US Cocaine Prices and Imported Violence

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The jump in killings in Mexico since 2006 coincided with a rise in cocaine prices in the U.S. — analyst Alejandro Hope outlines how the price increase could have triggered the outbreak of violence, as traffickers responded to new economic incentives.

The following is InSight Crime’s translation of an article from Plato o Plomo, a blog by Alejandro Hope:

Between the first trimester of 2007 and the last trimester of 2008, the price of cocaine doubled in the United States, according to data from the National Drug Threat Assessment 2010 (published by the National Drug Intelligence Center – NDIC). Adjusting for purity, the price increased from $98 to $198 dollars per gram and remained high throughout 2009 (see chart below).

cocaine

Could this atypical rise in price be connected to the increase in violence in Mexico? While we don’t know for sure, the theory merits exploration.

First, some contextual data:

  • In real terms the price of cocaine in the United States has been decreasing since the early 1980s: according to some estimates, the cumulative decline in real terms between 1981 and 2007 was 85 percent. There is no consensus on the causes of the price collapse, but it may have been the combined result of efficiency gains by drug traffickers, increased competition (many ex-offenders on the street without many legitimate job prospects) and the loss of the drug’s popularity.
  • This downward trend has been punctuated by several episodes of temporary price increase due to disruptions in the supply chain. The most notorious and longest (pre-2007) of these episodes occurred between 1990 and 1991, at the height of Pablo Escobar’s war against the Colombian state. In all cases, however, the downward trend was reinstated after a few months.
  • The latest price hike, which began in the first quarter of 2007, is unusual because of its duration. Thirty months after the initial climb, neither the price nor the purity had returned to previous levels (unfortunately, there is no public information on the evolution in prices over the last two years).
  • No one has been able to fully explain the reasons for the unusual behavior of the U.S. market. It could be the effect of a decrease in Colombia’s production capacity that was not entirely offset by increases in Peru and Bolivia. It could also result from increased demand in Europe and other markets (Brazil, for example) or greater interdiction efforts in the transit zone (particularly in the Caribbean and some Central American countries).
  • It should be noted that there is a great deal of uncertainty about price evolution. This is due to the nature of the data used to track the prices of illegal drugs in America. Known as STRIDE (System to Retrieve Information from Drug Evidence) and administered by the Drug Enforcement Administration (DEA), the database records purchases of illegal drugs by undercover agents linked to specific investigations. Therefore, among other methodological problems, the data cannot be considered a representative sample. There is indeed much debate among specialists about the usefulness of the system (see here and here).
  • In particular, we do not know precisely if the relevant prices for Mexico (wholesale prices in the border area) have increased nor the magnitude of such increases. On its website, the DEA has broken down data by state and volume of operation through 2006. We do not know what happened to the wholesale price after that date (except for some unofficial references).

With that being said, the following graph is still suggestive:

cocaina violencia

The apparent correlation between homicides linked to organized crime and cocaine prices in the United States does not, of course, suggest there is a causal relationship between the two variables. And if a causal relationship does exist, it is not clear which is the cause and which is the effect.

However, the simultaneity of both phenomena suggests to me that is the following is at least plausible as a theory:

  • For fundamentally exogenous reasons, there was an increase in wholesale prices of cocaine between 2007 and 2008.
  • Faced with a sustained prices hike, narcotraffickers adjusted by reducing the average size of cocaine shipments (to maintain a constant risk for shipping).
  • This probably implies a significant increase in the number of participants and transactions, at least in the short term (as both supply and demand adjusted to reflect price increases).
  • Because of this increase, narcotraffickers may have faced growing problems of internal control (preventing employees and drug mules from stealing the product), external security (preventing rivals or authorities from intercepting shipments) and collection (getting customers to pay).
  • In this environment, it is not improbable that narcotraffickers would have decided to employ violence more intensively in order to discipline employees and others. Once unleashed, violence increased as a result of cycles of reprisals and ruptures.

Note that I’m not saying that this process actually occurred. Much more information is required to validate or disprove the theory. I merely suggest that the origin of the increased violence could partially be found in the fluctuations of international drug markets, which are not subject to control from Mexico.

The mere possibility leads me to refine my views on current government policy and, in particular, its role in the uptick in violence. There is still much we do not know, and we cannot make categorical judgments about the direction of causality. If anyone states with complete certainty what triggered the violence in 2008 and wants to reduce the explanation to a single causal factor, pay no attention: they do not know what they are talking about.

Translated and reprinted with permission from Alejandro Hope*, of Plata o Plomo, a blog on the politics and economics of drugs and crime. Read Spanish original here.

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