40th Session Issues
Economic Impact of International Drug Trafficking
INTRODUCTION
Drug trafficking is an industry in a very real sense. Forbes Magazine calls it "...a huge, multinational commodity business with a fast-moving top management, a widespread distribution network, and price-insensitive customers."
That point of view is supported further when one considers the many facets of the cartels that control international drug trafficking. As with any commodity, they must raise capital, see that the fields are tended and harvested, and that the product is processed and packaged. Distribution deadlines must be met. Executives of the cartels must plan and watch every step of the process because supply must meet demand and demand grows as quickly as profits. Those profits then constitute a subsidiary industry of their own. It is easy to see that substantial percentages of the global labor pool are involved in this five hundred billion dollar per year industry.
To balance the profits, employment and growth associated with drug trafficking, however, are the taxes, opportunities, and production lost to this illegal business. Drug cartels spend most of their profits on business related expenditures such as processing equipment, boats, and planes, and on overseas investments and recreation. The effect is that only 10% to 20% of the money earned in trafficking is spent in the producer nation. This minimal reinvestment in the country, coupled with the corruption, extortion, and terrorism that are common occurrences in drug trafficking, can drain more from national coffers than is saved.
BACKGROUND
The two major divisions of drug trafficking, incorporating most of the transactions involved in the industry, are cocaine and heroin. Cocaine, a derivative of the coca plant, is most often grown and refined in South America. The lines of distribution extend out from there through Central America and Mexico to the United States, the number one demand-side country in the world, and to the rest of the world by other routes. Heroin, a drug refined from certain poppies, is usually found growing half a world away from cocaine in Asia. Distribution of this drug follows various routes including many Asian and Middle Eastern countries. In both cases, the production and distribution is controlled by sophisticated organizations.
The Medellin Cartel
Most of the world's supply of cocaine is produced in the mountainous regions of Colombia, Peru, and Bolivia. This South American business is controlled by the Medellin Cartel, named for the city of Medellin, Colombia which is its headquarters.
The godfather of the Medellin Cartel is Pablo Escobar. This 39 year old former Colombian congressman runs the cartel like a Fortune 500 company. Confiscated organizational charts have shown the cartel to be as multifacted as any other multinational corporation with some unique differences. Among these differences are some of the responsibilities of two "divisions" of the organization. The Financial Division is charged with collecting and investing cartel revenues and money laundering. The Enforcement Division provides guards and performs the bribery and executions that are everyday necessities of the business.
The cartel has a decentralized management responsible for the various functions involved. It has created, in economic terms, a vertically integrated organization. Medellin finances coca growers in Peru and Bolivia. These growers or other contractors process the coca leaves into cocaine paste. Cartel planes then take the paste to laboratories in the Colombian jungle for refinement into cocaine powder. After the powder is packaged into one-kilo bags for shipment, it is sent by various means to the cartel's own wholesale distribution outlets in the United States and elsewhere.
General Khun Sa
The main production center of heroin is a 60,000 square mile area at the Burmese, Laotian, and Thailand border known as the Golden Triangle. So called for its rich land and equally rich crops of opium poppies, this area controls as much as 44% of the world's heroin market.
Virtually all of this extensive production is controlled by General Khun Sa, a 56 year old self-proclaimed general who uses his proceeds from heroin production to finance the Shan United Army. The General's army provides employment and income to many people who would otherwise go without in Burmese society.
Originally named Chang Chi-Fu, General Khun Sa changed his name when he took his army into the Burmese jungle that is his headquarters. From there, the opium poppies are taken to laboratories on the Laotian/Burmese border and into Thai jungles for refinement into heroin. The drugs are distributed through Hong Kong, China, and India as well as by other routes.
MONEY LAUNDERING
With gross annual sales of $500,000,000,000 in an illegal business, drug traffickers must find ways to "legitimize" their profits. National and international law enforcement agencies have learned that "follow the money" is the best means to indict leaders of drug cartels. The process of money laundering has become a subsidiary industry of drug trafficking. Money laundering refers to the practice of disguising the source of funds in a way that gives the illusion of legitimacy.
The most often used means of money laundering is through a front company. This process takes money from any source on a clandestine route overseas and back again to give the illusion that the funds came originally from a fictional corporation. After drug sale receipts are collected in small bills, the cash makes its way to a front company (ususally a high-volume, cash-oriented business such as a restaurant, bar, or racetrack) which deposits the money in its regular accounts after balancing the business' books accordingly. When the deposit is made, the front company requests that at least the amount to be laundered be transferred by its bank to accounts in a "bank secret" country such as Panama, the Bahamas, or Luxembourg.
According to Scotland Yard, other money laundering centers include the British Virgin Islands, Hong Kong, and the Isle of Man. This money is then wired to another "bank secret" country in the name of an international subsidiary of the front company which will use the funds for grower subsidies, transport costs, and other drug traffic related tasks. To keep from paying taxes on the funds transferred, the international subsidiary will loan the funds back to the parent company. Due to the illicit nature of the activity, money laundering becomes a drain on national and international economies. No taxes are paid on the funds, and only a few countries get any revenue from the transfers. Most of the transactions are made in cash and, therefore, may not be traceable.
GOVERNMENT VERSUS THE PEOPLE
Almost every nation involved in the drug trade has made some commitment to combat trafficking. In those same countries, however, the citizens fight to protect the industry that has become their means of livelihood. This is much more than just a good-guys versus bad-guys scenario. There are very practical reasons for the decisions of both sides.
It is estimated that as much as 15% of the Bolivian workforce is involved in the growing, processing, and transportation of coca or its derivatives. This estimate can be considered representative of most drug producing nations. The government has tried several times to eradicate coca fields in favor of some other commodity. Coffee, rice and other crops have all proved either unproductive or unprofitable compared to coca. This is not surprising considering the income estimate comparisons and the longevity of coca production in the region (coca is known to have grown here for thousands of years). Coca, it is said, can bring in over $7,000 (U.S.) per hectare annually while the best estimate for any other crop is $450 (U.S.) per hectare per year.
It is estimated that in 1988, 285,610 acres of coca were cultivated in Peru, and 123,500 acres in Bolivia, in 1988. The result was production of approximately 227,000 metric tons of coca leaf, enough to manufacture more than 450 metric tons of cocaine hydrochloride.
Because they do not own the land growing coca or opium poppies, the citizens do not directly collect the income from them. The indirect benefits, however, have proved to be so important that they fight with their legitimate governments to protect the drug cartels.
Roberto Suarez of Bolivia has offered to pay off the national debt of that country if he will be left alone to conduct his business. This is a $3,500,000,000 offer, but it is only one reason Suarez has gained the nickname Robin Hood. He does so much for the people of his town and region that they have helped him elude officials of the Bolivian military and the United States Drug Enforcement Agency on several occasions.
In Colombia, Pablo Escobar has come to be called Don Pablo for his many investments in the livelihood of the people of the city of Medellin. In 1983, a flood put most of the poor citizens out of their homes. Escobar came into Medellin and built houses on the hills surrounding the city. Those people now have homes with indoor plumbing, electricity, and gardens. They pay no rent, just utilities, and cannot say enough about the kindness of Don Pablo. When government officials raided Escobar's rancho, he escaped and was not caught, in large part due to the help he received from the people of Medellin.
UNITED NATIONS ACTION
The international community has focused its attention on drug traffic control since the subject was first taken up in 1909. Until 1946, the League of Nations was the only major international body to deal with drug trafficking. The most important work accomplished by the League in this area was the 1931 Convention for Limiting the Manufacture and Regulating the Distribution of Narcotic Drugs, and the 1936 Convention for the Suppression of the Illicit Traffic in Dangerous Drugs. Since that time, control of the industry has remained the focus of international cooperation.
The United Nations accepted responsibility for control of international drug trafficking from the League of Nations in the 1946 Protocol. Under the Protocol, a functional commission of the Economic and Social Council was established: the Commission on Narcotic Drugs. The Division of Narcotic Drugs, also created by the Protocol, was to act as the secretariat for the Commission and as the central repository for United Nations' professional and technical expertise in drug control.
The 1948 Protocol, entered into effect 1 December 1949, added new synthetic drugs under the control of the 1931 Convention.
In 1953, the Protocol for Limiting and Regulating the Cultivation of the Poppy Plant, the Production of, International and Wholesale Trade in and Use of Opium authorized only seven countries to produce and maintain opium and then only for medical and scientific purposes. This Protocol took force in 1963.
The 1961 Single Convention on Narcotic Drugs, adopted 31 March 1961, brought together the definitions, recommendations, and bodies associated in earlier League and U.N. work. The International Narcotics Control Board (INCP) was created by bringing together two bodies established in earlier conventions. The Single Convention also continued the earlier work to limit drug production only to medical and scientific need.
In 1971, the Convention on Psychotropic Substances extended the controls of the 1961 Single Convention to a broader range of drugs. These included amphetamines, barbituates, and other behavior or mood-altering drugs. In addition, the 1971 Convention added regulatory measures such as inspection of international stocks of drugs, and provisions for early detection and treatment of addiction.
By 1981, the international drug problem had escalated to such a point that the General Assembly found it necessary to form an International Drug Abuse Control Strategy and a five year program of action. The Strategy continued the philosophy of drug production tied to medical and scientific need. The program ran from 1982 to 1986 and was to establish specific activities for the United Nations and its Member Nations under the coordination of the Commission on Narcotic Drugs.
The 1984 Declaration on the Control of Drug Trafficking and Drug Abuse called drug trafficking and abuse "an international criminal activity" that constituted "a grave threat to the security and development of many countries and people..." In Assembly resolution 39/141, the Commission on Narcotic Drugs was instructed to prepare a Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. The Commission is continuing work on this Convention.
The most recent effort by the United Nations was the 1987 Conference on Drug Abuse and Illicit Trafficking. This ministerial level conference drafted a 114 page compendium of recommendations for action against drug trafficking. This 35 point compendium is the Comprehensive Multidisciplinary Outline of Future Activities in Drug Abuse Control. It is meant to be a working guide to member nations in effort against the drug trade.
The 35 points of the Multidisciplinary Outline are arranged into four areas of concern:
- 1) Prevention and Reduction of Demand
- 2) Control of Supply
- 3) Suppression of Illicit Trafficking
- 4) Treatment and Rehabilitation
The Multidisciplinary Outline of the 1987 Conference on Illicit Drug Trafficking has emerged as the most important set of guidelines for United Nations' actions. Delegates should become familiar with the 35 points of the outline.
SUGGESTIONS FOR FURTHER RESEARCH
The drug traffickers and countries mentioned here are by no means the only participants in the industry. They should be thought of as examples. Other countries that came up in our research were Afghanistan, Iran, Pakistan, Argentina, Panama, Ecuador, and most of the Caribbean nations.
In studying and preparing resolutions, it would seem important to work out income losses of the citizens of producer nations instead of focusing on direct humanitarian issues. If the drug industry is providing the citizens an income based on collecting up to $7000 per hectare, it would not be economically sound to base their livelihood on $140 per hectare.
Terrorism is an everyday fact of the drug trade. In Colombia, officials have become terrified by the assassinations and threats of the traffickers to a point where extradition of offenders is almost impossible. This sort of destabilization is compounded by such groups as the Sendero Luminoso in Peru who are using the atmosphere in that country in attempts to begin a revolutionary overthrow of the political/economic system. In studying this issue, delegates should consider the effects this destabilized atmosphere might have on a nation's economy. Will multinational corporations be enticed to invest in these nations? What could happen to the labor pool in the country?
SOURCES
- Gillgannon, Michael J., "Drugs, Debt and Dependency," America, October 29, 1988
- Kraar, Louis, "The Drug Trade," Fortune Magazine, June 20, 1988.
- Robbins, Carla A. "Money Laundering under the Palms," Insight, November 17, 1986.
- Rosenberg, Tina, "Murder City You Can Kill Someone for $10 in Medellin, Colombia," Atlantic, November, 1988.
- Satchell, Michael, "S.E. Asia's Golden Triangle Reign of an Opium Warlord," U.S. News and World Report, May 4, 1987.
- Scott, David Clark, "Southeast Asian Heroin Surging Sales for Golden Triangle," Christian Science Monitor, 1/6/89
- "The Money Laundry Business," The Press Enterprise, Sunday, February 24, 1985.
- UN Chronicle, Vol XXIV, No.4 1987