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Underground Economy Series: The Business of Illicit Drugs

Products in the illicit drug economy

[Editor’s note: Welcome to the Underground Economy series, which delves into the business of illicit, under-the-table, or otherwise accepted-but-not-quite industries. The previous installment explored sex work–check it out here. Today’s installment deals with the illegal drug industry!]

A transaction in the illicit drug economy
The illicit drug economy is big business throughout the world–and it’s only getting bigger.

As a nation, we celebrated the 50th year anniversary of the War on Drugs in 2021. Unfortunately, there was little to celebrate. Illicit drug trade and use in the U.S. peaked in the early 1980s before starting to decline. But in recent years, it has once again escalated, nearing those same statistics despite tremendous investments. As a result, many have touted the war as a complete and utter disaster, doing little to curb drug use. And the economic impact the illicit drug trade continues to have in the U.S. remains profound. Solutions are needed, but few effective ones have been offered as of yet.

When it comes the illicit drug economy, most would say it’s doing just fine on a global scale. Worldwide, the industry is estimated to be roughly $652 billion in annual sales, even though exact statistics are difficult to find. Assuming this is accurate, illicit drug trade outperforms dozens of countries and would appear 22nd in global GDP rankings. Understanding that these revenues aren’t directly taxed or claimed as income, the negative effects are obvious. But additional economic impacts extend well beyond lost tax revenues. As one of the top players in the underground economy, the illicit drug trade continues to be a major problem.

“The drug war is a failed policy and the things that they said would happen — people would stop using drugs, communities would get back together, we’d be safe, they’d get drugs off the street — those things didn’t happen.” – Kassandra Frederique, Executive Director at the Drug Policy Alliance

An Overview of the Illicit Drug Economy

In defining the illicit drug economy, key substances involved include cocaine, opioids, methamphetamine, and other illicit substances. This also includes the illicit use of pharmaceutical drugs that are part of the underground economy. The sum of these sales was estimated at $153 billion in the U.S. in 2017. These figures are believed to have increased further today given illicit drug use has increased. In 2019 alone, a year-over-year increase of 13% was reported among individuals 12 and older. At the same time, drug-related overdoses climbed as well, hitting over 90,000 a year. All of this supports an illicit drug economy that is quite strong.

(Not all drugs are bad. In fact, customized pharmaceutical medicines are a bold innovation–read about it here.)

While estimated revenues from illicit drug trade provide some measure of costs to the nation, these are incomplete. Indirect costs such as lost productivity, healthcare costs, and criminal justice costs are also prominent. In 2007, these costs were calculated to total $193 billion with lost productivity costs being the greatest. Since then, the illicit drug trade has grown substantially, meaning these figures are likely higher as well. Personal consumption of illicit drugs consumes more than 4% of consumer spending today. And this is occurring despite the legalization of marijuana in many states around the country.

“We are still in the midst of the most devastating drug epidemic in U.S. history.” – Vanda Felbab-Brown, Senior Fellow at the Center for Security, Strategy, and Technology at Brookings Institution

Failed Strategies Targeting Illicit Drug Trade

Perhaps in trying to find better strategies to attack the illicit drug trade, an analysis of past approaches is worthwhile. The War on Drugs sought to curb illicit drug use by implementing deterrence measures. Three strikes laws and harsh penalties were adopted nationwide, and for a time, use decreased. But in the process, much was lost. Mass incarcerations due to drug-related crimes skyrocketed. In fact, about 20% of those in prison had been arrested for illicit drugs. Estimates suggest that this increase in incarceration cost federal and state governments over $182 billion a year. This figure exceeds the amount attributed to the illicit drug economy overall. And at the same time, these strategies devastated communities, especially urban and racially marginalized ones. In short, these policies had little long-term benefit.

Items in the illicit drug trade
When it comes to the illicit drug trade, efforts to curb supply have come up short–mainly because of unwavering demand.

At the same time, significant expenditures targeted prevention strategies to curb illicit drug use. The current budget for the federal government in this regard exceeds $34 billion annually, which has risen exponentially. But education and public outreach programs have done little to slow down the illicit drug economy. Some experts have suggested that legalizing some drugs might help undermine illicit drug trade. Using marijuana as an example, illicit drug markets continue to persist, however. Due to strict state policies regulating production, distribution and sales of cannabis, underground markets continue to thrive. Criminal justice costs may have declined, but these shifts have done little to change the landscape. Thus, after 50 years of effort, things are essentially back to where they were before.

″[The goals of the war on drugs] were to literally eradicate all of the social, economic and health ills associated with drugs and drug abuse. It doesn’t get much more ambitious than that.” – Christopher Coyne, Professor of Economics at George Mason University

New Approaches to Consider

In examining prior and current strategies targeting illicit drug trade, the primary focus has been on the demand side. Deterrence policies punished those believed to be the primary consumer while prevention efforts did the same. However, strategies focused on the supply side of the illicit drug economy have been less robust. Of the current budget, a very small amount is used to identify money laundering or smuggling of bulk cash. Drug cartels have adapted to new environments over the years including new methods of concealment and production. But most of the current policies regarding illicit drug use continue with the same approach. Things definitely need to change.

There are several things to consider in efforts to curb illicit drug trade that will likely work better. First and foremost, international cooperation is needed along with a central data depository regarding cartel activities. Likewise, investing in efforts to track money laundering schemes and new drug trafficking approaches should also occur. By targeting the supply side of the illicit drug economy, opportunities exist to reclaim some of the lost tax revenues. And given that illicit drug trade represents a major player in the underground economy, this seems to be a more rewarding approach.


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