How do narcodollars contribute to local and global economies?

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Assuming that they actually do. I’ve heard and read that drug money plays a vital role in upholding economies, but have only been offered handwaving explanations as to how it acheives this. The only concrete example that I can think of are individuals like Pablo Escobar who directly funneled some of their income into the local community. But as I understand it the issue is more complex than that.

In: Economics

You should give the documentary Cocaine Cowboys a watch.

Drug sales generate money… A LOT of money. So what the heck do you do with it all? The problem of course is that it’s illegal, so if you want to use it you have to launder it. ie hiding the real source of your income.

Much of this was done using Panamian banks, but there was some money laundering done in local businesses as well.

Drug cartels bought up huge amounts of businesses and real-estate in Miami. They ran night clubs, strip joints, trucking companies, helped build stores + malls, high rises and apartment complexes. This was in part to launder the money, and in part to spend the money on things they enjoyed and wanted to invest in for the long term.

For example the drug dealers and drug runners bought so many Mercedes that the local dealerships more than doubled their sales.

All of these businesses drive up the economy. They employ staff, they buy and sell goods, etc.

And while the illegal side of the business doesn’t pay taxes, the legal side often does.

The Hell’s Angels are believed to outright own so many businesses that they are considered one of the largest sources of capital investment in North America.

Start with the baseline of an ordinary industry. People combine labor and capital to produce something (a drug) that others want to consume. Even if the raw materials for the drug are produced elsewhere, there are still jobs in distributing it to local consumers. It’s like having an ordinary grocery store. You can go to the store and buy potatoes, and the people who run the store have something productive to do. Everybody wins.

But the drug trade differs in two crucial ways. First, it is forbidden by the government, which invests resources in shutting it down. This massively increases the costs and risks associated with distribution. This means the drug will cost more to consumers, and that the people who sell it will (potentially) get paid more to account for the risk that they might go to prison. ([Though our best study of this so far](http://pricetheory.uchicago.edu/levitt/Papers/LevittVenkateshAnEconomicAnalysis2000.pdf) shows that most street-level dealers don’t make much more than they would stocking groceries). From a pure economics perspective, you can think of this as wasted resources. There’s a lot of money in drugs, but it’s going to non-productive activities like incarceration, smuggling, drug seizures, money laundering, and violence. That is, drugs are a big business, but but they’d be even bigger if they were legal. We’d still have a Pablo Escobar spending money on whatever, just like we have Jeff Bezos and Sam Walton, except the guy who gets insanely rich of drugs in a world where they’re legal would probably be less “vicious kingpin” and more “boring farmer”.

However, none of this accounts for the second way that drugs differ from ordinary groceries. That second way is that drugs have potentially deleterious effects on individuals and communities. Drug commerce can have a net negative impact on economies if it turns a bunch of otherwise-productive workers into junkies and OD cases. Drug prohibition primarily exists to avoid this outcome precisely by making the drug trade inefficient, so it’s harder to buy cocaine than it is to buy potatoes. Even so, it’s clear that many of the negative effects of drugs arise not from the drugs directly but from the fact that drugs are sold in a black market with little regulation and lots of violence.