primarily in Europe near the source of chemical teristics of illegality and risk, but there is a crucial precursors; today, much of the production process difference in that geographical determinants are takes place in the immediate growing area.20 A much less important. Unlike drugs with a botanical similar trend has been noted for cocaine starting point, synthetic drugs can be manufac- processing; the reason for both developments being tured from chemicals which can be found or that moving the processing stage of drugs closer to produced almost anywhere in the world; this means source raises the potential value of a given unit of that they do not need to be trafficked over the weight trafficked. distances required in the production of plant-based drugs. Not only does this reduce risk, but reduces trafficking and input costs as well, allowing for 4.4. CLANDESTINE much larger gross profit margins.23 One recent MANUFACTURE OF study concludes: “...the overall ‘value-added’ to be SYNTHETIC DRUGS reaped in the (consumer) country/region in ques- tion is higher than for illicit plant-based drugs In 1991, synthetic drugs were thought to account where the value-added in consumer countries is for less than 5% of the money spent on illicit drugs de facto limited to trafficking activities. Only minor in the USA. Since then, the share has grown manufacturing processes, such as transformation rapidly.21 Consumption of two synthetic drugs – from cocaine hydrochloride into crack cocaine, take methamphetamine and methylenedioxymetham- place in the country of final consumption.”24 phetamine (MDMA, or ecstasy) – has grown particularly rapidly.22 In countries of the In many cases those who reap the benefits Asia/Pacific region, methamphetamine abuse is more widespread than that of do not bear the costs. cocaine, and in several countries more prevalent than heroin. Consumption of ecstasy and Overall, these differences with the plant-based amphetamine exceeds that of heroin and cocaine in drug manufacturing process allow for greater several European countries. (For more details see profit and more robust expansion, and point Part 1, Box 1B) towards significant changes in consumption patterns over the coming years. In certain ways the illicit industry for synthetic drugs behaves much like its plant-based counter- part. It has, for example, the same defining charac- 4.5. TRAFFICKING AND DISTRIBUTION Risks and transaction costs Given the considerable profit margins, it is not surprising that the industry is so large, both in terms of estimated numbers of participants and of turnover. However, entry into the industry is not cost-free, and one of the most important costs is risk. The illicit drugs industry carries a high penalty for inefficient risk management. The risks – to entry, to persons and to product – constitute the costs of doing business in an illicit industry. In economic terms, these risks can be described as ‘transaction costs’ – quite simply, the costs associ- ated with engagement in an economic transaction. According to the theory of transaction cost, all economic transactions, either exchanges Selected LSD Papers Photo: UNDCP of goods/services or a promise to deliver 129 goods/services, involve a cost which is equal to that for their organizations. Success and failure are necessary to ensure fulfilment of the contract, or to determined by the organization’s ability to manage the risks inherent in the business at every The illicit drug business is dynamic level of its operation (see Table 3). As Table 1 shows, all the licit sector risks apply to the and responds quickly to change. illicit sector as well, effectively doubling the necessity to manage risk, and, as many that of endowing the contract with self-enforcing analysts argue, increasing the margin for profit. properties. In the case of illicit drugs, it is assumed that the highest proportion of costs associated Table 3. Similarities in business operation. with the industry are transaction costs rather than Similarities in operating characteristics between those of ‘factor inputs’ such as land, labour, or legitimate business and the illicit drug business: capital. 1) need for strategic planning In defining the risks inherent in the illicit drugs 2) need to manage a complex set of business activities industry it may be helpful to make a distinction 3) need to lower factor costs between personal risks and risks to the product. 4) need to manage employees with a variety of interests and Personal risks, it can be argued, come from the skills absence of laws to ensure physical and economic 5) need to generate and meet demand protection. In the illicit drugs industry, where an 6) need to organize intelligence about markets, competitors important managerial skill is the threat or use of and risks violence, this risk comes with an extremely high cost. From the business and product aspects, lack of 7) need to acquire and master technology for the develop- formal legal recourse means that organizations and ment of new products and methods of distribution individuals may use violence as a means of coercion 8) need to maximize profit through expanding market share in obtaining market entry and position (see Part 3, Box 3B). Lack of recourse to legal redress, for The organization of illicit drug trafficking example, implies higher transaction costs, because Considerable profits for participants in the illicit new entrants are liable to be coerced by better drug industry extend throughout the distribution established, more powerful organizations or indi- and laundering phases – a fact verified by their viduals. In other words, entry to a market place and readiness to operate in the illicit markets despite its to market position have to be fought for in ways considerable risks. However, countries to which that lie outside legitimate business practice. As revenues from production and trafficking accrue in Table 2 shows, risks to product and to business large percentages relative to the overall economy, come mainly from law enforcement. tend to incur many costs as a result of economic gains made by participants in the industry. This is At the higher organizational levels of the industry, because the illicit drug industry yields a high degree managers are required to manage the sectors of of costly adverse side effects — such as violence and production, distribution and sales within their property loss through theft — relative to industries responsibility, to ensure a steady supply of drugs in the licit sector. A considerable share of these costs and aim for a constant expansion of market size is borne by those external to the industry. Table 2. Comparisons of licit and illicit sector risks. Illicit sector risks Licit sector risks 1) loss of business through effective law enforcement 1) loss of business to competitors 2) arrest/imprisonment/death penalty 2) market contraction/loss of demand 3) confiscation of assets/loss of profit through seizure 3) loss of trained employees to competitors 4) risk of coercion from rival organizations 4) increased fixed costs due to increase in factor costs 5) increased fixed costs due to improved law enforcement 5) change of investment regulations etc … 130 Trafficking is the crucial link in the chain between Fig. 4.2: Distribution of “value added” of heroin illicit drug production and consumption. The in the producer country. highest percentage of value added (gross profit) is generated at the distribution stage of the illicit drug industry (see Fig. 4.2). According to data for the illicit opiate industry in Pakistan, wholesalers and retailers can receive up to nine-tenths of the retail price of heroin. Once the heroin is exported from Pakistan, however, the value added gets even higher. The value added by trafficking outside Pakistan can easily amount to more than 90% of the retail price in Europe or the USA.25 (See Fig.4.3) Similar patterns hold true for cocaine. Distribution and trafficking post-export, yield the highest gross profit margins. In Bolivia, one estimate claimed that Heroin traffickers (90%) less than 7% of the total end-value of cocaine was Processors (2%) earned by farmers in 1990. This yields not more Farmers (6%) than 2% of the final street value of farmers’ output Opium traders (2%) once fully processed, and leads most analysts to Source: UNDCP. conclude that producer countries cannot be the principal beneficiaries of the raw materials they produce.26 Fig. 4.3: Generation of “value added” of heroin in distribution network from Golden Crescent towards Western Europe in the 1990’s. 140,000 120,000 100,000 80,000 60,000 US$ per kilogram heroin US$ per kilogram 40,000 20,000 0 I II III IV V Trafficking in consumer country* Internat. trafficking within Europe Internat. trafficking to Turkey Trafficking in Golden Crescent Farmers (Afganistan) * Data do not include trafficking profits made due Only a minute portion of the value added of heroin goes to to dilutions of heroin; actual profits in consumer the farmers. countries are thus still higher. Photo: UNDCP Source: UNDCP 131 Table 4. Major organized crime groups. Major Activities Size International Connections Cocaine Cartels Headquartered mainly in Colom- The cartels employ individuals in a Cosa Nostra bia and Mexico, the cocaine rigid pyramid structure, with La Cosa Nostra cartels manage the entire cycle of heads of various families in Triads cocaine from production to dist- control of geographic areas gath- Yakuza ribution around the world. ered together as loose business coalitions. Their objective is to maximize profit. The activities of the Triads are The Triads employ upwards of The Triads are pervasive and are Triads extremely diversified. They cover 170,000 persons in a fairly tradi- known to be active throughout drugs, money lending, gambling, tional pyramid structure headed Asia, Europe and the USA, racketeering, service sector by a Boss, Underboss, and although their main activities investment, money laundering Recruiting boss.