Originally Posted by
Stratfor
A failed state is one in which the central government has lost control over significant areas of the country and the state is unable to function... it seems to us that the Mexican government has lost control of the northern tier of Mexico to drug-smuggling organizations, which have significantly greater power in that region than government forces. Moreover, the ability of the central government to assert its will against these organizations has weakened to the point that decisions made by the state against the cartels are not being implemented or are being implemented in a way that would guarantee failure.
Despite these facts, it is not clear...that Mexico is becoming a failed state. Instead, it appears the Mexican state has accommodated itself to the situation. Rather than failing, it has developed strategies designed both to ride out the storm and to maximize the benefits of that storm for Mexico.
First, while the Mexican government has lost control over matters having to do with drugs and with the borderlands of the United States, Mexico City’s control over other regions — and over areas other than drug enforcement — has not collapsed (though its lack of control over drugs could well extend to other areas eventually). Second, while drugs reshape Mexican institutions dramatically, they also, paradoxically, stabilize Mexico...
...Let’s begin by understanding the core problem. The United States consumes vast amounts of narcotics, which, while illegal there, make their way in abundance. Narcotics derive from low-cost agricultural products that become consumable with minimal processing. With its long, shared border with the United States, Mexico has become a major grower, processor and exporter of narcotics. Because the drugs are illegal and thus outside normal market processes, their price is determined by their illegality rather than by the cost of production. This means extraordinary profits can be made by moving narcotics from the Mexican side of the border to markets on the other side...
...Whoever controls the supply chain from the fields to the processing facilities and, above all, across the border, will make enormous amounts of money. Various Mexican organizations — labeled cartels, although they do not truly function as such, since real cartels involve at least a degree of cooperation among producers, not open warfare — vie for this business. These are competing businesses, each with its own competing supply chain.
Typically, competition among businesses involves lowering prices and increasing quality. This would produce small, incremental shifts in profits on the whole while dramatically reducing prices. An increased market share would compensate for lower prices. Similarly, lawsuits are the normal solution to unfair competition. But neither is the case with regard to illegal goods.
The surest way to increase smuggling profits is not through market mechanisms but by taking over competitors’ supply chains. Given the profit margins involved, persons wanting to control drug supply chains would be irrational to buy, since the lower-cost solution would be to take control of these supply chains by force. Thus, each smuggling organization has an attached paramilitary organization designed to protect its own supply chain and to seize its competitors’ supply chains.
The result is ongoing warfare between competing organizations. Given the amount of money being made in delivering their product to American cities, these paramilitary organizations are well-armed, well-led and well-motivated. Membership in such paramilitary groups offers impoverished young men extraordinary opportunities for making money, far greater than would be available to them in legitimate activities.
The raging war in Mexico derives logically from the existence of markets for narcotics in the United States; the low cost of the materials and processes required to produce these products; and the extraordinarily favorable economics of moving narcotics across the border. This warfare is concentrated on the Mexican side of the border. But from the Mexican point of view, this warfare does not fundamentally threaten Mexico’s internally...
...The heartland of Mexico is to the south, far from the country’s northern tier. The north is largely a sparsely populated highland desert region seen from Mexico City as an alien borderland intertwined with the United States as much as it is part of Mexico. Accordingly, the war raging there doesn’t represent a direct threat to the survival of the Mexican regime.
Indeed, what the wars are being fought over in some ways benefits Mexico. The amount of money pouring into Mexico annually is stunning. It is estimated to be about $35 billion to $40 billion each year. The massive profit margins involved make these sums even more significant. Assume that the manufacturing sector produces revenues of $40 billion a year through exports. Assuming a generous 10 percent profit margin, actual profits would be $4 billion a year. In the case of narcotics, however, profit margins are conservatively estimated to stand at around 80 percent. The net from $40 billion would be $32 billion; to produce equivalent income in manufacturing, exports would have to total $320 billion.
In estimating the impact of drug money on Mexico, it must therefore be borne in mind that drugs cannot be compared to any conventional export. The drug trade’s tremendously high profit margins mean its total impact on Mexico vastly outstrips even the estimated total sales, even if the margins shifted substantially.
On the whole, Mexico is a tremendous beneficiary of the drug trade. Even if some of the profits are invested overseas, the pool of remaining money flowing into Mexico creates tremendous liquidity in the Mexican economy at a time of global recession. It is difficult to trace where the drug money is going, which follows from its illegality. Certainly, drug dealers would want their money in a jurisdiction where it could not be easily seized even if tracked. U.S. asset seizure laws for drug trafficking make the United States an unlikely haven. Though money clearly flows out of Mexico, the ability of the smugglers to influence the behavior of the Mexican government by investing some of it makes Mexico a likely destination for a substantial portion of such funds.
The money does not, however, flow back into the hands of the gunmen shooting it out on the border; even their bosses couldn’t manage funds of that magnitude. And while money can be — and often is — baled up and hidden, the value of money is in its use. As with illegal money everywhere, the goal is to wash it and invest it in legitimate enterprises where it can produce more money. That means it has to enter the economy through legitimate institutions — banks and other financial entities — and then be redeployed into the economy. This is no different from the American Mafia’s practice during and after Prohibition.
Mexicans fleeing drug war violence seek asylum in US.
