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Globalization and the price decline of illicit drugs

Costa Storti, Claudia and de Grauwe, Paul (2009) Globalization and the price decline of illicit drugs. International Journal of Drug Policy, 20 (1). pp. 48-61. ISSN 0955-3959

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Abstract

Background This study aims at understanding the mechanisms underlying the dramatic decline of the retail prices of major drugs like cocaine and heroin during the past two decades. It also aims at analysing the implications of this decline for drug policies. Methods We use a theoretical model to identify the possible causes of this price decline. This allows us to formulate the hypothesis that the major driving force behind the price decline is a reduction of the intermediation margin (the difference between the retail and producer prices). We also develop the hypothesis that globalization has been an important factor behind the decline of the intermediation margin. We then analyse the statistical information to test these hypotheses. Results We find that the decline in the retail prices of drugs is related to the strong decline in the intermediation margin in the drug business, and that globalization is the main driving force behind this phenomenon. Globalization has done so by increasing the efficiency of the distribution of drugs, by reducing the risk premium involved in dealing with drugs, and by increasing the degree of competition in the drug markets. Conclusion We conclude that the cocaine and heroin price declines were due to a sharp fall in the intermediation margin, which was probably influenced by globalization. This phenomenon might have a strong impact on the effectiveness of drug policies, increasing the relative effectiveness of policies aiming at reducing the demand of drugs.

Item Type: Article
Official URL: http://www.journals.elsevier.com/international-jou...
Additional Information: © 2009 Elsevier
Library of Congress subject classification: H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HV Social pathology. Social and public welfare. Criminology
Journal of Economic Literature Classification System: F - International Economics > F1 - Trade > F10 - General
K - Law and Economics > K4 - Legal Procedure, the Legal System, and Illegal Behavior > K42 - Illegal Behavior and the Enforcement of Law
Sets: Departments > European Institute
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 05 Oct 2012 13:37
URL: http://eprints.lse.ac.uk/46598/

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