Thursday, April 26, 2007

UN Misses Even the Small Points

In an opinion piece titled “An Opium Market Mystery” in the Washington Post yesterday, Director of the UN Drugs and Crime Office Antonio Maria Costa wonders breathlessly why a significant increase in 2006 opium production did not cause an equally significant reduction in the street price of heroin, and frets that it may indicate hoarding by dealers to maintain high prices.

As with most members of the UN, this guy clearly has too much time on his hands. First, a major part of the answer is provided in the article itself. Costa states that while Afghan opium farm prices did drop “from $150/kilo to $125,” a not insignificant 17%, more importantly “[Heroin’s street] purity is going up – a telltale sign of greater availability.”

Two things. If heroin street purity is a “telltale sign of greater availability,” how does that suggest criminals are hoarding supplies? More importantly however, the increase in purity itself suggests the answer. There are two basic ways handle an increase in supply of any product in the face of fixed demand: 1. lower prices. 2. offer a greater quantity at the same price which is just another way of accomplishing the same thing. Dealers have chosen the latter. Buyers are purchasing more (purer) heroin for the same price, kind of like a Safeway two for one sale.

There could also be new markets emerging that we have not yet identified, as Costa suggests. Afghan drug dealers could also be having a harder time getting their product to market. There is a war going on, you know. But to think that dealers might hoard drugs in an effort to maintain high world prices reflects an ignorance both of the competitive nature of the drug trade as well as of the inherent instability of cartel organizations.

There are simply too many players with two many competing incentives for any one group to have that much control over supply, and the minute one group restricts supply, another group sees an economic opportunity in increasing it. For this reason, cartels rarely work over any appreciable period. Just look at our much-lamented gas prices. Despite OPEC’s best efforts, US gas prices have not yet surpassed 1960s prices, after adjusting for inflation!

The only way Costa’s sinister drug cartel model could be maintained would be if there was some kind of effective worldwide enforcement mechanism to punish wildcat suppliers. This would require a vast network of informants and enforcers controlled from one single point. Such would imply the resources if a state, and a major state at that. As preeminent promulgators of all kinds of crime, drug dealing and terrorism, Russia and China come immediately to mind.

But I don’t think Mr. Costa would dare suggest that.

Jim Simpson is a businessman, free-lance writer and former White House staff economist and budget analyst who among other duties, oversaw drug-control budgets of Treasury Department law enforcement agencies during the elder Bush and Clinton administrations.