[A Mexican think tank has published the following report detailing the positive effects in Mexico from American Cannabis Legalization. If “X” number of states pass legalization laws, the Mexican cartels would be bankrupted in short order. See the full technical report (in Spanish) from the Mexican Institute for Competiveness by clicking-on the title below.]
Eduardo Alejandro Hope and Clark
Rule of law and security
Possible impact of legalizing marijuana in the U.S.
The possible legalization of marijuana at the state level in the U.S. could cause a significant decline in revenues from drug trafficking in Mexican criminal organizations. United States is currently a net importer of marijuana. But in terms of legality created in one or more states could meet most of its domestic demand with domestic production. In this scenario materialize, would be facing the largest structural shock suffered by drug traffickers in Mexico since the massive arrival of cocaine in the late eighties. There is considerable uncertainty about the effect a substantial loss of income might have on the behavior of Mexican criminal organizations and, therefore, on the security environment in Mexico. However, the consequences could be significant. In this study, the IMCO this topic seeks to incorporate strategic planning and defining the security policy of the new federal administration.
- On 6 November, the states of Washington, Colorado and Oregon will put consideration of their voters a series of initiatives that would legalize the possession, production, distribution and sale of marijuana.
- The measure can have a serious impact on the marijuana market in the United States, with implications for the structure of revenue and business model of the Mexican drug trafficking groups
- A high percentage (approximately 40 and 70%) of the marijuana consumed in the neighboring country is imported from Mexico
On 6 November, the states of Washington, Colorado and Oregon will put consideration of their voters a series of initiatives that would legalize the possession, production, distribution and sale of marijuana. The adoption of any of these root could transform public debate about illegal drugs worldwide. But beyond the symbolic and political effects, the measure could have a serious impact on the marijuana market in the neighboring country, with implications for the revenue structure and business model of Mexican drug gangs.
If passed one or more of the initiatives, the U.S. could move from being a country primarily marijuana importer to one capable of meeting most of its domestic demand with domestic production. Depending on the federal response to statewide legalization, the producers of the states that eliminated legal penalties for marijuana could provide much of the produce consumed in the United States.
Currently, a large percentage of marijuana consumed in the neighboring country is imported from Mexico. While there are no conclusive studies on the exact involvement, literature estimates a range between 40% and 70% .1 If marijuana legally produced is exported to other states, the degree of participation decrease. The effect size would depend crucially on the production and sale prices under conditions of legality.
The determining factor in the formation of illegal commodity prices, including marijuana, is the effect of the risks incurred by individuals participating in those markets. That is, under conditions of illegality, the price paid by a consumer for a gram of marijuana is not only the cost of production and distribution of the gram, but also the risks that producers and distributors have to face when participating in an illegal market 2 This “raw” risk includes extra compensation a producer or seller requires the possibility of imprisonment, injury or death prematura.3
Additionally, the illegality produces structural inefficiencies. The need to elude authorities prevents the use of best production techniques. Because of the possibility of
eradication or forfeiture, producers use small plots rather large area, thereby forgoing the benefits of economies of scale. Other financial and institutional factors also reduce market efficiency of marijuana: the exclusion of credit markets to cover fixed costs and capital investment, difficulties in recruiting insurance, failure to attend the court system to resolve commercial disputes, etc..
For these reasons, it is anticipated that, in terms of legality, the costs of production and distribution of marijuana drop significantly, affecting the prices consumers pay. That price decrease significantly alter the marijuana market and thus the revenue obtained criminal organizations currently trade of that substance.
This study is based on an estimate made in 2010, under the auspices of the RAND Corporation, in the case of California.4 There are some methodological differences that are detailed in subsequent sections, but the conclusions are similar: a statewide legalization could have a severe crowding on Mexican exports of marijuana. This effect would mean a significant structural shock to the Mexican drug trade.
The study has two parts: 1) a description of the model and estimation parameters, and 2) a report of the main results. It should be noted that not modeled the effects of a possible U.S. federal response to the adoption of measures statewide legalization. There is considerable uncertainty about the strength and characteristics of a possible federal response and not found a completely satisfactory method to estimate its possible effects. It is essential, however, keep in mind that a strong federal response could substantially change the results presented below.
1. Model Description
a) Cost of production of marijuana in states “legalized”
The possible legalization of marijuana at the state level in the United States would not have the same effect as a national legalization because of a basic fact: the substance would remain illegal at the federal level. Producers, distributors and marketers continue to face risks of arrest and imprisonment, even if their activity is fully legal in terms of the state standard. Consequently, a basic assumption of the model is that it would continue to pay a risk premium and do not disappear all structural inefficiencies of illegality.
1 Kilmer et al, Reducing Drug Trafficking Revenues and Violence in Mexico, 2010
2 Caulkins and Reuter, Drug Enforcement Affects How Drug Prices, 2010
3 Caulkins and Reuter, What Price Data Tell Us About Drug Markets, 1998