Book Summary: Narconomics (Part 3)

Continue the conversation from part 1 And part 2In this final section, we delve deeper into how cartels explore new business models, innovate new products, and introduce e-commerce.

Let’s get started.

In the 1990s, Mexican cartels primarily served the Colombian cartels by moving drugs through Mexico to the United States. However, after a crackdown in Colombia and the deaths of key figures such as Pablo Escobar, Mexican cartels gained control of a larger portion of the drug trade. They went from following Colombian orders to managing the entire operation, from production to distribution. In recent decades, cartels have moved their operations to Central America because of weaker law enforcement, cheaper labor, and easier influence over police, judges, and corporations.

A notable change in cartel operations is the move from a centralized approach to a more decentralized, franchise-like model. Mexican cartels, which have adopted this model like McDonald’s, have experienced explosive growth over the past two decades.

The Los Zetas cartel, formed by deserters from the Mexican army, is an example of this structure. Under the franchise model, the Zetas central command provides franchisees with military training and, in some cases, weapons. In return, franchisees contribute a portion of their revenues (similar to royalties in a restaurant franchise) and agree to a “solidarity pact” to support the Zetas in conflicts with rival cartels. Franchisees are responsible for maximizing revenues in their territories, using local knowledge.

In the illegal drug trade, self-financed growth is especially attractive to the franchisor, in this case the Los Zetas cartel. Los Zetas enforces operational standards among franchisees, just as McDonald’s ensures consistent quality worldwide. This model also explains the cartel’s extreme brutality. The Zetas, more than any other Mexican cartel, document their atrocities, such as beheadings and hangings, and often share images to bolster their brand. Just as McDonald’s uses advertising to promote global appeal, Los Zetas sow fear through these violent campaigns.

However, the franchise model also has disadvantages. A major problem is infighting. In the illegal drug trade, courts cannot settle disputes between franchisees and the franchisor, so territorial conflicts are resolved violently. This has led to clashes between factions such as Guerreros Unidos, Rojos and the Independent Cartel of Acapulco.

Another problem is the lack of mobility. Local franchises are less agile than top-down groups like the Sinaloa cartel, which often allows Sinaloa to strike more effectively in Zetas-controlled areas. Furthermore, cartels risk making mistakes that damage the entire brand by handing control to local managers. Los Zetas has suffered from the incompetence of some affiliates, and the franchise model has made it easier for authorities to dismantle these decentralized networks compared to more complex, centrally organized operations.

As cartel structures evolved, so did their products, leading to the rise of synthetic drugs.

Synthetic drugs have become a major problem in New Zealand. The government has tried to address this by banning certain substances, but these bans target specific chemical compounds, making enforcement difficult. Manufacturers simply change their formulas to get around the bans, leading to the creation of legal highs with even less regard for safety.

Regulators are struggling to keep pace with industries driven by constant innovation. High R&D costs have made the synthetic drug market highly concentrated, with smaller companies struggling to compete, further complicating regulatory efforts against large, well-funded companies.

In response, the New Zealand government is considering creating an FDA-like entity to approve legal highs. While not ideal, this approach is intended to discourage manufacturers from continually changing their formulas to circumvent bans and produce dangerous products. The hope is that this regulatory framework will encourage manufacturers to focus on making existing products safer and less harmful.

Drugs have moved to e-commerce. In a traditional, open market where legal goods are bought and sold, prices are determined by supply and demand. In the illegal drug market, transactions are conducted in secret and there is no transparent price comparison. Buyers are limited to buying from dealers they know and trust, and dealers tend to sell only to customers who are trustworthy and discreet. This lack of transparency means that drug markets are much less efficient.

For example, a consumer might unknowingly pay $200 per gram for poor-quality cocaine from a trusted dealer, while another nearby seller offers higher quality cocaine for half the price. Dealers face a similar problem. They may have potential customers willing to pay more for their product, but lack an easy way to identify them. The risks associated with advertising illegal products, such as possible arrest, limit their ability to reach a wider audience. As a result, drug markets function as network economies where established players with established networks dominate. New entrants face high barriers, including lack of connections and potential reprisals from established players.

The advent of online drug markets disrupts this dynamic. On platforms such as Silk Road or Evolution, buyers and sellers can trade freely without being limited to their personal networks. This reduces the advantage of established dealers and lowers the entry barriers for new ones. Online markets also offer better product information with reviews. For example, thousands of reviews can provide more reliable insights into the quality of a product than informal word-of-mouth advertising. Studies have shown that the quality of medicines sold online is relatively high.

However, e-commerce in drugs has created new challenges for law enforcement. While governments seek to increase drug prices to discourage consumption, moving drug sales online typically results in lower prices, which expands the market and increases demand. E-commerce also changes the value chain of drug distribution. Traditionally, central brokers (well-connected individuals who connect wholesalers and retailers) captured significant value from price increases, such as the increase from $19,500 to $78,000 for cocaine. This centralization made it easier for law enforcement to target and dismantle the value chain. In contrast, removing one or even several online dealers has little impact on the overall supply chain.

Instead, experts argue that legalizing the most dangerous drugs seems more effective. The argument for legal control, rather than relying on prohibition, is driven by the harm these drugs cause.

For example, some European countries have implemented limited legalization, allowing doctors to prescribe controlled amounts of the drug to the most addicted individuals to help them kick the habit. This approach removes heavy users from the illicit market, reducing the cartel’s clientele and making the market less attractive. As demand decreases, the willingness to supply decreases, further reducing demand. The argument is that such legalization methods can achieve more than prohibition ever could.

Narconomics is a fascinating read that shows how shadow industries still follow fundamental economic principles. The author argues persuasively that, given the ongoing challenges to eradicating the drug trade, legalization may be the most viable solution. While it would inevitably bring its own set of negative consequences, if it can reduce both demand and human casualties, it may be the only realistic way to address this complex problem.

Thanks for reading. I’ll talk to you next time.

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