The Andean Cocaine Industry
Patrick L. Clawson and Rensselar W. Lee III
New York: St. Martin's Press, 1996
Criminal activities are not normally considered as a contributor to national income, yet the cocaine industry in the Andean countries (Peru, Bolivia, and Columbia) are important enough to be a major part of their national economies, as this fascinating book documents. Cocaine exports (cocaine is primarily an export industry) are estimated to be 53% of Peru's exports in 1992. For Bolivia, U.S.AID estimates had put cocaine exports as 90% of the exports in 1988, but "only 23%" by 1992. For an illegal activity, these are high figures.
The structure of the industry consists of large numbers of peasants growing the crop in low-lying and jungle areas, and with processing in "laboratories" located in the rural areas. The per capita incomes derived at this stage are low. The big profits are made by smuggling the drug into the U.S. and Europe. Estimates are that cocaine hydrochloride costs $1000 per kilogram, with the cost of transportation to the United States market being $3,000, and miscellaneous other costs (handling, bribes in major markets) $500. With a wholesale price estimated at $13,000 per kilogram in the U.S. market, the profit potential is very high. Getting the proceeds back home in legal form is estimated as costing 15% of the total, leaving the gross profit margins from shipping to the U.S. at $6,500 per kilogram, about half of the wholesale proceeds. Interestingly, European prices appear to be much higher at $35,000 per kilogram.
With the retail price of cocaine being $120-$151 per gram, the retail price is $121,000-$151,000 per kilogram, about 10 fold higher than the port-of-entry prices. Thus most of the cocaine profits are made in the United States, creating a strong incentive for the Colombian exporters to move operations downstream. In many U.S. cities Colombians have established distribution cells that sell the cocaine in lots of 30 to 100 kilograms at prices of $35,000 to $45,000. These highly profitable operations are run by inmigrants from Columbia with strong ties back home (having relatives whose location is known to the exporter is one way of assuring loyalty). Since it is not known how many of these will eventually return home, it is unclear in national income accounting terms how much of this income should be credited to Columbia.
Estimates by Colombian economists of their country's cocaine income differ widely from as low as $170 million to $3.1 billion. One table (p. 24) puts exports by core Colombian organizations (i.e. excluding the small organizations not affiliated with the major Cali or Medellincentered groups) at 250 tons to the U.S., and 80 tons to Europe, with total earnings of $3.71 billion. Due to higher prices in Europe, most of the earnings were actually from Europe. Estimating the major exporters as accounting for 75% of the exports, the total value of exports would be $8 billion. This substantial sum is 90% of the country's merchandise exports (recorded) in 1994, and 380% of the coffee exports (the leading agricultural export). The value-added proportion of this can be estimated at four to five billion dollars, which is equivalent to 8 to 9% percent of Colombia's 1994 GDP.
While not discussed in this section, it is likely that much of this income is held abroad (Swiss bank accounts etc.) due to problems in money laundering and in spending the vast per capita incomes earned by the estimated 500 individuals who stand at the apex of the industry.
The industry emerged in the 1970's with early traffickers smuggling small amounts in personal luggage. This system was organizationally simple. This small-scale system was replaced by fleets of small airplanes operating from rural airstrips that could carry 400 to 1000 kilograms, and later by large-scale smuggling in cargo containers, ships, etc. These systems required large organizations and sophisticated management One organizational innovation was insurance. …