Source: Economist
Date: 25 November 2004

The price of powder

picture of cocaine

The cheapness of illicit drugs isn't just a sign of police failure. It is also evidence that the drugs business has got more competitive.

FOLLOWING a quiet spell, Britain's war on drugs seems to be heating up. This week, the Home Office unveiled legislation that will create a Serious Organised Crime Agency (SOCA), which, it is promised, will conduct “a specialist and relentless attack” on racketeers. Suspected traffickers will be compelled to produce documents and drug kingpins encouraged to inform on one another. Other legislation will force more addicts into treatment.

Hopes are high, which is surprising given the failure of previous efforts. Street prices of Class A drugs have fallen steadily in recent years (see chart) and the number of users has risen. Drug traffickers are running slicker businesses. “We dealt with a team a while ago that had a director of operations and a director of finance, and they actually called them that,” says Bill Hughes, the appointed director-general of SOCA. More importantly, they are running a different kind of business.

The drugs trade used to be dominated by stable, vertically integrated outfits resembling mini-Mafia families. That was a response to the risks of doing business. Drug buyers may be undercover police officers; promises to pay may be broken (these are criminals, after all); trusted contacts may be jailed and rivals get shopped. Stable partnerships reduced these risks, as did recruitment from a shallow ethnic pool. But market forces have gradually pushed these cumbersome organisations out of business.

Competition in the cocaine trade has cut margins to minuscule levels, considering the risks involved. Powder cocaine from central America is sold in multiple-kilogram loads for £15,000-30,000 ($28,000-56,000). But the price for a single kilogram, £18,000-32,000, is barely higher, and the retail price not much more than that. Last year, the National Criminal Intelligence Service estimated that cocaine was selling for £56 per gram (equivalent to £56,000 per kilo) but the current London price is said to be around £40 per gram.

The falling price of powder is especially striking considering the supply problems of recent years. The United Nations Office of Drug Control (UNODC) estimates that global coca leaf production has fallen every year since 1999, from 353,000 to 236,000 tonnes. And, unlike heroin, cocaine is perishable, which means it cannot be stockpiled against lean times.

Margins are fatter in the heroin trade. Importers, many of them London-based Turks, sell multi-kilo loads to white British middlemen at £16,000-22,000 per kilo. The middlemen, who rarely deal in any other product, sell on to retailers at prices up to £33,000 for a single kilo, enhancing profits further by adulterating the drug. Heroin is then cut again before being sold on the street for the equivalent of £60,000 per kilo.

The reason why the cocaine price has fallen so much is that the market is opening up. Dave King, a drugs specialist at the National Crime Squad, says that the London-based Colombian importers who traditionally controlled the import and wholesale trades now contract freely with British entrepreneurs. A recent trend is for Britons living in Spain to deal directly with Central American suppliers before selling on to Colombians in London or directly to an army of middlemen.

New importation routes open frequently, sometimes as a result of police activity. Operation Airbridge, a co-operative Jamaican and British venture, proved so successful that traders have explored other routes through the Caribbean. Improvements in Spanish policing have encouraged traffickers to ship cocaine through Africa, where it can be bundled with other drugs likely to interest the same consumer. One of the biggest domestic seizures this year came from a warehouse in west London. Among a shipment of pineapples and vegetables from Ghana were ten kilos each of cocaine and marijuana.

By contrast, the heroin trade is more closed and less innovative. Mr King believes that is partly because demand for heroin is more inflexible than demand for other drugs. Reliability of supply is more important than price, which means there is less shopping around at any stage of the supply chain. Another barrier to greater competition is linguistic. To move cocaine from producer to market, English and Spanish are essential; to move Ecstasy, it helps to speak Dutch. But as many as 120 languages, from Italian to Pashto, are spoken by those involved in the heroin trade. That makes it tricky to seek out new sources or new routes.

Heroin traffickers do not constitute a cartel, though. They behave more like members of an oligopoly, with a mixture of competition and co-operation at the highest levels of the trade. Paul Evans, chief investigation officer at Customs and Excise, says that this can extend to emergency relief: “if your shipment hasn't arrived, someone else will loan you stuff to tide you over.”

Such cosy arrangements are likely to break down as new players enter. Turkish importers have already lost business to Kurds and Albanians—both groups now scattered across Europe, thanks to instability at home and higher immigration into rich countries. British-based Colombians squeezed out of the cocaine trade are dabbling in the more profitable opiates. The dissolving of ethnic and family bonds is likely to mean still freer trade.

Competition in the drug market is good for the consumer, which means it is bad for anyone trying to reduce or eliminate drug taking. Against Mafia-style cartels, the police might have succeeded. They are less likely to prevail against the invisible hand of the market.

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