What are the nature of the political economy of the illegal drug-producing countries and their export of illegal drugs to an importing country like the United States?

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Illegal substances flow into the United States because they are addictive. Addictive substances tend to be price-insensitive (that is, people are willing to pay any price for them and so price has little effect on the rate of production and sales). Additionally, these substances are not grown in the United States. While the United States accounts for less than 5% of the world population, it consumes 65% of illegal drugs. These consumers include both casual and chronic users.

The primary economic factors that promotes such intense import of drugs into the United States is that these drugs are illegal. Put another way, these the supply increases when substances are more difficult to get (which is the case with illegal drugs). As evidence of this, we need only to look at the relative markups of alcohol and tobacco (legal substances) and cocaine and heroin (illegal ones). The markup for cocaine is estimated to be about 1,000 percent and that for heroin is as high as 2,000%, compared with a markup of about 25% for tobacco and the (still comparatively modest) 200% percent markup on alcohol in bars.

As a result of the illegal status of drugs, the US does not produce them—both because it is illegal and not economically viable. Because of the more stringent law enforcement in the United States, growers face harsher penalties than in countries whose authorities are willing to look the other way. For this reason, countries in Central and South America have developed large and successful drug cartels with a decided comparative advantaged in drug production, and the US, where drugs remain illegal, is the primary market.

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