The always-brilliant Alejandro Hope reads my mind! Go read his latest piece. Or, to prevent link rot:
El Chapo’s millions. Over at El Universal, a big piece on companies allegedly connected to fugitive kingpin Joaquín El Chapo Guzmán. Apparently, the US Treasury Department has identified 288 firms connected to the capo, out of which 95 are Mexican and may have even received government contracts. The surprise? How small and unimpressive some of these ventures are. Case in point (translation mine): “The day care center Niño Feliz was one of the first companies identified by OFAC (Office of Foreign Assets Control) as connected to the Sinaloa Cartel. The main reason was that María Teresa Zambada Niebla, daughter of drug kingpin Ismael “El Mayo” Zambada, was one of the firm’s founding partners … The day care center provides service for 209 children and charges 3042 pesos per month for each children. In total, the federal government pays the center almost 8 million pesos (500,000 USD) every year.” A day care center? Really? (The business “empire” also includes, allegedly, eight service stations and one moving company, among other equally exciting activities.)
No boom town. So if El Chapo is not using his wealth to create world-beating companies, where is he parking his money? Certainly not in his home town, Badiraguato. The legendary largesse of the capo is nowhere to be seen in the streets he roamed as a child. Mark Stevenson, from the Associated Press, reports: “The roads to La Tuna are still washed-out dirt tracks, and Badiraguato itself has none of the flashy accoutrements of money — luxury car dealerships, palatial mausoleums, acres of fancy, gated communities of new homes, or dozens of street money-changers offering cheap dollars — that are abundant in Culiacán, the state capital, 1½ hours away. The town’s big projects include a new balcony for the town hall that looks out over the sleepy square dominated by a 19th-century church, where residents seek shade from the punishing Sinaloa sun.”
So where’s the dough? What if most of the drug money was actually reinvested in the illegal economy. This is something I wrote some years back:
“Imagine you’re a drug dealer. Even if you’re Chapo Guzman, you cannot be considered a good credit risk: you might be killed or arrested tomorrow, and then who will pay the debt? You will not be able to obtain a revolving line of credit, and your suppliers will probably not give you marijuana or cocaine on credit. Nor can you leverage yourself using your employees’ salaries: it is not a good idea to stop attending to the payroll when your staff is armed to the teeth and knows too much. Factoring is not an option, for the obvious reason that there are no receipts. Furthermore, nobody is going to sell you an insurance policy to protect the product; therefore you have to have a financial reserve in case goods are seized, stolen or lost (planes fall and boats sink).
“The only real option is to finance your operations with the profits of previous deals. But you do have this; if the product meets a good fate, you will get back more (perhaps a hell of a lot more) of what you invested. Given that, where you would put your money: in bonds, on the stock market, into the production of serrano peppers, in real estate development, or in the smuggling of illegal drugs? Perhaps you would try to diversify a bit, but in all likelihood the most important part of your portfolio will be in the most profitable activity. And how will you preserve your working capital? Most likely, you will want to keep it in cold, hard cash, guarded by some unfriendly thugs: In addition to known risks, you do not want to worry about your bank account being frozen, do you?”
My (somewhat depressing) conclusion: “If the majority of the profits of crime are reinvested in crime, no amount of financial intelligence can help: the only way to seize the money is by physically finding it (as in the case of Zhenli Ye Gon).”
There is another implication to Hope’s idea. No enterprise can expand forever. At some point, you hit diminishing returns. But if narcos prefer to reinvest their profits in more narcotrafficking, then they will tend to expand their businesses well past that point. The enterprises will start to resemble ‘70s-era conglomerates or Japanese keiretsu: too big, basically unprofitable shambolic zombie organizations overextended in the product lines they do best and muscling into all sorts of markets where no rational profit-maximizer would go. In the end, there might not be any profits the way we think of them; everything would get reinvested for an overall return of zero, if properly accounted for ... hell, given the margins, returns could even be persistently negative.
Which does sort of resemble Mexican organized crime, no? One mystery has always been the scale of the violence. It just doesn’t seem profitable to spend that much trying to monopolize drug routes, not given the scale of the U.S. market and the porousness of the border. Live and let live. But if all you can do with the returns is plonk them back into the organization, then the creation of a giant metastasizing enforcement arm might be just the ticket. What the hell else are you going to do with the money?
It would also explain the relentless push into new businesses. For crying out loud, the Knights Templar went after iron mines and took over avocado farms. The Zetas took to kidnapping impoverished Central Americans. To be honest, I suspect my family earns higher percentage returns on some Miami real estate that we own, or hell, our house here in D.C. (It’s a highly-leveraged investment.)
And low profitability (caused by overexpansion) might also explain cartel fragmentation. They start to lose money, can’t keep their enforcement arms happy (or pay enough bribes), spin apart.
In this view, Sicilianization happens when organized crime can reinvest its profits in things other than organized crime without getting caught. Like construction. Or waste management. Then violence declines and things become stable. But if that doesn’t happen — and the state can’t get its act together sufficiently to impose order — then you get cartels that resemble ... Beatrice.
At least until they spin apart. Like Beatrice. Only with more blood. The scary clown seems appropriate.
And the implications of Hope’s insight seem worth exploring further. Some fascinating testable hypotheses may emerge.