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The true cost of cocaine

According to the United Nations Office of Drugs and Crime, Australians are now the world’s eighth highest per capita users of cocaine. Cocaine use within the wealthier echelons of society is so unremarkable…

We might pay more for cocaine in Australia but the social and economic costs of its use reach beyond our shores. Flickr/Valerie Everett

According to the United Nations Office of Drugs and Crime, Australians are now the world’s eighth highest per capita users of cocaine.

Cocaine use within the wealthier echelons of society is so unremarkable that when he was convicted of cocaine dealing in 2010, Richard Buttrose described it as being “much like having a glass of wine”. And studies of our cocaine market suggest that alongside hardcore users, there is a large group of casual users who share Buttrose’s attitude. The drug is being used widely by people on more moderate incomes (typically relatively well-educated and employed), usually in private with friends. Cocaine use is becoming more socially acceptable.

Increased demand is being met by increased supply. Australian Crime Commission (ACC) data shows a marked increase in seizures of cocaine (measured by weight) in recent years. There’s also evidence that Mexican cartels have become involved in the supply and distribution of the drug in Australia, and have been stepping up the scale of smuggling.

What’s the market price?

So how much do we pay for our cocaine? By international standards, cocaine prices in Australia are high. In the US you can expect to pay a wholesale price of around 20 US dollars per gram. In Australia, it’s been rare to see that wholesale price fall below 200 to 250 Australian dollars per gram, depending on purity. Does that price reflect the real cost of cocaine? No. Not by a long shot.

The wholesale price of cocaine in Australia is one the highest in the world UNODC World Drug Report 2012

Economists define the real cost of a good or service not just in terms of the cost paid by the buyer, but also the cost to other parties affected by the transaction – the negative externalities. This is why as institutions like the National Drug and Alcohol Research Centre try to estimate the social cost of drug use.

It’s also important to bear in mind the costs and consequences associated not just with its use, but also with its supply. There are negative externalities on the supply side of goods and services. In the context of illegal markets, consider the introductory sequence to Lord of War (a film of debatable quality modelled loosely on the story of Victor Bout), which emphasises the role not just of the user, but also of the production, transportation and distribution of a bullet before it is fired.

We know about campaigns against sweatshop labour or initiatives like Oxfam’s Fair Trade which try to raise awareness about costs and consequences in relation to food and clothing. So when it comes to cocaine, how does it get to Australia, and what other costs – whether monetary or not – are created along the way?

Production

Most cocaine is produced in Colombia, before being trafficked through Central America into the major narcotics transit hub of Mexico. The fight between cartels for control of territory, trafficking routes and local distribution is a large part of the story behind that country’s drug war. Since the conflict there intensified in 2006, at least 47,000 people have been killed in the crossfire. Some estimates put the figure at 60,000 or more.

A Paraguayan police officer guards 388 kilos of cocaine seized in an operation, February 2013 Andres Cristaldo/EPA

The cartels corrupt public officials and extort and intimidate still more people, with the simple choice between plata o plomo (silver or lead). Los Zetas, who wield considerable influence over entry points for Colombian cocaine, kidnap engineers and technicians and force them to maintain the cartel’s private radio communications network, and intercept and enslave migrants on the outskirts of Mexico city.

While cocaine is by no means their sole business (groups like Los Caballeros Templarios are allegedly involved in protection and extortion, and it’s estimated that a large proportion of the cartels' revenue is from cannabis), the Australian market is lucrative. Like legal business, organised crime goes where the money is, and for cartels there is plenty of money in cocaine, as evidence by the major Sinaloa cartel’s infiltration of Australia.

Transportation

The cocaine makes its way from Mexico to Australia via a number of routes. In 2010-11, the majority of cocaine intercepted coming into Australia entered via small craft by way of the Pacific Islands (like the yacht that ran aground near Tonga last year) or stowed away in commercial shipping containers (say, hidden in a shipment of ride-on lawn mowers or stone pavers). As total shipments of legal products increases and the capacity to inspect them remains constrained, the latter method becomes easier and easier.

Tongan authorities found a dead body and 204 kilograms of cocaine aboard this yacht headed for Australia. Australian Federal Police/AAP

Technology helps reduce the risks for suppliers. Better encryption makes it easier to communicate and coordinate pickups without being detected (for some time, the encryption in RIM’s Blackberry made it the mobile phone of choice for cannabis traffickers in North America).

Package tracking for mail means you can try to smuggle cocaine in the post, and if the package is unexpectedly delayed, you can take that as an early warning sign that it might have been tampered with as part of an attempted sting. If you think posting cocaine into the country sounds fanciful, think again. The ACC reported that 55 kilograms were seized in mail in 2010-11 (at $250 per gram, around 13 to 14 million dollars' worth).

Ultimately, getting cocaine into the country involves lining the pockets of the public officials and other individuals at stops along the way, as well as here upon arrival. The same is true of cocaine smuggled into the country by plane, as demonstrated by the alleged cooperation of airport staff and/or customs officers in bringing cocaine into the country through Sydney airport.

And if the corruption of public officials isn’t a bad enough additional cost, bear in mind that corrupt and criminal networks can easily be used to smuggle one product illegally into a country can easily be used to smuggle another.

Distribution

As in any illegal market, doing regular business requires the ability to enforce your own contracts (obviously, the court system isn’t going to help a seller to compel a buyer to pay up, or order a seller to compensate a buyer for peddling a cap of cocaine that has more than the usual proportion of livestock dewormer).

You also need to be able to protect yourself from the authorities that want to shut down your business. And you need to be wary of competition. Dealing with these issues necessarily involves the use or threat of violence and the corruption of officers charged with policing narcotics, particularly when an illegal market becomes entrenched.

Mark Standen of the New South Wales Crime Commission was found guilty of involvement in attempts to import precursor chemicals. Other law enforcement officers, such as Malcolm Rosenes, have been found guilty of dealing cocaine. AAP/Tracey Nearmy

In addition to corrupting local police, suppliers tend to outsource distribution to local groups – this has proven to be a lucrative business model for Colombian gangs collaborating with local Italian and Spanish organised crime in distributing cocaine in the EU.

Pre-existing criminal groups in Australia alleged to be involved with the Mexican cartels include the ‘Ndrangeta, Triads and Comancheros. An industry that shores up criminal groups that already pose a serious problem is a costly one indeed.

Buyer be aware

Assuming decriminalisation or legalisation are not on the table, targeting suppliers in an illegal market such as this is unlikely to eradicate the problem. One possible complement would be to focus on consumer awareness and information – an anti-cocaine campaign that tries to reduce demand. Something that pushes buyers to face up to these not-so-hidden costs.

If we’re a society that worries about eating free range chicken, drinking fair trade coffee and buying shoes and jeans that were not put together by sweatshop labour? Well, we’d better worry about the real cost of cocaine, too.

Join the conversation

23 Comments sorted by

  1. Nick Melchior

    Senior Publishing Editor

    Surely just assuming that "decriminalisation or legalisation are not on the table" is a cop-out? We're not going to get free trade cocaine with the current legal situation and the situation you describe seems to primarily be the result of the illegal trade rather than anything inherent to the drug itself.

    Will people who spend $250/gram and risk legal sanction and ill health going to stop when they realise that people in Mexico are being killed in gang violence? Do we really think that most cocaine users ("typically relatively well-educated and employed") aren't aware of the political situation in Mexico?

    We can't talk intelligently about drugs and their effects without talking about the legal situation surrounding them.

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    1. Mike Pottenger

      Sessional Lecturer, Department of Economics at University of Melbourne

      In reply to Nick Melchior

      'Surely just assuming that "decriminalisation or legalisation are not on the table" is a cop-out? '

      Well, at present there are no signs of cocaine being legalised or decriminalised in Australia, so it seemed reasonable to me to assume that decriminalisation and legalisation are not on the table.

      'The situation you describe seems to primarily be the result of the illegal trade rather than anything inherent to the drug itself.'

      I agree that these costs derive from the illegality of the market (and so are very similar to those associated with other illegal markets). I'm also very interested in the debate surrounding decriminalisation, legalisation and (in the case of analysts like Gambetta), even arguments in favour of nationalisation of narcotics production.

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  2. Kim Darcy

    Analyst

    There are a few concerns about this idea:
    1. A minor quibble, but a consumer pays a 'price', not 'cost'. Cost is a supplier issue
    2. I don't know anybody who "worries" about "eating free range chicken, drinking fair trade coffee and buying shoes and jeans that were not put together by sweatshop labour." And that goes double for people who buy cocaine.
    3. To the extent people DO worry, their responses would largely be a function of the availability of substitute products and suppliers. For the…

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    1. Mike Pottenger

      Sessional Lecturer, Department of Economics at University of Melbourne

      In reply to Kim Darcy

      1. Absolutely - that's why it's worth wondering whether the price reflects the cost or not. In this case, the social costs are fare higher the private price paid. This is not to imply that the price of cocaine necessarily accurately reflects the private costs, either - even in legal markets where standard economic theories are more likely to be accurate (given fewer constraints on information, contract enforcement, etc) the price paid by consumers needn't necessarily reflect the exact cost incurred…

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  3. Tim Niven
    Tim Niven is a Friend of The Conversation.

    Chinese Student and EFL Teacher at Tzu Chi University, Hualien City, Taiwan

    Mike, I like you're angle. I've been watching Latin America for years, particularly Colombia (www.peacebrigades.org), and the effects of organised crime on the populations of these countries is a horrific tragedy. If we could neuter the b@stards, I'd be all for it, happy to chip in some dollars.

    But, echoing a point of scepticism already raised, I don't reckon the kind of moral argument you're talking about will resonate too deeply with your average cocaine user. I've known plenty of cocaine users who care about fair trade, etc, who wouldn't change their habits because of these issues. Too far-fetched to give a sh!t about brown-faced peasants when you've had a hard week working in your depressing corporate slave job and just want to have a good time on the weekend, I guess.

    Incidentally, Tanya Plibersek wrote an opinion piece about this a while back:
    http://www.theaustralian.com.au/opinion/the-ethical-dilemmas-of-cocaine-and-bottled-water/story-e6frg6zo-1225984625352

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    1. Mike Pottenger

      Sessional Lecturer, Department of Economics at University of Melbourne

      In reply to Tim Niven

      "happy to chip in some dollars."

      A Kickstarter-funded organised crime taskforce, perhaps?

      "I don't reckon the kind of moral argument you're talking about will resonate"

      I'd have to say I share the scepticism. I probably should have worded my last section more carefully. When I said that supply-side crackdowns won't eliminate the market, and that addressing demand was important too, I wasn't meaning that a demand-side anti-cocaine campaign would suddenly make all users put their cash away…

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    2. Tim Niven
      Tim Niven is a Friend of The Conversation.

      Chinese Student and EFL Teacher at Tzu Chi University, Hualien City, Taiwan

      In reply to Tim Niven

      Yeah. I think the supply-side is a tough one. It would still be good if we made some dent, if not a total wipeout :) But Hollywood @rseholes will continue to pump out film and TV that valorise criminals, dealers, and rich users. People will continue to associate cocaine consumption with wealth and success. Stressed and depressed rat racers will continue to seek escape from the banal grind. Meanwhile legal tobacco continues to kill more than all other drugs combined...

      In Colombia there was…

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  4. Ken Taylor

    Research Scientist at CSIRO

    Interesting disconnect between market price and usage. Eighth highest per capita consumption and world's highest price by far (at least highest of the countries listed).

    That suggests Australian customs is more effective than elsewhere and that it mainly leads to increased profits for the most successful smugglers.

    Is Ukraine customs really the second most effective?

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    1. Mike Pottenger

      Sessional Lecturer, Department of Economics at University of Melbourne

      In reply to Ken Taylor

      Interesting question. Tricky to answer.

      Your assumption (which I'm inclined to think is a reasonable one) that the price is driven up by the quality or effectiveness of Australian customs making it difficult to get cocaine into the country (alleged instances of corrupt customs officers helping smuggle cocaine in aside) is certainly one way to explain the high price.

      It could also be a story of a high willingness to pay. To the extent that Australia has weathered the GFC better than other countries, and that we consider cocaine (amongst casual users) to be a luxury good, that might be part of a story of high demand driving high cocaine prices. The problem with this story, though, is that it wouldn't really explain the differences pre-GFC, which were similarly stark.

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  5. Malcolm Kyle

    logged in via Facebook

    Mike, a more honest and far more realistic title for your article should have been: "The True Cost of Prohibition"

    Every time the ghastly violence of prohibition is falsely blamed on the users it diminishes the culpability of those who are truly responsible for maintaining the status quo. Prohibition is an absolute scourge –the end! The use of drugs is NOT the real problem; the system that grants exclusive distribution rights to violent cartels and terrorists IS.

    Nobody can be expected to…

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    1. Michael Gormly

      Editor at Superkern Design Pty Ltd

      In reply to Malcolm Kyle

      I don't think it's quite a matter of 'not giving a shit'. As others have pointed out, the downside is seen by thinking people as the fault of prohibition, not themselves. It's up to the government to change this, not the user, for whom the benefits (as vividly described by Tim) are great enough to pay the outrageous cost and too great to waste time chest-beating. As Malcolm Kyle puts it below, "Were the users of alcohol to blame for the St Valentines massacre in 1929?".

      Better to plug regulated legalisation, even though it is not yet on the Australian table, rather than calling for some moral epiphany. Let's get it on the table!

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    2. Mike Pottenger

      Sessional Lecturer, Department of Economics at University of Melbourne

      In reply to Malcolm Kyle

      <i>"The violence and the deaths ultimately arising from such bad public policy should always rest squarely on the shoulders of those ignorant imbeciles who are responsible for implementing and supporting such foolishness."</i>

      I'm not sure I accept that buyers of illegal goods or services can be absolved of all responsibility on this basis (though I certainly wouldn't suggest they are solely responsible).

      If you face a market in which a particular good or service is prohibited, and that as a result of that prohibition, a persistent market for the good or service causes significant harm to a great many people, you have a choice: should you consume that good or service, or not?

      I think it is reasonable to ask people to consider the broader social costs of their decisions in the context of the world in which they actually live, rather than the one in which they believe (whether rightly or not) that they should be able to live.

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  6. Justin R Pearce

    logged in via Facebook

    I only buy organic, vegan, local, fair-trade cocaine..

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  7. Axel Boldt

    Professor of Mathematics

    1. When measuring the external cost of cocaine use, you should also account for the negative costs, i.e. increased productivity and creativity of users.

    2. "[A]n anti-cocaine campaign that tries to reduce demand" would of course have the effect of reducing the street price, thereby attracting new users who are less amenable to moral arguments.

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    1. Mike Pottenger

      Sessional Lecturer, Department of Economics at University of Melbourne

      In reply to Axel Boldt

      1. Good point - I'll have to have a think about how this might be captured.

      2. Can you elaborate more on why you think lower prices would attract users who are less amenable to moral arguments? I'm not sure I follow the logic of a positive relationship between willingness to pay and amenability to moral arguments. Or do you mean that new users are likely to be less amenable to moral arguments than existing users?

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    2. Axel Boldt

      Professor of Mathematics

      In reply to Axel Boldt

      A percentage of the population is amenable to moral arguments, the rest is not. Those who are will reduce consumption, resulting in lower street prices, causing the rest to ramp up consumption.

      Your scheme will still result in somewhat lower consumption overall, but the reduction will be much less pronounced than you might think.

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    3. Michael Gormly

      Editor at Superkern Design Pty Ltd

      In reply to Axel Boldt

      Axel and Mike, I think this line of discussion misses the point. There is nothing immoral about using cocaine per se (at least, no more than having a beer). The immorality lies in prohibition and its well documented injustices. Any thinking user knows this and so won't be moved by so-called moral persuasion.

      Even if the 'moral' persuasion had an effect, it would hardly affect prices which are subject to much bigger forces. A much more productive debate would be about price elasticity, which does not much apply to drugs for many reasons. Nevertheless, it is commonly argued by prohibitionists that liberalising the law will lower the price and lead to an 'explosion' in drug use.

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  8. Ordinary People Aust

    logged in via Twitter

    Reading this reminded me of Major Howard who in Season 3 of The Wire "legalised" drugs by creating a "prohibition-free" zone in his district. Of course, it blew off after a while when McNulty tried to arrest a dealer en route to the zone... Here is their paraphrased dialogue:
    McNulty: "So you let the dealers run free here..."
    Howard: "Pretty much. The corners in my district are empty. In some areas crime has gone down 5% !"
    McNulty: "You know this will eventually blow off and you will have to…

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  9. Alexander Rosser

    Philosopher

    I heartily agree with all those advocating the legalisation of cocaine, pot herion etc. Their arguments are sound and have been put forward by many senior peiple in politics and law enforcement. The latter since retirement for obvious reasons.

    The obstacles to change are pretty high.
    1) There is a UN convention declaring these drugs illegal. Any country legalising them is exposing itself to substantial international pressure.

    2) The demand from the USA, and its international policies, completely…

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