Study predicting declines for Mexican drug cartels since US legalization of marijuana

A recent study released by the think tank Mexican Institute of Competitiveness (IMCO) details how the legalization of marijuana in Colorado and Washington could cause a significant decline in the revenues of Mexican drug cartels. They predicted up to a 30 per cent decline in profits, assuming ballot initiatives passed in three states, including Oregon. According to the study, Mexican cartels stand to lose $1.425 billion in Colorado and $1.372 billion in Washington.

They further predict that once even a fraction of the U.S. turns from net importer to producer, there is potential for domestic production to meet most of domestic demand. The study looks at pricing factors that favor domestic product over Mexican imports to create their model, including high transport costs for the Mexican product, projected post-legalization prices of cannabis diverted from the three states, and the relatively higher THC content of domestic product. The author does, however, acknowledge that the predictions do not take in to account a potential post-legalization federal crackdown on domestic cannabis.

An earlier study published by the RAND Corporation in 2010, looked at the potential impact of marijuana legalization when Proposition 19 was still pending in California. Taking in to account that California accounts for roughly 14 per cent of total marijuana consumption in the U.S., cartel revenues would drop by only 2 to 4 per cent, assuming there is no diversion to other states. Washington and Colorado have smaller populations and lower demand, so a federal crackdown would mean an even more marginal drop in cartel revenues. If there were smuggling to other states, the total loss of export revenue for cartels estimated by RAND would be up to 20%. The RAND Corp. study outlines other important variables, including the lack of empirical evidence on how marijuana consumers trade off price and potency, as calculations in these studies use price per unit of THC, whether excise taxes are paid on inter-state diverted marijuana, the exact cost of smuggling across the U.S., and how much cheaper domestic product would need to be to undercut Mexican product, considering minor price adjustments can be made to avoid losing market share.

While White House officials have states that 60 per cent of Mexican cartels’ revenue comes from marijuana, the RAND Corporation’s report estimates the upper limit is closer to 26 per cent, with cocaine exports accounting for twice as much. It’s unclear what sort of reaction, if any, can be expected from the cartels and what this means for drug-related violence. Darker forecasts include cartels compensating by relying more heavily on other drugs and illegal activities.

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Someone else. has been kind enough to post a rough English translation of the IMCO study here.

Their argument is expressed in pictures too, in Spanish, below: