Have Drugs made the World Richer?

Global trade creates wealth. A concept introduced by Adam Smith in the 18th Century, this has since become economic orthodoxy. But does all trade create wealth equally?

A UN paper published in 1998 entitled “Economic and Social Consequences of Drug Abuse and Illicit Trafficking” sought to put a figure on the probable global worth of the trade in narcotics, estimating that “a turnover of around $400 billion per annum is considered realistic”. According to data collected by the World Bank, this equates to about 1.3% of world GDP at the time. To put this into perspective, the estimated worth of the international automotive industry was 9.4% of world GDP.

Described by the OICA as “the greatest engine for economic growth in the world” the automotive industry has a global turnover of almost $2.2 trillion labelling it “essential to the working of the global economy and to the well-being of its citizens”. Why, if the contribution to the economy from drug trafficking is just over 1/9th of the contribution from the automotive industry, is it given none of the same accolades? Does it not also bring economic growth to trading nations? Colombia, an emerging market economy, has a comparative advantage in the production of cocaine. Shouldn’t comparative advantages be exploited? Growing coca brings employment and wealth to independent farmers in the same way growing cacao or coffee does- but in much greater proportions. In much of Latin America where work is scant, violence rampant, and there is an inherent distrust in institutions, Narcos like El Chapo can ensure work and protection. In 2008, the drug trade was Mexico’s fifth-largest employer. It’s unsurprising that drug barons like El Chapo or Pablo Escobar were often seen as heroes by the towns they came from: known as ‘Robin Hood Narcos’, they famously stole from the rich and gave to the poor.

Drug smugglers operate on a strict cash-only basis. One of the biggest obstacles cartels must overcome is concealment of these ill-gotten gains. HSBC, Bank of America, Citigroup, JP Morgan, Chase&Co, and Wachovia have been alleged to have failed to comply with American anti-money laundering laws. In 2012, HSBC Holdings paid nearly $2bn in fines after it was discovered that the financial institution had laundered almost $7bn for drug traffickers, terrorists, and other organized crime groups. In the aftermath of the financial crash of 2008, the profits from these criminal organisations were the only liquid assets available to allow some banks to avoid insolvency. In December 2009, Antonio Maria Costa (then the head of the UNODC) made the astounding declaration that a large part of the estimated annual revenue from drug trafficking was absorbed into the legal economic system, allowing banks to lower their defences and finance interbank loans. As a result, the banks rinsed the blood from billions of dollars of drug money, helping to keep the economy afloat.

Clearly, the argument given above takes into account none of the immeasurable social, environmental, and political destruction the drug trade is responsible for. Since Nixon, it has been estimated that over $1 trillion has been spent on the War on Drugs. The cost associated with domestic drug abuse is also giant: a 1992 study estimated the total cost of drug abuse in Australia amounted to 4.8 percent of GDP. Some 32% of this were estimated to be due to reduced productivity. Even once the drug money reaches the supplying country, the distribution of income is concentrated among a small number of people, which only serves to increase the disparities of income across developing nations. The social influence and fortune of cartels also continually undermine governments, forcing them to remain unpopular and creating room for corruption at every level.

The amount of violence that countries afflicted by the drug war have become accustomed to is unimaginable. By 2013, estimates set the death toll above 120,000 killings in Mexico alone, which does not even include 27,000 missing. Drug trafficking leads to violence due to the immense returns and inelastic demand from consumers: the more drug prohibition is enforced, the lower the market supply, and the greater the profit for the largest cartels who can systematically skirt the law. The violence is also of the bloodiest kind. Robert Saviano, author of ZeroZeroZero, describes the way cruelty has become a performance; he writes “The body of one’s enemy is spared no humiliation as it serves as a warning for the living. Sometimes the genitals of the victims are cut off and put in their mouths. One time the face of a man was even removed and sewn onto a soccer ball.”

Prohibitionist policies like the War on Drugs unfairly stagnates economic growth in developing nations. Though it may be in these producing countries’ best interests to legalise the trade, they need international cooperation to do so. Defying the laws of consuming economies would put them at risk of losing other areas of essential trade and relief. Even in the consuming nations, if the goal is completely eradicating substance abuse, prohibitionist policies are hopelessly ineffective. More people are getting high than ever before and this supply-orientated approach to combat drug use has come at great cost to all countries involved. The lucrative, sordid, and bloody trade in narcotics has not made the world richer and for this, the blame is shared in equal measure between the traffickers and the Western policy-makers who continue to wage this war.