie on the cocaine-trafficking route, where thousands more are murdered each year attempting to fight the drugs business. The scale of public investment is huge, and the evidence used to support it is threadbare. As I followed the trafficking trail, I noticed four big economic mistakes that governments everywhere from La Paz to London keep on making. First, there is an overwhelming focus on suppressing the supply side of the business, when basic economics suggests that addressing demand would make more sense. Cutting supply has done more to raise prices than it has to reduce the amount of drugs consumed, resulting in a more valuable criminal market. Second, there is a constant and damaging short-termism, in which governments economize on early interventions, preferring to run up bigger bills further down the line. Prisoner rehabilitation, job creation, and treatment for addiction are among the first programs to be cut when budgets are tight, while front-line enforcement, which accomplishes the same goal at a higher cost, seems to enjoy spending without end. Third, even though the drug cartels are models of nimble, borderless global commerce, efforts to regulate them are still clumsily national in scope. The result is that the industry survives by slipping from one jurisdiction to another, easily outwitting the uncoordinated efforts of different countries. Finally, and most fundamentally, governments mistakenly equate prohibition with control. Banning drugs, which seems sensible at first, has handed the exclusive rights to a multibillion-dollar industry to the most ruthless organized crime networks in the world. The more I learned about the way the cartels do business, the more I wondered if legalization, far from being a gift to the gangsters, could be their undoing. The following chapters will add flesh to these arguments. But the bottom line is this: predicting the cartels’ next steps, and making sure that the money and lives laid down to stop them are not wasted, is easier when we recognize that they are run like other big multinational companies. This book is a business manual for drug lords. But it is also a blueprint for how to defeat them. Chapter 1 COCAINE’S SUPPLY CHAIN The Cockroach Effect and the 30,000 Percent Markup “My name is bin Laden.” It’s a drizzly spring day in La Paz, the headache-inducingly high capital of Bolivia, and I have been sheltering in a doorway waiting for a ride into the mountains. The car has just pulled up—a dark-gray Toyota Land Cruiser, its rear windows blacked out with dark film that is peeling at the corners—and the driver has jumped out to introduce himself. “They call me bin Laden because of this,” he explains, tweaking the end of a bushy, jet-black beard that protrudes a good six inches beyond his chin. “You’re the one who wants to see where we grow the coca, right?” I am. Here in the Andes is where the cocaine trade, a global business worth something like $90 billion a year, has its roots. Cocaine is consumed in every country on earth, but virtually every speck of it starts its life in one of three countries in South America: Bolivia, Colombia, and Peru. The drug, which can be snorted as powder or smoked in the form of crystals of “crack” cocaine, is made from the coca plant, a hardy bush that is most at home in the foothills of the Andes. I have come to Bolivia to see for myself how coca is grown, and to find out more about the economics at the very start of the cocaine business’s long, violent, and fabulously profitable supply chain. I jump into the back of the Land Cruiser and wonder whether to open the window, letting in the rain, or keep it closed, worsening the smell from a leaking gasoline canister in the trunk behind me. I decide to wind it down a little and then shuffle into the middle of the row of seats to stay dry. We set off, climbing from 10,000 feet to 13,000 feet, as we make our way over the top of the Bolivian altiplano, the high plateau of the Andes, which lies about three times higher than Kathmandu in the Himalayas. The car grumbles as bin Laden, who occasionally sings to himself but says very little, urges it on around bend after bend. We drive up through clouds, which when they part give glimpses of patches of snow on the other side of the valley. Bolivia has two main areas for growing coca: the Chapare, a humid region in the center of the country where the crop has taken off in recent decades as the cocaine trade has boomed, and the Yungas, a warm area of forest northeast of the capital, where people have been growing the leaf for centuries. We are heading to the latter, and as we slowly descend the eastern slope, the air gets warmer and the bare rock of the mountainside becomes covered, first with moss and then with a thick green blanket of ferns. I focus on the view across the valley, trying to take my mind off the Yungas Road, which is utterly terrifying. Known locally as the camino de la muerte, or “death road,” it is a narrow, gravelly track that clings to a crumbling cliff face to the right, with a ravine 1,000 feet deep on the left. As bin Laden cheerfully flings the Land Cruiser around blind corners (and, at one point, straight through a small waterfall), I edge over to the right-hand door, where I sit clutching the handle, ready to jump to safety if I feel the car start to slide into the abyss. Fortunately, it never does. After hours on the road, some of it spent clearing a small landslide by hand, we eventually arrive at our destination. It may be because my nerves are shot from the nail-biting journey, but Trinidad Pampa, a village of about 5,000 people living mostly in homes of cinder block and corrugated iron, looks like Eden. The road into town is framed by banana trees rather than sheer drops. To the north and south, the steeply sloping sides of the valley have been carved into neat terraces, each just a few feet deep. Behind them, higher mountains recede into clouds that sit against a dark-blue sky. I jump out of the car into the warm afternoon, glad to stretch my legs, and walk over to a plantation by the verge. There is no mistaking the bushes growing there. Delicate, almond-shaped leaves on fine stalks protrude from thicker stumps that have been carefully bedded into the reddish soil. This is coca, the billion-dollar leaf for which thousands of people are murdered every year. Terrace after terrace has been cut into the mountainside for the bushes, forming a long ladder of green. At a crossroads in the center of the village I meet Édgar Marmani, the head of the local coca-growers’ union, who has come straight from the fields with muddy hands and in rubber boots. A union for drug farmers? Almost anywhere else in the world such a thing would be illegal. But Bolivia has a lighter regime than other South American countries when it comes to coca. The leaf has been consumed in the Andes since long before Europeans arrived in the Americas. Some people like to brew it in tea, whereas others simply chew the leaves in handfuls (Bolivian peasants can often be seen with one bulging cheek, sucking on a wad of leaves as they go about their business). In this form the leaf has only a mild stimulant effect, nothing like cocaine. It supposedly helps to ward off cold, hunger, and altitude sickness, all of which are tedious features of life on the altiplano. Many hotels in La Paz serve coca tea to guests on arrival—in fact, even the American embassy used to, not so long ago. I had drunk a mug of it at breakfast; to me it tasted like green tea, and not much stronger. To allow this “traditional” use of the leaf, the Bolivian government each year licenses a limited amount of land to be used for coca farming. Marmani’s drink of choice, however, is not coca but Pepsi, and we sit down on plastic chairs in a little convenience store with two plastic cups and a two- liter bottle planted between us. I start by asking him how to grow a good coca crop. “First we have to make the wachus,” he says, pointing up into the hillsides and using the local word for the terraces. Each is dug two feet deep and cleared of stones. Every person in the community tends to a dozen of them, with the biggest landowners managing over an acre in total. The balmy weather and fertile soil of the Yungas mean that farmers can get up to three harvests a year out of their coca bushes—a much better deal than coffee, which yields a single annual harvest and is tricky to grow, requiring shade. The only difficult time, Marmani says, is the winter—July, August, and September—when there is no rain, and “estamos jodidos”: we’re screwed. Once plucked, the leaves are dried in the sun and then bundled up into takis, fifty-pound bags. These are loaded into a truck that bounces along to the Villa Fátima market in La Paz, one of two places in the country where coca can be legally traded. Each truck displays a license showing exactly how much coca it is carrying, and where it comes from. Coca farmers are tolerated, or even celebrated, in Bolivia, whose president, Evo Morales, is himself a former cocalero, as the growers are known. Breaking all sorts of laws, he once took bags of coca to Manhattan to chew defiantly before a meeting of the United Nations, where he called for a repeal of the international conventions that outlaw the leaf. The stunt was part of a broader stand against what he sees as Western meddling in Andean affairs. In 2008, he expelled the US ambassador for interfering in local politics, kicking out the US