The Economic Impact of the Illicit Drug Industry

17 November 2005

The Economic Impact of the Illicit Drug Industry
TNI Expert Seminar, Amsterdam, 5-6 December 2003

Full report available in PDF.

The first activity of the new TNI project, Crime & Globalisation, was a seminar on The Economic Impact of the Illicit Drug Industry. Goal of the seminar was to assess the global business volume of the illegal drug industry and to look where the illegal proceeds of the industry are going. Issues discussed included: the size of the illicit drug economy and the flows, investments and collusion of drugs money in the legal economy the façade of money laundering control and the alleged funding of international terrorism through drug trafficking. It also discussed deficiencies in current research; and propose new areas and lines of research.  The seminar illustrated the widespread recourse to inflated figures, doubtful evaluation processes and the institutional need for numbers.

Data on illegal drugs are hard to collect and interpret, and the emotional charge carried by most data users leads to widespread misuse. Most existing estimates simply do not have plausibility. The economic impact of the illicit drugs industry could have an impact in less developed countries with weak institutions, while in developed countries the it seems to be minor. The effects on institutions and society are cumulative, so that the actual size of industry is not the main determinant of impact on the economy. It is not the size of the trade that is important, but its ability to change social behaviours, increase corruption and crime and fund insurgent and counter insurgent guerrillas.

Since the 9/11 attacks, in the mainstream discourse the "criminal underworld" is increasingly merged with that of political terrorism and constructed into one underground "axis of evil" that is a major security threat. The participants agreed that the drugs-terror nexus had been hyped, and state sponsorship of terrorist or armed organisations through drug trafficking revenues is downplayed. There is a commonality in financial needs for both drug traffickers and terrorists – a need for infrastructure, which can then be used for other illicit activities – but the groups are not united around any common policies or desire for changed policies. There may be a common enemy but any alliance is probably temporary. Drug traffickers want stability – the cost of doing business in conditions of anarchy are very much higher.

With regard to money laundering, despite a multitude of control bodies there is a near total vacuum of knowledge. It is unknown if and how much drug money becomes "gentrified", that is, not used in any further crime, but by integrating it with legal funds in the establishment of new companies.

The funding of terrorist organizatons can be channelled through legitimate entities, such as charitable organisations, and aggressive short-term policies, such as those applied since 9/11, may achieve short-term results but they are likely to compound the long-term problem. Drying up the financial assets of terrorists could certainly not be seen as a panacea. It was agreed that it was necessary to address the "demand side" of terrorism and the terrorist mind set, and that to understand actions one must understand actors. Governments felt the need to designate an enemy for policy purposes.

All one can say is that many terrorist actions are taking place, some of which are financed by illegal sources, of which a part derives from drugs. An alternative approach is to look at armed conflict and see how this interacts with the legal and the illegal economy; to look at what the fuelling effects on conflict are. One must look at how the illegal economy and conflicts interrelate on a micro level in order to de-escalate both conflict and the level of the illegal economy. The only way to change the dynamics and profits of a market is to regulate it: this would be one way of diminishing the pool of dirty money that can be used for these purposes.

Seminar report and papers

More information:

Measuring Progress Global Supply of Illicit Drugs TNI Progress Report, Mid-term (2003) Review of UNGASS, April 2003 [PDF document]

Professor Peter Reuter published several papers on the volume of the global illicit drugs industry, see:

The UNODC, in its 2005 World Drug Report, attempted to recalculate its estimates of the value of the global illicit drug markets, see the chapter: Estimating the Value of Illicit Drug Markets.