For Mexican Cartels, Cash is King

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Drug trafficking is the single most lucrative activity for criminal groups in Mexico, but while the supply chain and production methods associated with it are fairly well known, the micro-economic dynamics of the industry are often overlooked.

As InSight has previously described, it is common for Mexican cartels, upon establishing control over a given area, to monopolize all illegal activity within it. As such, criminal organizations in the country have diversified their business portfolio to include activities like arms trafficking, car theft, kidnapping and human trafficking. On top of the additional profits that these side rackets bring in, they have the added bonus of shielding the cartels from police crackdowns on drug-related business.

One emerging venture for cartels is oil theft. In recent years years, cartel members have stolen millions of dollars of oil and gasoline from pipelines and refineries belonging to state-owned oil company PEMEX. According to a recent article in Time magazine, there were 712 such instances in 2010, up from 136 in 2005. Although it is not unusual to see black-market gasoline sold on the side of major highways, occasionally large quantities of stolen oil are bought by American and Guatemalan companies.

Still, the ever-increasing need to widen their profit margins has caused organized criminal groups to move even further beyond illicit commerce and into the “protection” industry. In many areas of Mexico that lack significant state control, drug cartels impose a tax on everyone from individual vendors to large-scale businesses.

According to a recent investigation by Mexico’s Contralinea magazine, this practice is common in the border state of Tamaulipas, where shops, food vendors and street merchants alike are forced to pay a financial contribution to organized crime. While there is no official tally of how much money is paid per year to criminal groups in the state, Contralinea alleges that such extortion is one of the main reasons for the recent decline of business near the state’s border with Texas.

Because drug trafficking is such a profitable industry, some analysts have even described it as a core component of Mexico’s economy. In 2009, the AP reported that up to 10 percent of Mexico’s gross domestic product – the world’s 13th largest – is based on cartel operations. However, a recent study by Harvard University researchers argues that the flow of drug money has had little actual effect on the economic development of those areas that are most affected by violence. The study found that people living in Mexico’s northern border region make an annual per capita income of around $7,000, compared to an average per capita annual income of $14,000 on the U.S. side of the border.

Whatever the exact numbers, the fact remains that there exists a hidden aspect to organized crime in Mexico. Although media outlets in the United States generally focus on the “hard” aspect of cartel strength (like their arsenals, manpower and degree of military-like training), it may well be that the majority of their influence lies within the realm of “soft” power. The cartels in Mexico are not waging the “drug war” with automatic weapons alone. Instead, they are tapping into their profits, bribing civilians and government officials alike to ensure the survival of their business.

When one middle-class lawyer in Juarez, cited by the Harvard study, was asked why he chose to beome a drug trafficker, his answer underscored the power of such economic incentives. “You live in a nice area of Tijuana or San Diego.” he said. “You’re driving a decent car. (…) But you’re not driving the Porsche, the Lamborghini, the Ferrari, the Mercedes, the new Beamer that just came out.”

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