Mapping the Revenue of Mexico’s Organized Crime Organizations

Starting tomorrow, Stanford’s Center for International Security and Cooperation will host a two-day conference on violence, drugs and governance in Mexico. In preparing for the event (at which Mark Kleiman will also be in attendance), I decided to try to estimate the current revenue streams of the Mexican organized crime organizations (MOCOs). I leaned heavily on RAND research and on the analyses of colleagues in Mexico to generate my estimates, so credit for whatever is correct in these charts goes to them whereas any errors are solely on my own head.

The most difficult thing about getting current revenue streams correct is estimating how much the MOCOs are making from non-drug-related activities (e.g., smuggling immigrants across the border, pirating videos, kidnapping, extortion). Everyone I read or talked to agrees that this line of MOCO revenue is growing, but estimates of how large it is were divergent. The first chart here uses the low-end estimate among experts of 15% non-drug revenue. If this estimate is correct, the MOCOs are still largely one dimensional drug trafficking organizations, with principal profit coming for cocaine. Note that were we mapping drug markets more generally, cocaine would be a much larger share of the pie but because much of that money is made by Colombian gangs, the share for the MOCOs is smaller.

The drug-related pie slices are all based on the national U.S. market revenue, with one exception. Because California had a ballot proposition to legalize marijuana, I have broken out the California marijuana revenue stream separately. It’s about a seventh of the total.

A minority of experts (e.g., Sylvia Longmire, Edgardo Buscaglia) think that the MOCOs make a much larger share of their money today from non-drug sources. This second chart presents the revenue breakdown if these experts are correct. You can see the differing policy implications, for example even national methamphetamine legalization in the U.S. wouldn’t put much of a dent in MOCO revenue.

A few analytic notes:

*If you want to convert these charts into US dollars, I suggest you use $10 Billion as the size of the overall pie. That could be off a a billion or two in either direction but it’s not a bad estimate, and it makes the math easier.

*If you want to calculate the impact of legalizing a drug under each assumption (high or low non-drug revenue), multiply the relevant pie slice by 80%. The 20% that’s left would be the residual black market, for example from selling heroin to people under 21 in a state that legalized use for those 21 and over. So for example, under the low non-drug revenue scenario, national legalization of cocaine in the U.S. would reduce cartel revenue by 80% of 34% or about 27%. In the high non-drug revenue scenario, legalization of marijuana in California would cost the cartels 80% of 1% or .8% of revenue (i.e., pocket change). If you want to project the impact of an unusually loose legal market, use a higher proportion to reflect a larger impact on illegal revenue (e.g., 90%); if you want to project the impact of a tightly regulated legal market use a small proportion (e.g., 70%).

*Finally, when following media reports about the MOCOs, don’t fall for two common misrepresentations. The first is that the MOCOs are “drug cartels”. The MOCOs are not cartels, they have yet to coordinate production and prices as cartels by definition do and we therefore do not need to take this tactic into account when estimating their revenue. Second, don’t mix up reports of drug revenue with total revenue. Numerous news stories slip back and forth between the two as if they were the same thing, but regardless of who is correct about the level of non-drug revenue, no one thinks it is negligible. MOCO drug revenue and total revenue are therefore different things.

Author: Keith Humphreys

Keith Humphreys is the Esther Ting Memorial Professor of Psychiatry at Stanford University and an Honorary Professor of Psychiatry at Kings College Lonon. His research, teaching and writing have focused on addictive disorders, self-help organizations (e.g., breast cancer support groups, Alcoholics Anonymous), evaluation research methods, and public policy related to health care, mental illness, veterans, drugs, crime and correctional systems. Professor Humphreys' over 300 scholarly articles, monographs and books have been cited over ten thousand times by scientific colleagues. He is a regular contributor to Washington Post and has also written for the New York Times, Wall Street Journal, Washington Monthly, San Francisco Chronicle, The Guardian (UK), The Telegraph (UK), Times Higher Education (UK), Crossbow (UK) and other media outlets.

19 thoughts on “Mapping the Revenue of Mexico’s Organized Crime Organizations”

  1. The 20% that’s left would be the residual black market, for example from selling heroin to people under 21 in a state that legalized use for those 21 and over.

    Why wouldn’t the under-21 market be catered to by pliant over-21s, like with alcohol? Given the facility, under-21s would surely prefer legal pharma-grade heroin rather than legacy cartel product. In which case. even an organized sector catering to under-21s would be contained within the US*

    *I’m assuming legal heroin would be manufactured within the US, or if made abroad, within a sanitised regime, like with medicinal opiates in Australia or Turkey.

  2. According to Mark Kleiman, “Frequent or random drug testing [of those on parole or probation]… could shrink the market — and thus the revenue of Mexico’s drug-trafficking organizations — by as much as 40 percent.”

  3. daksya: They might, underage sales are just an example of how a black market will persists even for legal addictive products (e.g., cigarettes). How big the black market is depends on how tight the legal market is — if heroin is untaxed, cheap, available at an abundance of locations at all hours of the day or night and available to all ages, the black market will be small, if heroin were strictly regulated, highly taxed etc., the black market will be larger. Policy analysts put their estimates of the decline in black market revenue from as low as 65% to as high as 95% — 80% is the middle of those estimates so I picked that — pick a different number to do your calculations if you anticipate a tighter or looser legal market.

  4. Keith, I can’t tell you how much I wish I could be a fly on the wall at that conference! It’s quite an undertaking to try to figure out these kinds of numbers when black market activity is so nebulous. I’m almost done with Mark’s book (and Jon Caulkin’s, who’s an acquaintance, and Angela Hawken’s) “Drugs and Drug Policy,” and I’m completely fascinated by it. Every single day I go back and forth on what kind of impact full legalization of all drugs would have on the drug war, on our public health system, on our society, etc. There are just so many factors to take into account, and so many “what ifs.” Then you have to inject personal moral feelings about drug use, which makes things even more complicated. If there’s any way I can help, please let me know!

  5. I’m a bit skeptical of that 20% figure. Do black market sales account for 20% of the liquor market? How about the tobacco market?

    Also, regarding heroin, it’s important to bear in mind that the severely addicted account for nearly all consumption. Casual and experimental users make up a tiny segment of the heroin market. If the US were to legalize heroin in the same manner as Switzerland has (free or nearly free, pharmaceutical-grade heroin for hardcore addicts), this would leave the cartels with only casual and experimental users as their customer base, hardly a lucrative market.

  6. Keith, some sort of black market will most likely persist. I’m just confused as to why you seem to assume that the nature of that black market will the same as now, just scaled down to the median estimate of 20%. As it stands, most heroin is manufactured in Afghanistan (and some in South America or elsewhere; none in US). Much of that heroin needs to be transported to the US. Being contraband, organized crime steps in to fulfill that need. Mexico, being the neighbour of the US, and having a fragile state of L&O, is the ‘last frontier’ abutting the big market. So there’s a high concentration of drug trafficking activity alongwith its concomitant turf battles etc. But..

    once heroin is legalized; it will be manufactured in the US (or elsewhere in sanitized regimes). It won’t be contraband. The primary purpose of MOCOs (based in Mexico) is no longer extant. Whatever black market arises to meet the needs of under-21s etc will operate using diverted legal heroin or “surplus” inventory manufactured at or near the legal production sites.

    Of course, I have neglected the most important oversight. If legalization of heroin does happen, what would be the likely public reasoning behind that? To cut off revenues of MOCOs? If the US polity ever becomes sympathetic to the idea that heroin needs to be legalized (in order to induce lower market prices) to hurt the MOCOs then high taxes are a no-go area from the start. And no other reason for legalization (such as libertarian impulse) has any hope of purchase within US politics in the near future, or ever.

  7. Sylvia: You will be missed at the conference — good luck with your book tour!

    pforehlich2004: The black market in tobacco is very large, so much so that in some places taxes have had to be reversed because the illegal market was swamping the legal one. In any event, as I said, if you want to see the effect of a looser legal market, bump your number up from 80%, if you want to project a tighter one, move it down.

    dakysa: Black markets are not just about manufacture, they are also about tax evasion, hours of sale, places of sale, forbidden buyers etc. There is an enormous black market in legally and locally produced, high grade opiates in India, there is a also a huge black market in factory produced untaxed cigarettes in much of the developed world.

  8. Nice quick summary. I take most of the comments to effectively be suggestions for how one would refine this if one were going to write a longer (and hence probably less accessible) summary.

    Two similar such things I’d love to see worked out —

    The RAND figures should basically be thought of as export revenues. There is a lot of discussion but not yet much hard evidence about how many dollar made through distribution activities within US borders get “repatriated” to DTOs. I’d identify at least three stories. (1) None — domestic distribution generates revenues for domestic distributors some of whom might be of Mexican ancestry but no real connection. (2) Basically none because even if some domestic distributors have connections to DTOs they are more like independent companies connected through a supply chain than a vertically integrated whole. (3) Lots because mark-ups within the US are roughly a factor of 5 greater than import prices and higher levels of the wholesale chain within the US are “staffed” by “lieutenants” sent on temporary assignment by DTOs and the profits generated by those “employees” belong to the DTOs. I’ve heard passionate defenses of images along all three lines.

    Second, I tend to be an advocate of focusing on dollars/value as the best general purpose proxy of the damage caused by a black market, but it is only a proxy. We really care about black markets mostly because of the associated violence, corruption, etc., and there is no magic rule that requires the number of homicides per billion dollars to be the same across drugs let alone between drugs and non-drug sources of revenue. So even when we get the revenue pie chart perfect, the pie chart for homicides, for example, may look different. I would be very interested if someone could guesstimate whether homicides per unit revenue are higher or lower in kidnapping, extortion, or trafficking — or whether it is even possible to think about those as distinguishable industry verticals vs. being revenue streams all generated by one “capital stock” in the form of capacity to threaten and carry out violence.

    (Apologies to all who balk at using business jargon when characterizing criminal activity, but for expressing concepts like these, it has its value. Naturally I do not mean them literally and understand that it is metaphorical to an extent.)

    But clearly getting the big picture right on the revenue pie chart is a positive step.

    1. Keith and Jon,

      1. I tend to side with the low-ball estimates of post-import revenues of Mexican DTOs (i.e., Jon’s options 1 and 2) for aat least three reasons: a) a very large influx of dollars would show up somewhere in the Mexican balance of payments and it does not as far as I can see: so-called errors and omissions in the Mexican BOP amounted to US 7.7 bn in 2010, a figure more or less consistent with RAND’s estimate of wholesale export revenues; b) of course, drug revenues might be hidden in other line items of the BOP: say, the trade balance, FDI or remittances. But then an interesting question arises: if the DTO’s can send billions upon billions of mostly undetected dollars using formal commercial or financial channels, why would they bother sending bulk cash (which they do)? It seems like a rather risky, time-consuming, and expensive way of moving money, particularly if you have well established alternatives. You would only do it if you don’t have those alternatives, but if that’s the case, then the money is not hidden in other line items of the BOP; c) it might be the case that the earnings are never repatriated to Mexico, but then, i) it is no longer Mexico’s problem, and ii) the bulk cash question is still a killer: if you can keep the money and launder it in the US, why bother with the complicated mechanics of physical shipments to Mexico and then on to Colombia? Wouldn’t it be better to just pay suppliers (Colombian or otherwise)by means of formal commercial or financial channels (after laundering, of course)?

      2. The 50%-plus estimate for non-drug revenues of DTO’s is absolutely ludicrous. Let’s go quickly through the potential sources of income: a)human trafficking: according to the latest National Employment and Occupation Survey (ENOE) done by the Mexican equivalent of the Census Bureau (INEGI), 150,000 Mexicans emigrated to (mostly) the US in 2010; out of those, a portion were legal migrants and another portion were visa overstays, i.e., they did not need a trafficker to get to the US. So let’s put at 100,000 the number of illegal Mexican migrants to the US in 2010. Migrants from third countries have always been a fraction of Mexican migrants, but for the sake of argument, let’s say they were the same number. So you have around 200,000 potential clients for human trafficker, which charge about USD 3,000-5,000 a pop (and that includes about 3-4 attempts). That brings the total to somewhere betwee USD 600 million and US one billion, not all of which is accruing to DTO’s because there are a lot (probably a majority) of independent gangs of coyotes; b) piracy: according to data from the Mexican Film and Music Protection Association (guys that would tend to exxgerate the problem), in 2010 music piracy caused losses of 436 million dollars to the industry. Such potential losses are not equivalent to the pirates’ earnings: they imply that 30 to 40 million pirate CDs are sold every year in Mexico at a price of not more than two dollars each. Therefore, the earnings from CD piracy would stand at levels of 60 to 80 million dollars. The pirate DVD market is predictably smaller and that of clothes and other articles somewhat larger. In any event there is a high probability that the total amount of income produced by piracy is in the range of the low hundreds of millions of dollars (and there are a lot of non-DTO players); c) fuel theft: according to Pemex, about one million barrels of fuel (mostly gasoline) were stolen from its network in the first four months of 2011; extrapolated, that would translate to three million barrels per year. A barrel is equivalent to about 80 liters of gasoline. Thus, some 240 million liters are stolen. In both the US and Mexico, a liter of unleaded gasoline is sold in a gas station for something less than a one dollar, but since the thieves probably have to offer a discount given the illegality. So the total amount accruing from this is likely less than USD 200 million (again, with many independent players); d) kidnapping: according to data from the Ministry of Public Safety (SSP), the average paid ransom in Mexico is approximately USD60,000; in 2010, there were 1264 recorded kidnappings; thus the income from “official” kidnappings would be around USD 72 million. Let’s assume (correctly) that that figure is a wild underestimate and multiply by 10: you get to USD 720 million (with a lot of that money going to specialist kidnapping gangs, not DTO’s); e) extortion: this is the tricky one. No one as far as I know has a minimally reliable estimate of the size of the phenomenon. But according to some anecdotal evidence, the average extorted firm is paying about USD10,000 per year (NB: since extortion is decentralized, the death, imprisonment, or relocation of a specific henchman can lead for a firm to the suspension of payments for a few months or even permanently, so that estimate seems not that wildly off the mark). If that number is more or less correct, you would need about 100,000 firms paying protection my oney to get to one billion: that would be one in forty Mexican economic units, according to the latest economic census; to get to half of what RAND estimated as drug export revenues, one in thirteen economic units in the country would have to be extorted. That would seem to me pretty much unprecedented in human history (maybe someone has an example). There are, of course, other types of extortion (e.g., phone extortion), but that is mostly the work of con men posing as kidnappers or Zetas or whatever. So, in summary, I would be massively surprised if non-drug revenues of Mexican DTO’s were much more than USD 1-2 billion (and that range could be on the high side), i.e., 15-25% of total revenue at most.

      3) I’m no longer in public service, so I launched a new blog on drugs and crime: http://www.plataoplomo.org. It is in Spanish and mostly geared to a Mexican audience, but maybe some RBCers might find it interesting.

      Best regards.

      1. Alejandro — this is some serious work on your part and much needed. I would tend to agree with you that the low end estimate is probably closer to the truth than the high end (although it depends on the cartel, Los Zetas have more, Sinaloa less, non-drug revenue).
        Two points on which I think you could be challenged are (1) Pemex’s reports of how much gas is stolen when people within Pemex are almost certainly in on the stealing — actual theft could be way way higher (2) One scholar at the Stanford meeting said that the Zetas essentially control much of the apparatus of whole cities, peeling money off of imports/exports/pensions/public service budgets on top of straight out extortion of businesses. That could be a lot of money in a middle income country. Those things said, I would still tend to agree with you that the truth overall (averaged across MOCOs) is probably closer to the lower end.

        And congratulations on your new blog, and a suggestion: It’s too hard to post a comment, can you make it so it goes up without needing to login to wordpress or some other system to post a comment? (i.e., like it is here). I am techno-idiotic and couldn’t get one to post despite a few tries.

        1. Keith,

          Just fixed the comments bug (or I think I did. I’m still a rookie at this blog thing). Thank you for the suggestion.

          1. Agreed on the Pemex issue, although it would still surprise me if the actual number is not in the hundreds of millions of dollars range. Pemex is deeply flawed, with severe corruption problema, but there aré still some internal controls and external oversight. The loss of billions upon billions of dollars in gasoline would show up somewhere. And considering that total annual oil production in Mexico is about 800 million barrels and a large portion of that is directly exported from offshore platforms, losing three million barrels to theft does not seem that small a proportion to me.

          2. I am deeply suspicious of claims that one cartel or another has full control of a town. Based on what evidence exactly? And “inteligence sources” dos not quite cut it for me. As I said in my earlier comment, we know very little about extortion in Mexico. I don’t think there is yet any good scholarly treatment of the issue and good data is somewhere between really scarce and non existing. Official numbers and ven victmization surveys may be recording things that aré not really extortion (some forms of so-called phone extortion are more akin to fraud than to real extortion) and may be leaving out some of more serious staff. So we don’t really know how extended the phenomenon is. I am currently trying to approximate a number using economic census data, but it’s really tough going. And then there’s the issue of the posers: how much money is really going to, say, the Zetas, and how much to people just posing as Zetas? Not really sure.

          Anyway, thank you very much for a very lively discussion.

  9. Keith, the disagreement is over the nature of the black market, not the conditions needed for its existence. My 2nd comment is, I think, pretty clear about this.

  10. Seems to me that there’s another factor when considering drug and non-drug sources of income, and the effect of shutting down one source. It should be clear that the success these organizations have in non-drug-revenue activities (like kidnapping, for example) is, to a large degree, possible because of their ability to corrupt and nullify law enforcement reaction. Once they “own” the regulatory system, then other revenue streams are wide open to them.

    Losing even a significant minority of their revenue stream (from something like legalization, particularly as it is an external funding source) would hamper their ability to recruit, bribe and intimidate, thus opening the door to effective law enforcement response and public outrage against non-consensual crimes.

  11. I can assure you that the 15% estimate for nondrug income is way low. Not only are the MOCO becoming more involved in shake downs (witness the recent firebombing of the casino in Monterrey which is only the tip of the iceberg) and kidnapping and similar behavior, but the smaller criminal gangs that don’t have much to do with drugs are increasing their activity because the environment is favorable to things like extortion and kidnapping. One thing that hasn’t been mentioned so far is that legalizing drugs under either of the two scenarios will mean that the MOCO’s will just turn their attention to their other “activities” making the social situation that much worse.

    In Monterrey the Old Quarter used to be full of people weekends at the various bars, discos, and restaurants. Now it is empty because of the violence perpetrated against owners who don’t pay their “insurance premiums.” The road running south out of town used to be full on weekends of people driving to various vacation sites, but now you can get on the road at any time of day during the weekend because of so much of the violence involving kidnapping.

    By the way, the abbreviation “MOCO” is more than a bit amusing. In Spanish it means mucus running from your nose, and by extension, any snotty nosed little kid.

  12. Texas Aggie: There are certainly people at the conference I am attending that agree with you. Personally, if I had to pick one of the two estimates I would think the lower one is more accurate though because the income generated by the drug trade is so lucrative, even relative to kidnapping. I have heard that the piracy of brand name videos and clothes is quite profitable, however.

  13. These are essentially gross sales figures (well, estimates), right? Does looking at net profits change the overall picture much?

    [I assume a ‘profits’ figure going to be a little harder to define in a criminal organization where the lack of careful accounting and nature of the business mean ’employee salaries’ blend in with ‘ownership profits’, but these are all estimates anyway]

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