REUTERS/Fernando Carranza

COVID-19 Meets the Cartel

by robert looney

bob looney teaches economics at the Naval Postgraduate School in California.

Published August 14, 2020


Latin America has long been the epicenter of the illicit drug business, traditionally exporting cocaine and marijuana, but more recently meeting demand — in particular, US demand — for methamphetamine and fentanyl. But Covid-19 has proved an equal-opportunity disrupter of commerce. Not even the drug trade has been spared the consequences of drastic restrictions on the movement of people, goods and capital.

Unlike legitimate enterprises, though, drug cartels and local drug distributors have long been practicing the craft of circumventing border closures and transport stoppages. It’s not surprising, then, that the more astute players in this Darwinian jungle are adapting well, diversifying their business models to maximize profits and protect their bottom line. Indeed, their adaptation is likely to leave its mark on the structure of the drug trade long after the pandemic is an unwanted memory.

Some caveats are in order. As with data on most illegal activities, the numbers (and the conclusions that follow) are less than rock-solid. In addition, the impact of Covid-19 on the drug trade may be evolving along with the disease. Some general trends are apparent, however, and, at least in the medium term, market economics is likely to remain operative.

Supply, Demand and the War on Drugs

In the years leading up to the pandemic, Latin American coca production surged, spurred by rural poverty and political turbulence. In Colombia, the cultivated area devoted to coca increased by half in 2016-17 alone following the government’s failure to support economic alternatives to coca cultivation as promised in its peace accord with FARC, Colombia’s all-purpose bandit-revolutionaries. Bolivian production similarly ramped up in 2019 after the government ended former President Evo Morales’s Cato Accord, which (in defiance of Washington) had legalized coca and capped production in order to stabilize prices.

Since the Covid-19 lockdowns, the price of raw coca, already down due to oversupply, has fallen by as much as three-quarters, stripping tens of thousands of farmers of their livelihood. For one thing, coca farmers are unable to get their crops to market. For another, border restrictions designed to contain the pandemic have interrupted the international transport of the raw leaves to cocaine refineries and hobbled the refineries’ access to the chemicals and cheap gasoline from Venezuela needed to refine the finished product.

Covid-19 has thus shifted the supply curve for cocaine to the left — at any given price, less will be supplied. And since demand is somewhat sensitive to price because many consumers use it only recreationally, sales have fallen. By contrast, the demand for highly addictive synthetic opioids and stimulants is relatively inelastic, so sales should hold up when it becomes more expensive to make and distribute the drugs. But Covid-19 closures have revealed just how dependent the cartels are on the availability of chemical precursors such as ephedrine from China — if you can’t get the precursors, you can’t make the meth. Period. Full stop.

Covid-19 travel restrictions have also disrupted distribution, with synthetic drugs (which had been transported by air) the most affected. But here, traffickers are adapting pretty well, opting for smaller but more frequent shipments. Maritime shipping has also increased, with drugs concealed in lockdown-exempt food freight or in pandemic-related shipments of medical equipment.

The digitization of markets may make winning the half-century-old war on drugs that much more of a fairy tale for the benefit of the naive and self-righteous.

The pandemic is also incentivizing the creation of more direct links between international suppliers and domestic consumers, including the use of phone apps and the dark web to market, sell and organize direct delivery. This digitization of markets may make winning the half-century-old war on drugs that much more of a fairy tale for the benefit of the naive and self-righteous. But there’s a bright side: without retailers ready to kill each other for street corner monopolies, the violence associated with drug dealing is likely to fall.

As predicted by economic theory, supply shortages have resulted in a sharp rise in the drug prices paid by consumers. However, moving the revenue into the cartel’s accounts has become more difficult when the legitimate businesses that ordinarily launder the money are preoccupied with surviving the pandemic. By no coincidence, from March to late May 2020, the DEA reported record seizures of cash that, lacking more sophisticated alternatives, couriers had simply stowed in the trunks of cars crossing the border into Mexico.

Opportunity from Adversity, Part I

For many Latin Americans engaged in the drug trade, the pandemic represents a chance to branch into other illicit commerce. Mexico, Honduras and Guatemala have long had active black markets in medicines, facilitated by corruption in their health care and social security systems. With the advent of Covid-19, these and other Latin American countries are experiencing a boom in the theft of medical supplies — especially of masks, disinfectants and coronavirus testing kits.

In Brazil, 15,000 coronavirus test kits and more than 2 million personal protective items were stolen from Guarulhos Airport in São Paulo in early April. In Honduras, hospitals have been receiving boxes of N95 masks with dozens of missing units. In Colombia, there have been constant seizures of stolen and counterfeit medicines, especially acetaminophen (that’s right, generic Tylenol), the recommended analgesic for coronavirus-induced fever. The longer the pandemic lasts, the more likely this growing black market will become entrenched and hardened against law enforcement.

Opportunity from Adversity, Part II

As the number of Covid-19 cases rises, economic projections for Latin America are becoming grimmer. Goldman Sachs predicts Latin America’s GDP will contract by 7.6 percent in 2020, with recovery to pre-recession levels not occurring until 2022 or 2023 (and that assumes the availability and broad distribution of a vaccine). The recession will raise new challenges for the region’s cash-strapped governments, putting them at an even greater disadvantage when it comes to combatting the corruption that facilitates the illicit drug trade.

Criminals are already stepping up to fill gaps left by overwhelmed or absent governments, replacing legitimate state actors as service providers. The goal, presumably, is to build goodwill that makes enforcing the drug laws that much tougher.

In Honduras, they organize Covid-19 vehicle disinfection campaigns in the territories they control. Throughout Mexico, cartels are distributing food and other coronavirus aid (food parcels in Guadalajara are even stamped with the El Chapo Guzman 701 label belonging to the daughter of the jailed Sinaloa Cartel boss). Videos widely circulated on the internet show people collecting food parcels from heavily armed cartel members, a public-relations campaign that illustrates the cartels’ sophisticated use of social media.

Government responses have been far from uniform. Mexican President Andres Manuel Lopez Obrador has called on cartels to focus on reducing violence and desist from distributing desperately needed food. In sharp contrast, former Brazilian Health Minister Luiz Henrique Mandetta has urged municipalities to work with local gangs, a tacit acknowledgment that the government’s resources are insufficient to meet the demands of the emergency.

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While such Robin Hood strategies may seem relatively harmless, they form part of a broader effort by the cartels to take advantage of the Covid-19 emergency to fill state power vacuums, build their social bases and secure territorial control. But as the weakening of the state opens the door to the development of criminal governance in parts of the region, there is little likelihood that mafia-like stability will emerge. Even in the midst of the Covid-19 crisis, cartels have shown little inclination to reduce violence. As the economic crisis deepens, extortion, kidnapping and a more streamlined and efficient drug trade will almost certainly make matters worse.

main topic: Region: Latin America