Blog dedicated to reporting on Mexican drug cartels
on the border line between the US and Mexico

Tuesday, February 19, 2013

Mexico: Organized Criminal Groups-A Business of Scale

Borderland Beat
If you want a great overview of Mexican Narco Study.. this is very well done.

By Noel Maurer   Revista Harvard Review
There is nothing new about organized crime. Nor is there anything new about criminal violence. What is new—at least for Mexico—is the scale. In Mexico, homicide had been falling steadily for a decade, from 17 per 100,000 in 1997 to a little under 10 in 2007.
Since 2007, the rate has steadily grown to 22 per 100,000, with several states in the north of the country spiking above 40. Violence appears to have peaked in the northern cities, but now also seems to spreading throughout the country.
The question, then, is why has violence spiked now? I believe the necessary condition was a change in business strategy prompted by changes in drug markets and the market for political protection in Mexico. The primary change in drug markets was the successful U.S. attack on Colombian mobsters, combined with an effective shutdown of the Caribbean drug route.
This opened the way for Mexico’s organized crime organizations—increasingly known by the unfortunate acronym of MOCO—to vertically integrate both upstream and downstream. It also opened the way for them to develop local drug markets within Mexico, since they now controlled more of the product. Vertical integration and horizontal expansion, however, meant a greater need for market intelligence (including the movement of rival shipments) and contract enforcement both within and without the organization.-Miguel Aleman left-
The political change was the increase in political competition engendered by democratization. Democratization disrupted the mechanisms that made the drug trade an actual cartel (thus opening opportunities for violent competition) while simultaneously making it worthwhile for criminals to attempt to violently intimidate local governments.
The sufficient condition for the violence explosion, however, was the Calderón administration’s crackdown on the cartels. The crackdown drove up the costs of the drug trade, and caused the cartels to expand horizontally into new drug routes and new criminal markets.
Moreover, the arrests of cartel leaders caused internal organizations to break down, allowing specialized divisions (such as the Zetas or La Línea) to go into business for themselves. The result has been an escalation of violence and a widespread growth in extortion.
A History of Violence
Mexico’s first smuggling rings emerged as vertically integrated enterprises under political protection. As far back as 1916, in the middle of the Mexican Revolution, U.S. customs officials in Los Angeles reported that Esteban Cantú, the governor of Baja California, was selling leases to smuggle opium into United States.
Cantú didn’t last— he became involved in a bizarro-world attempt to cleave Baja from Mexico as an independent state, which led to his exile— but the governors who followed him continued their involvement with drugs.

Once the federal government of Mexico banned marijuana in 1920 and opium in 1926, they needed more government protection than before—and that protection was quite forthcoming from the old Partido Revolucionario Institucional (PRI) machine. Moreover, they relied on U.S. crime rings to market their product.
Smuggling soon spread away from Baja. In 1931, President Pascual Ortiz Rubio (who was actually not the true head of government at the time—that position being occupied by the Jefe Máximo de la Revolución, Plutarco Calles) expressed worry over “the increase in national and international narcotics trafficking along the rail line joining Mexico City and Ciudad Juárez.” He went on to state that he was sending three “secret agents” who were “currently in Torreón” to combat the traffickers.

 The head secret agent, Juan Requena, sent back a report stating that Torreón was the “main center for narcotics trafficking in the towns linked by the rail line from Mexico City to Ciudad Juárez and for the international trafficking carried out in this city.”
It went on to say the main kingpin was a man of Chinese descent named Antonio Wong Yin, who was in contact with the mayor of Torreón (Francisco Ortiz Garza), a close friend of the governor of Coahuila (Nazario Ortiz Garza), and the head of the federal Army in the state, General Jesús Garza Gutiérrez.

(It was good to be a Garza!) He went on report that the traffickers “have a complete espionage service prepared to do anything.” At that point Requena was transferred to Los Angeles.
The next year, General Rodrigo Quevedo became governor. His brother became mayor of Juárez. They shot the head of the smuggling cartel there, who fled to Mexico City, where gunmen killed him in a tiny little park that used to be next to the Casa de Azulejos in 1937.

That same year, the head of the federal Department of Public Health, José Siurob, called Juárez “possibly the most dangerous center where traffickers operate who ... defend their trafficking with gunfire.”
The Baja criminals were under the thumb of the Mexican government on one end (which controlled the violence needed to enforce contracts inside Mexico) and a group of Americans who both controlled the supply channels on the other.

By 1947, Harry Anslinger, the head of the Federal Bureau of Narcotics, declared Mexico to be U.S.’s main opium supplier. He also accused state officials in Sinaloa (where it was grown) of being in the drug business, including Governor Pablo Macías Valenzuela.
Surprisingly, the Mexican press picked up the accusations. There must have been some sort of infighting between Macías and President Miguel Aleman (at left), because once the President made a trip to Sinaloa, the accusations stopped. Macías finished his term and became head of Military Camp No. 1 in Mexico City. The feds made a show of capturing one of the traffickers Macías was accused of protecting—Miguel Urías Uriarte—but he was son released.
Over the next three decades, heroin and marijuana smuggling grew as America’s drug habit took off. Opium was grown in Sinaloa, and the “narcotraficantes” began to move from the highlands to new subdivisions in Culiacán.

In 1975-85, under the name Operation Condor, the Mexican government sent an Army division into the Golden Triangle around the intersection of Sonora, Sinaloa, and Durango.
Operation Condor, however, wasn’t really about breaking up the drug trade as it was about establishing “plazas.”

A plaza did not refer to a public square, but rather the area under the control of particular political authority, who would monitor all the drugs passing through their jurisdiction.

Those controlled by traffickers who made payoffs would be allowed to continue.

The authority would then insure that the payoffs flowed through to the beat cops, soldiers, and low-level officials whose cooperation was needed.
With the new stability, the Mexican smugglers integrated backwards into production. The reason was simple: there are scale economies to be had in marijuana and opium cultivation. Miguel Ángel Félix Gallardo was particularly good at this: the El Búfalo ranch, raided in 1984, covered two square miles, employed 10,000 farmworkers at harvest time and held drying marijuana worth (in 2010 dollars) somewhere between $3.2 and $8.0 billion .
The emerging “cartels” could not retroactively integrate into cocaine—that was produced in the Andes, not in Mexico—but as the United States succeeded in shutting down the Caribbean corridor (mostly by getting the Bahamas to agree to allow U.S. law enforcement to freely operate in its territory) more cocaine traversed Mexican territory

The agreement between the Colombian producers and the Mexican wholesalers was stable because the Mexicans lacked distribution channels in the United States. The Colombians sold cocaine to the Mexicans at one end of the value chain and bought it back from them at the other.
The “cartels” didn’t consider themselves to be particularly cartelized: as Félix Gallardo himself wrote in his diary, “In 1989, the cartels didn’t exist … there started to be talk about ‘cartels’ from the authorities assigned to combat them” (The diary can be found in Diego Osorno, El Cartel de Sinaloa [Mexico City, 2009, pp. 207-57]).
Félix was correct in the current sense of the word “cartel” as an organized crime ring, but wholesale distribution via Mexico was in fact cartelized in the technical sense.
Two mechanisms served to control the market: the Mexican government insured that there would be no fighting over possible routes inside Mexico, and the U.S. Coast Guard (with the full cooperation, it should be noted, of the Bahamian government and the de facto help of the Cuban one) insured that Mexico would be the cheapest route for cocaine transshipments into the United States.
The above business model collapsed in the 1990s because the U.S. government refused to quietly play its role and went after the Colombian-controlled distribution networks. The U.S. and Colombian governments took down Pablo Escobar in 1993. Soon, three Mexican organizations controlled the drug trade, and succeeded in seizing most of the rents from their Colombian suppliers.
In Ciudad Juárez, a mid-level drug dealer named Amado Carrillo Fuentes took the opportunity of Escobar’s death to shift the traffic to his city. He also began to sell retail inside Mexico.

Juárez became littered with “tienditas,” where drugs sold for less than a quarter of the U.S. street price. In theory, the tienditas were under police protection. In practice, the police functioned as just another gang.
Homicide in Juárez jumped from 5 per 100,000 to a shade under 30 as Carrillo’s men tried to take control of the retail trade. A similar process occurred in Tijuana, taking up that city’s homicide rate.
The creation of a retail market combined with three other factors to move the border cities to a new, higher level of violence:
a large population of transient young men, an economy that offered few economic opportunities, and continuing connections with U.S. prison gangs that could not freely operate in San Diego or El Paso but could easily coordinate their activities south of the border from their American redoubts.

Yet, outside of Ciudad Juárez and Tijuana, the rest of the country remained relatively peaceful.
A Strategy of Violence

The peace began to break down in 2005, when the Sinaloa Federation began to try to take control of the Nuevo Laredo plaza away from the Gulf cartel after the 2003 arrest of Osiel Cárdenas. Under the leadership of Joaquín “El Chapo” Guzmán and Arturo “El Barbas” Beltrán Leyva, the Sinoloans meticulously planned to seize the plaza.
They did not, however, realize that Cárdenas’s network of enforcers was fully capable of fighting back. The “Zetas,” originally a group of former Mexican special forces who had gone to work for Cárdenas, fought brutally to take control from the Gulf Cartel and keep out the Sinaloans.
What does it mean for a cartel to “control” a plaza? In short, it means two things: intelligence and enforcers (called “sicarios”) who can intercept such cargoes and (given good intelligence) punish those responsible. In addition, if there is a retail drug market, control means having a monopoly over sales.
Seizing control over a plaza is therefore a violent business, since it requires destroying the other cartel’s intelligence network. Violence is also useful to terrorize the other side. Since so many local cops were on cartel payrolls, federal and local police forces at times shot at each other.
After coming to office in 2006, the Calderón administration declared war on the cartels. There is evidence that the Calderón administration’s attack contributed to accelerating the explosion of violence. Melissa Dell, in a recent study of the effects of political change on violence in Mexico, found that whenever a PAN mayor was inaugurated, violence jumped by more than half.
Moreover, violence also jumps in the surrounding counties. (Mexico has no municipal governments as known in the United States; the basic political unit is the county; each county has an elected mayor.) More tellingly, female labor force participation and wages in the informal sector fell in all the affected counties.
               A Structure at Bufalo Ranch Chihuahua
In a more direct test of a similar hypothesis, Eduardo Guerrero found that federal enforcement actions (drug seizures, crop eradication, dismantled meth labs, and arrests) all increased the probability of homicide in the county.
The interpretation of the results is based upon the assumption that PAN mayors are able to call in federal resources to combat drug trafficking in their counties. The application of federal power disrupts the operations of the local cartel—which depend, crucially, on intelligence in order to control their territories.  
The cartels then react to the higher costs that they face in two ways. First, they displace their smuggling activities to nearby routes. Inasmuch as those routes are contestable territory, it triggers inter-cartel violence. Second, as costs rise in the trafficking business, the cartels move into other profit sectors: among them protection rackets aimed at small businesses.
As rents on small businesses increase, wages and female labor force participation fall (the latter under the unfortunately but probably true assumption that women are the last hired and first fired). The cartels also likely divert more resources into narcomenudeo—local retail sales.
Research by Viridiana Rios  indicates that the breakdown of PRI control had an effect on cartel strategies, even independent of Calderón’s crackdown. Is there any evidence that the government’s efforts have in fact raised the costs of trafficking drugs to the United States? The answer to that question is yes.
After a long period of decline that took retail cocaine prices down by 80% since 1981, the price of cocaine started to escalate in late 2007, doubling by the middle of 2008 and remaining at that level thereafter. The implication is that the supply of drugs to the U.S. market (and the cost of getting them there) increased dramatically over the first few years of the Calderón crackdown.
Outsourcing Violence
The cartels have branched horizontally into new businesses, particularly extortion (including kidnapping) and human trafficking, but this change in strategy has been accompanied by a disturbing change in organization.
First, the cartels themselves have fragmented under pressure from the federal government. Second, the cartels have increasingly outsourced various functions to local gangs. The rationale follows the same logic as business outsourcing.
First, the smaller organizations often have a comparative advantage in a specialized function, be it enforcement, transport, retail distribution, or marketing. (The Zetas, most prominently, were born as the enforcement arm of the Gulf Cartel.)

The gangs also have local knowledge. In addition, they give the cartels flexibility: there is no need to maintain “a bloated bureaucracy of gunmen” (in the words of Eduardo Guerrero). Finally, gang members, when arrested, cannot give away information about internal operations, for the simple reason that they are not internal to the cartel.
The problem, of course, is that the cartels cannot always maintain control over their outsourced branches. When top leaders were arrested, the heads of these secondary organizations were tempted to go their own way.
Similarly, when federal enforcement created an opportunity (by, say, shutting down a smuggling route or a kidnapping ring) the leaders of the secondary organizations engaged in entrepreneurialism.

The cartels became less stable, and needed to use violence to control challenges from their outsourced arms as well as from other cartels. In the long run, fragmentation will lead to less violence, as small gangs lack scale economies, but the transition will be long and bloody.
Calderón’s crackdown may have triggered the increase in violence, but the seeds were set far before then. The correct MOCO business model is certain to provoke violence, particularly as the cartels disintegrate.
Moreover, cocaine consumption and prices in the United States seem set to continue their secular decline, which will push more criminals out of trafficking and into other lines of work. In the long-run, Mexico will likely get a handle on its law enforcement problem as the economy grows and the MOCOs disintegrate into street gangs… but without a proactive strategy, the long-run could be some time away.
The following is a video of Quintero's House of Rock...literally a house made of rock.  

Thank you TexPatNMex for the video


  1. interesting article, it puts things in perspective

  2. The biggest always have been from Sinaloa the cradle of drug trafficking in Mexico Sinaloa always will be top dog in mex weather beltranes or chapos and the new up rising narco juniors.

  3. PABLO ESCOBAR picture looks like he found a cookie in his pocket. lol

  4. its good to know Mexican PRI are back in power and taking protection money from the cartels.

  5. Wow , what a history lesson. Thanks Again BB!!

  6. Incredible post! I have learned more in this one post than reading all others in the past year.

    So the Mexican Government created the 'plazas' for their benefit not to curb trafficking, a piece of the pie as drugs flooded the US.


  7. Bookmarking this post!

  8. Readers
    thank you so much for the support, I have been reading the many messages but elected to keep them just for me:) I am a bit better today, sometimes the cure can make you as sick as the illness...
    and the beat goes on......

  9. Anyone could have googled that much. Those Who beleive that
    "The primary change in drug markets was the successful U.S. attack on Colombian mobsters, combined with an effective shutdown of the Caribbean drug route.", as this article claims need to wake up. That Only happend in the news headlines and in the imaginations of the benightened. U.S. killed Pablo Escobar (Q.E.P.D) and yet the reality was and still is that the coke price went down in 1994 while quality significantly improved. Every major player, dealer, narco or petty hustler could die 2night and América will still get high 2morrow. U people who love to vicariously be entertained at the expence of another aré the real monsters. The problem is not Only the consumers but the jotos that keep the dream alive that the drug war could actually be won against yourselves. When a government uses currupt tactics to fight evil (i.e. fast and the furious) they embody the evil they claim to be at war with as much as Diablo for those that will perish. Incidently plazas have been plazas as far back as the history of the spanish language. The fact that illegal goods can also be found at the town square at the border of any country is not a consequence of a succesful war on Anything. I understand though, its all political LOL

  10. Great read! If you want more info on how cocaine and Columbia crept into Mexico and all about Fuentes's crazy antics, read The Kings of Cocaine, by Gugliotta Guy and Jeff Leen. Fuentes was shit nuts, a communist nut job, loved Hilter and was insane. Idiot for sure. And what is also interesting is how to make cocaine you need ether, and no one was asking the three largest suppliers of ether in the US who their customers where. Following the ether is was busted it wide open. The US drug history and Mexico's clusterfuck is very interesting. And FYI, gun crimes in the US have been cut in half in the last ten years. Guns are illegal in Mexico, and it's # 3 in the world for murders, the US being #28. Even the UK has three times more violent crimes per capita than the US. So called "assault weapons", not semi automatics (%95 of all guns are semi automatics), are used in less than %1 of all gun killings in the US. Compare that to Mexico where the AK and the rest are used daily. The point? MEXICO IS SCREWING ITSLEF!!! WTF, Mexico? Are you that corrupt that you bitch about violence and guns but won't do shit about it? We have to now search cars going IN to Mexico, AND coming out? Are you too busy to do this job, or are you worried the guns and money won't get to the bosses and then to the leaders? Mexico is it's own worst enemy. If Mexico truly wanted to fix itself, take the 12 million that are here in the US and take it back! It's like %25 of Mexico said "fuck it. Lets move to Fresno with Ricardo". Are you Mexicans? Then fix Mexico! Hell, we would help! And feed your economy! These assholes are so few and hold so much power over you because you can't defend yourself. Amazing. You have a right to life but not a right to defend it. Like a Democrat's wet dream! Mexico tried to fix the gun problem as if they tried to fix the DUI death problem by making it impossible for sober people to buy cars, and then the drunks are all that's left on the roads! I swear, you would think Mexico disarmed those who obey the laws to make them passive and easy prey. Because just like Obama's stupid gun control suggestions, they target law abiding people and do nothing to address the problem of criminals who are already armed.

    1. With all those facts you must realize that the united states is the largest gun supplier to Mexican cartels with legal straw purchases along the border states.

    2. That doesn't mean shit. If mexico allowwed its citizens to own firearms like we do here n the usa then that would have cartel gunman slowing down drastically. They roam the streets and they're untouchable only bcuz the ordinary mexican doesn't have a gun. The sicarios r gunna think twice about rushing someones house bcuz now they kno that any mexican can own a gun. I mean for fucksake, take the guns away from them once the cartels have been eradicated

  11. very easy read, i like the way it uses modern references as you read about how a cartel loosely works, i am or have been wondering, is there a quota that has to be met to be considered a cartel, i mean for something to be something, it has to have the characteristics of design. what are the key factors that make up a cartel, as opposed to just being a gang that likes to call themselves gangsters??? just wondering

  12. sinaloa always been snitching. Thats why the gov loves them

    1. The ponds that were destined to be sacrificed is what u see on t.v.. What We should be looking into is How humanity has allowed the scales of justice be used to measure out 50 states worth of narcotics. When the real power players aré religiously legit Its no wonder so many dogs show up at their table.

  13. 7:37: A great example of why drugs are so bad to human health...

  14. Race played a crucial part on why some narcotics became illegal to begin with in the U.S. Mexicans would smoke marijuana, blacks would use cocaine, and the Chinese would use heroin. That would attract white woman and that did not sit to well with white men. At the turn of the turn of the 19th century, real cocaine was used in coca cola; hence the word coke.

    1. WOW !!!!!!!! Did u figure that out all by urself???

    2. Not to mention that, fearing competition, the alcohol and tobacco companies lobbied hard to outlaw "illicit" drugs, specifically marihuana since it grows like a weed.

  15. Best informative article to date on the beginning & present life of drugs n organized crime. Politics will always be part of the drug trade. Good job Chivis!


  16. Snitchaloa Chapo got becuz PAN party protected him.The PRI threw his little pudgy ass in jail.

  17. I read a history of narcotrafico on a spanish bloga couple of years and it specifically stated that the us government came to sinaloa during wwii and created the opium industry for the war effort and then after the war dropped everyone like toxic waste. The us government has and will always be the biggest death dealer and drug dealer. Yeah we bring you the drugs but you fucking buy them. We shoot the guns but you make the bullets. As long as gringos remain ignorant about these issues ain't shit ever going to change

  18. Chivis's post may be factually correct,but politically incorrect.Many people don't want the truth written like this,many people like to believe something else.Example,February 19, 2013 at 10:32 PM .What that has to do with the story i don't know?Anyway i always read a lot of history,especially some of these movers.

  19. February 19, 2013 at 10:30 PM
    "That would attract white woman and that did not sit to well with white men"
    So that's why drugs are illegal?Because i can't stand to see a white girl with a brother,a mexican,a chinese dude,i never knew that.Oh no,it is because of me,,,im white?Very pertinent explanation of the root cause of drugs being made illegal"where the white women at"
    Sometimes i think the brain is a muscle,,,,,

  20. chivis this is what I have been looking for to infuse historical fact to contemporary reality. This is a great find, one I almost missed but decided to read because it was you that posted it. thank you very much for the time you spend on this blog, in the past 8 months since I began educating myself on the Mexican Drug War and its relation to the states, this is the only blog I consider credible to fortify my study and this is an example of why.

  21. coca-cola along with some people from a govt agency went to a university in hawaii in the mid 60's to do research on wether or not the coca plant could grow in hawaiian mountain climates, maybe so that coca-cola would be able to grow in a us territory and not a latin country, the university dean told them they could not do this because it was a publicly funded school.but..if they labeled it secret and subject to american security then they absolutely could!! , they did this up until the mid 80's. they found out that they werent able to replicate the favorable conditions to grow this little plant, the main reason they couldn't pull it off is because a certain fungus would attack the leaves and stems of the plant and ultimately kill it, so rather thanscrapping the research and calling it a loss, the govt then stepped in to try and weaponize the fungus so they could use it to spray the coca plantations in columbia, peru, etc.. but they dont know wether or not this strain of fungus will flourish in these different mountain regions.. crazy shit huh......

  22. I also found this article to be different than the others I have read as far as a quick study. It is difficult to follow "today" without knowing some of the history. For example that Mexico did this to themselves willingly and aggressively not by narco gunpoint. And about the Plazas readers hear about so much, not a narco creation but a government willing to be be complicit in the addiction and death of the young people in the US to the great degree it quickly advanced.

    I found the article to be among the finest of its kind and perfect for this forum. my goal was to fill a few holes in the information banks of readers, to better understand the past, how it evolved where we are today, most articles rely on one point...either history or contemporary. This brings it in a neat package. I would further state that it is largely factual and any disagreement I may have with the 'facts' are insignificant and unchanging towards context.

    As for racism. It was a component then...and now. To concentrate on one sentence is to have wasted your time reading this informative piece. Paz, Chivis

  23. Great find, you never disappoint me, thanks.

  24. @7:37. What are u stupid? Mexico is sending troops to Sinaloa and they even opened a new group to help fight the narcos! It's not like there street gangs like in the us, there like company's with aks and bazookas. Of course there gonna have a hard time fighting them.

  25. I agree with 737 sinaloa is so proud of selling drugs and killing people they even make corridos and politicians arE sell outs ruining mexico more and more each year im mexican and I think mexico needs us help cus at least u.s looks out for their people not like the dumb mex gov

  26. It is definitely good to have this organization, however, I still don't know if they can surely catch those big criminals out there at large. It just seems impossible, just saying and I am just being practical.


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