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Jul 28th 2012 | from the print edition
MEXICO has 11 billionaires, according to Forbes magazine. Ten are often
pictured smiling at charity dinners and other posh bunfights. One, Joaqu n Guzm
n 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 Guzm n, 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 Guzm n. 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 imb
ciles 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 Guzm n 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
Guzm n 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 Guzm n s son, known as El Gordo, or Fatty . It turned out to be a false
alarm: the arrestee was a car salesman called F lix, 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, Ram n God nez, 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.
Economist.com/blogs/schumpeter
from the print edition | Business