Narconomics

MEXICO has 11 billionaires, according to Forbes magazine. Ten are often pictured smiling at charity dinners and other posh bunfights. One, Joaquín Guzmán Loera, has a rather different mugshot. Wearing a cheap anorak, he is pictured shivering in the rain inside the concrete walls of a high-security prison. Mr Guzmán, who is better known by his nickname El Chapo, or “Shorty”, is one of Latin America’s most successful exporters, having made perhaps $1 billion as chief executive of the Sinaloa drug “cartel”. There haven’t been many photos of El Chapo since he escaped from jail in 2001, hidden in a laundry trolley.

Other billionaires look down on Mr Guzmán. But unlike some of the entrepreneurs on Mexico’s rich-list, he seems to have weathered the American recession rather well. Conditions in his hideout in the Sierra Madre may not be luxurious, but his fortune is believed to have remained intact despite the efforts of the imbéciles on Wall Street that brought the Mexican economy to its knees in 2009. Armed with no more than a phrasebook and some Pepto-Bismol, Schumpeter went to the desert to see what lessons Mexico’s narcotraffickers might offer to other businesses.

These have not been easy times for the cartels, thanks to a declining American appetite for drugs. Encouragingly (at least from Mr Guzmán’s point of view), more American youngsters are smoking cannabis, much of which is imported from Mexico. But cocaine, the more valuable product, has been going out of fashion. America cut its habit by about a quarter between 2006 and 2010, according to the UN, and the number of employees failing workplace cocaine tests fell by two-thirds.

Dwindling sales in el norte are not unique to the drugs business. America’s imports of legal goods fell by more than a quarter in 2009, squeezing Mexican car factories as well as cocaine labs. But the cartels have been nimbler than legitimate businesses in switching to new markets. Eight out of ten legal exports still go to America, not down much from nine out of ten at the turn of the century. The cocaine business, by contrast, has switched its attention to Europe, which gets through twice as much coke as it did at the end of the 1990s. The average Brit now buys more than the average American, albeit of lower quality. Mexican sellers are also making inroads in Australia, another promising market.

The drug industry’s flexibility is partly due to its exemption from import duties. Whereas legitimate Mexican traders have free access to America and Canada via the North American Free-Trade Agreement (NAFTA), drug smugglers are granted tariff-free entry to every country in the world thanks to the Single Convention on Narcotic Drugs, which prohibits the regulation or taxation of their product. Pesky rules of origin, which prevent many Mexican manufacturers from selling goods in America, do not apply to Colombian cocaine processed in Mexico.

Granted, prohibition requires narcotics traders to dig the odd tunnel. But it spares them other headaches. Californian liberals recently proposed taxing Mr Guzmán and his colleagues up to $1 billion a year by legalising cannabis. Fortunately for the industry, conservatives voted to keep the thriving pot business tax-free. Red tape is minimal too: though America sees a million emergency-room visits a year from drug abuse, manufacturers see no need to invest in quality control when the penalty for selling contaminated cocaine is the same as for smuggling the pure stuff.

Mexican regulators have killed or imprisoned many of the country’s leading drug entrepreneurs since 2007. Last month the marines announced that they had nabbed Mr Guzmán’s son, known as El Gordo, or “Fatty”. It turned out to be a false alarm: the arrestee was a car salesman called Félix, whose only crime was to be plump. Such incompetence is common. As in other sectors, competent regulators are often tempted away by the higher salaries on offer in the private sector. Many traffickers start off as policemen; the Zetas mob began as an elite army unit.

On head-hunting (and -chopping)

Human resources are still a problem for the cartels, unsurprisingly given that more than 10,000 employees are violently retired each year. Junior vacancies are easily filled from the pool of 10m ninis, youths who ni estudian ni trabajan (neither study nor work). But Mexico’s poor schools—the worst in the OECD—mean that drug exporters face the same problems as other multinationals in attracting highly skilled workers. ManpowerGroup, a recruitment consultancy, found that 42% of legitimate Mexican firms reported difficulties filling vacancies. Most said they had to recruit expatriates to senior jobs. This is also true in the drug business: the Zetas have turned to former members of Guatemala’s Kaibiles special forces to satisfy a growing demand for experienced killers. Visa requirements, at least, are minimal.

Public relations are delicate in a business which has caused about 60,000 deaths in Mexico in the past six years. That is why cartel leaders are very serious about corporate social responsibility. Senior executives remain free partly because people are unwilling to tip off the police. Fear is one reason; another is that drug lords spread their profits around. Contributions to the local constabulary are popular. Conspicuous philanthropy is also common. A gleaming chapel in Hidalgo state recently put up a bronze plaque thanking Heriberto Lazcano, head of the Zetas, for a donation. When the pope raised an eyebrow about such “narco alms”, a Mexican bishop, Ramón Godínez, replied that when Mary Magdalene washed Jesus’s feet with expensive perfume, he didn’t ask her how she paid for it. “There is no reason to burn money just because its origin is evil. You have to transform it. All money can be transformed, just as corrupted people can be transformed,” he said. With God as its money launderer, Mexico’s dirtiest industry should stay on a high.

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