Narconomics

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 Drug Enforcement Administration (DEA) at the same time. Despite international bans on the leaf, the Bolivian state supports various national industries that churn out all manner of coca-related products, from sweets, cookies, and drinks to coca-infused toothpaste. The industry is regulated by the Vice-Ministry of Coca, which imposes the limits on how much of the leaf can be grown. The idea is to license enough cultivation to feed the market for tea, toothpaste, and all the rest of it, without growing enough to leak into the cocaine trade. The system is far from water-tight, though: the United Nations estimates that in 2014, Bolivia had about 20,400 hectares, or 50,400 acres, of land devoted to coca cultivation, enough to produce about 33,000 tons of dried leaf. In the same year, the country’s two licensed markets handled only 19,798 tons—less than two-thirds the estimated amount of coca leaf being produced.¹ It is a safe bet that the rest found its way into the illegal market, to be turned into cocaine.

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 and expertise 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. Scarcity is what makes gold more expensive than silver, and oil more expensive than water: if lots of people want something, and there isn’t enough to go around, they have to pay more to get their hands on it. 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. Just as a natural blight on cocoa crops has recently raised the international price of chocolate, causing chocoholics to cut down on their habits, destroying coca plants ought to raise the price of cocaine, persuading drug users to consume less.

Colombia and Peru, which are currently on friendlier terms with the United States than Bolivia is, have taken an especially tough line. The armies of both countries have been drafted as emergency gardening services, tasked with eliminating every trace of the coca bush. The mountainous geography has made this a fiendishly tricky task. Spotters fly up and down in light aircraft, looking out for the telltale terraces that show that coca production is under way. Farmers have gotten better at hiding their crops, but the authorities are now better at seeking them out. Nowadays the spotters’ planes are helped by satellites, which take detailed images of the countryside for experts to pore over to try to tell the difference between legal plantations of bananas or coffee and illicit ones of coca. Armed with these maps, soldiers are sent to destroy the crops by hand. In Colombia, some of the eradication has been done by spraying the farmland with weed killer from light aircraft. This destroys the coca—along with many other, perfectly legitimate crops, farmers complain. In 2015, Colombia indefinitely suspended its aerial spraying program, following a warning from an agency of the World Health Organization that the weed killer may cause cancer.

The eradication campaign has been devastatingly successful, at least on the face of it. Over the past couple of decades, Bolivia, Colombia, and Peru have destroyed thousands of square miles of illegal coca plantations, eradicating more and more crops each year. Whereas in 1994 the three countries’ governments destroyed about 6,000 hectares (15,000 acres) of coca,² in 2014 they laid waste to more than 120,000 hectares (300,000 acres), mostly by hand. It is an extraordinary feat: to picture the scale of the task, imagine every year weeding a garden fourteen times the size of Manhattan (while occasionally being shot at). By the rough calculations of the United Nations, nearly half of all the coca bushes planted in the Andes are now eradicated.

The annual loss of nearly 50 percent of production would be a crippling blow to most industries. But somehow, the cocaine market keeps bouncing back. As acre after acre of coca has been poisoned, burned, and sprayed, farmers have gone out and planted more bushes to replace the ones that have been destroyed. The result is that total output has not changed much. In 2000, following the first decade of intensive eradication measures, a total of about 220,000 hectares (545,000 acres) of land was successfully used to grow coca in South America—almost exactly the same as the amount in 1990. From time to time, individual countries have managed temporarily to drive out the coca business: Peru, for instance, cut down on its coca farming in a big way in the 1990s. But the cartels have quickly found other sources of supply. Peru’s crackdown triggered a coca-growing boom in Colombia. When Colombia redoubled its efforts and drove the farmers out, the coca terraces reappeared in Peru. Western observers call this the “balloon effect”: if you squeeze in one place, it bulges up somewhere else. Latin Americans have an earthier name for the same phenomenon—the “cockroach effect.” Just like cockroaches, you can chase drug traffickers out of one room, but they soon take up residence somewhere else in the house.

That doesn’t worry advocates of eradication, who argue that the point is not necessarily to eliminate coca farming completely but to make it more costly. For farmers to maintain high levels of output in the face of all the crop spraying, they have been forced to put in much more time in the fields. The need to create new plantations to make up for the ones destroyed by the armies imposes a significant cost on business. In the past, virtually all of the coca grown could be turned into cocaine. Nowadays nearly half goes to waste, yanked up by the roots or sprayed with weed killer by the authorities.

But even though they are having to grow twice as much coca as before to harvest the same amount of leaf, the cartels haven’t had to raise their prices. In the United States, a gram of pure cocaine today costs about $180. (A typical gram bought on the street costs about half that, because it is only about 50 percent pure.)³ That is roughly what it has cost for the past two decades, in spite of the thousands of swipes of machetes and gallons of weed killer that have been deployed. One explanation for a stable price at a time of a shock to supply would be a dip in demand. (In other words, there is less of the product to go around, but fewer people want to buy it, so the price stays the same.) But that doesn’t seem to be the case. Since the 1990s, the number of people regularly using cocaine in the United States has held pretty steady at between about 1.5 million and 2 million people. Recently there has been a significant dip in US consumption, but most of that has been made up for by much higher demand in Europe. The United Nations says that worldwide demand is stable. This makes for a puzzle: constant demand and restricted supply would normally lead to an increase in price, yet cocaine remains as cheap as ever. How have the cartels managed to defy the basic laws of economics?

To understand how they have pulled off this trick, consider Walmart, which has sometimes seemed able to defy the laws of supply and demand in a similar way to the drug cartels. Walmart, the world’s largest retailer, has worldwide revenues of nearly half a trillion dollars per year. Its success is built on prices that seem not to have risen much since Bud and Sam Walton opened their first store in 1962. Last Thanksgiving, shoppers could buy a turkey for 40 cents per pound and a set of nine (admittedly hideous) Thanksgiving-themed dinner plates to go with it for $1.59.

These extraordinarily low prices make Walmart wildly popular with its customers. But for the farmers and manufacturers who supply the goods, the low prices are sometimes crippling. Their complaint is that Walmart and other big chains have such a big share of the groceries market that they are able more or less to dictate terms to their suppliers. Everyone is familiar with the concept of a monopoly, in which one company is the dominant seller of a particular product and can therefore charge whatever price it likes. Critics of retailers such as Walmart accuse them of being “monopsonies”—that is, dominant buyers of certain products. (Just as the word monopoly is derived from the Greek for “single seller,” monopsony means “single buyer.”) In the same way that a monopolist can dictate prices to its consumers, who have no one else to buy from, a monopsonist can dictate prices to its suppliers, who have no one else to sell to. If you want to reach a really big audience of consumers, the theory goes, you have to be in Walmart. The store knows this and is therefore able to squeeze suppliers hard. A survey by Forbes magazine found that suppliers that sold a high proportion of their goods through Walmart on average had lower profit margins than those that did less business with the store. The difference was most pronounced in the apparel market: clothing manufacturers that sold less than 10 percent of their products through Walmart were able to maintain an average margin of 49 percent, whereas those that sold more than 20 percent through the store averaged only 29 percent.⁴ Driving down prices and forcing suppliers to be more efficient is great for consumers, of course, and indeed it has benefits for the wider economy—a McKinsey study made the extraordinary finding that Walmart alone was responsible for 12 percent of the US economy’s productivity gains in the second half of the 1990s.⁵ But for suppliers, it makes life difficult. If a harvest fails and the costs of production go up, you can bet that it is the farmers, not the supermarket or its customers, that will be made to feel the squeeze.

Walmart hasn’t yet opened in Colombia. But the drug traffickers in the region have applied Walmart’s genius when it comes to leveraging the supply chain. To start with, the cartels are more like big-box retailers than one might imagine, playing the role of buyers rather than growers. It is tempting to imagine that the whole cocaine business is in the hands of the cartel from start to finish, with gun-toting mobsters lovingly tending their coca bushes with Baby Bio in between massacring their rivals. But that isn’t usually how it works. The agricultural side of the cocaine industry is mostly handled by ordinary farmers like the ones in Trinidad Pampa, who would just as happily grow tomatoes or bananas if they paid as well as coca. Cartels play a role more like that of large supermarkets, buying produce from farmers, processing and packaging it, and then selling it on to consumers.

Are South American drug lords as single-minded as Walmart executives when it comes to managing their suppliers? A pair of economists, Jorge Gallego of New York University and Daniel Rico of the University of Maryland, decided to find out. Focusing on Colombia, they gathered information from the government about which parts of the country had undergone coca eradication, of both the manual variety and the aerial-spraying kind (detailed records of the latter are stored in planes’ in-flight recorders). They cross-referenced these data with information kept by the United Nations on the price of coca leaf in different regions of the country. By combining the two data sets they were able to see the impact of coca eradication on the price that farmers charged the cartels for their coca.⁶

If the supply-reduction strategy of eradicating coca plantations were working, one would expect areas that had undergone more eradication to see a greater increase in price than those that had been spared the weed killer. Less coca should mean that, other things being equal, the local cartels would have to pay the farmers more for it. But Gallego and Rico found no such pattern. Instead, they discovered, eradication had virtually no impact on the price of coca leaf, or the various illegal refined-coca products that farmers also sometimes sell to cartels. Surprised, they ran the study again, this time allowing for a one-year lag between eradication and sale, in case it took time for the scarcity to feed through to higher prices. But again, they found that destroying crops had virtually no impact on the wholesale prices that farmers charge to cartels.

The reason, they hypothesize, is that the armed groups that control the cocaine trade in Colombia act as monopsonies. Under normal market conditions, coca farmers would be able to shop around and sell their leaves to the highest bidder. That would mean that in times of scarcity, coca buyers raised their bids, and the price of the leaf went up. But Colombia’s armed conflict is such that in any given region, there is usually only one group of traffickers that holds sway. That group is the sole local buyer of coca leaf, so it dictates the price, just as Walmart is sometimes able to set the price of the produce it buys. This means that if the cost of producing the leaf goes up—owing to eradication, disease, or anything else—it will be the farmers who bear the cost, not the cartel. Just as big retailers protect themselves and their customers from price rises by forcing suppliers to take the hit, cartels keep their own costs down at the expense of coca farmers. “The shock is assumed entirely by growers, as major buyers have the ability . . . to maintain fixed prices,” write Gallego and Rico.

In other words, it’s not that the eradication strategy is having no effect. Rather, the problem is that its impact is felt by the wrong people. The cartels’ Walmart-like grip on their supply chains means that any worsening in coca-growing conditions simply makes poor farmers even poorer, without doing much to cut the cartels’ profits or raise the price of cocaine for consumers. “We’re against all of this,” says a farmer in Trinidad Pampa, who asks not to be named, referring to the official eradication programs that uproot any unlicensed plants. “We’re always clashing with the government over it. It’s infuriating for us.” Even if they want nothing to do with the gangsters who control the cocaine business, growers resent being limited in what they can produce, he says. Nearby, a wall next to an overgrown field has a notice daubed on it in white paint, reading: “This plot of land has been SEIZED for eradication.” Any unauthorized plantations are summarily destroyed, leaving the farmers worse off but failing to affect the bottom line of their clients, the cartels. Production remains high, retail prices stay low, and the cocaine business continues. If only it were legal, Bud and Sam Walton might have found much to admire in the drug cartels’ Andean supply chain.

•    •    •

Near to where Édgar Marmani and I are drinking our giant bottle of Pepsi—which I have suddenly realized I am expected to finish and am gulping down—I can see tiny hands reaching up to grab leaves from the tops of the coca plants. In Trinidad Pampa, children work in the fields from the age of six, going to school until lunchtime and then joining their parents to help with the planting and harvesting in the afternoon. The village has no nursery, so the youngest children accompany their parents to work, tottering around on the terraces or snoozing in slings carried by their mothers. Conditions elsewhere in the Andes are no richer: the United Nations estimates that in Colombia, the average coca farmer earns little more than $2 per day. The destitution of coca growers is starkly at odds with the image of wealthy cocaine barons, posing in Ferraris and managing private zoos.

How might the cartels be forced to absorb some of these costs themselves? The root of their monopsony power is that the farmers have only one customer. So the obvious solution would be to create more competition in the coca-buying market, giving the farmers more potential buyers and forcing the cartels to pay a market rate for the product. There is just one snag: because coca is illegal in most places, governments cannot do much to increase the number of buyers in the market. So they have tried to force the price up in another way: by providing farmers with alternative ways to make a living, thereby making them less dependent on selling coca to the cartels.

Rather than using the stick of eradication to make coca farming less appealing, many policy makers suggest providing a carrot in the form of subsidies for other crops. Some European countries, whose diplomats are privately critical of the eradication-focused approach favored by the United States, have established projects to encourage other agricultural industries. The idea is that if it can be made more profitable to grow some other, legal crop than it is to grow coca, then farmers will change their focus. There is interest among cocaleros. Even Édgar Marmani, the local union leader, says he would consider switching to other industries if the start-up costs were lower. “Poultry, tomatoes, pork—they’re all more profitable than coca, but they need investment,” he complains. The European Union has put forward some cash to meet that need, funding projects in Bolivia that encourage the cultivation of bananas, coffee, and citrus fruits, among other things. Similar tactics have been tried in other parts of the world that have a problem with narco-agriculture: in Afghanistan, which grows most of the world’s opium, farmers have been nudged toward growing wheat or cotton as an alternative to opium poppies.

There is some evidence that this sort of strategy can work. A recent study by the Center for Global Development (CGD), a Washington, DC–based research organization, tried to get to the bottom of how Mexican farmers decided whether to grow legal crops or illicit ones.⁷ The authors focused on marijuana and opium, the country’s main drug crops, and compared them with corn, the main legal one. It is hard to overstate the importance of corn to Mexicans, whose consumption of the grain is almost like a drug addiction. Corn is the main ingredient in the tortilla, the national staple, of which the average Mexican consumes two hundred pounds per year. A popular saying in the country goes, “Sin maíz, no hay país” (“Without corn, there is no country”). The tortilla-makers’ union has as its logo a picture of a scowling Centéotl, the vengeful Aztec god of corn, to whom thousands of bloody human sacrifices were made.

For all its patriotic and practical importance, corn has been a tricky crop to make a living from in recent decades, with enormous fluctuations in price playing havoc with farmers’ finances. Mexican growers saw corn’s price tumble following the introduction of the North American Free Trade Agreement (NAFTA) in 1994, which opened the market up to competition from the United States. At other times its price spiked, following shortages caused by droughts north of the border. The authors of the CGD study plotted this price information alongside data on the amount of land in Mexico dedicated to the growing of marijuana and opium. How easily were corn farmers tempted into growing narco-crops, in times of low corn prices?