How Important is the Illicit Economy?

Moises Naim, editor of Foreign Policy, has spent more than a decade studying the illicit economy that moves everything from drugs and guns to pirated movies and human body parts around the world. In the book, Illicit, he outlines what amount to a shadow system of global business and trade.

By Yale
Published: Dec 8, 2009 12:51:00 PM IST
Updated: Dec 22, 2009 03:17:27 PM IST

In Illicit, you write that “networks of stateless traders are changing the world as much as terrorists are, probably more.” Could you elaborate on that?
In terms of the scope and the frequency, illicit trades far outnumber terrorism. And in terms of the consequences they’re having for democracy and for the functioning of markets, illicit trade has a far greater impact. It undermines entire industries and reshapes cities.

Just think about what’s happening with the war on the drug cartels in Mexico and the spillover to the United States. Think of how many people you know that have been directly touched by terrorism and then think of how many people that you know that have been touched by drugs or who have bought a counterfeited watch or software or music. Even the floors in many homes are made with wood that has been illegally logged somewhere in Asia.

Moises Naim, editor of Foreign Policy
Image: Corbis/China Daily
Moises Naim, editor of Foreign Policy
I think that this kind of illicit trades is now where climate change was five or ten years ago in the sense that people know that it’s there but are not recognizing it as a fundamental threat. I think in a few years illicit trade will be put at the top of the agenda.

Can you talk about the gray market?
The gray market is everywhere. Traffickers are essentially motivated by greed. They are businesspeople. They are profit-oriented, market-oriented entrepreneurs with a transnational capability, and so they do what all large private sector firms do — they diversify. Many diversify from illegal activities to legal ones often by buying legal companies. The mafia is intensively buying legal companies in Italy. Albanians traffickers are buying companies across Europe. The Mexican drug cartels are buying banks in Central America. The traditional line that we thought existed between legal and illegal companies has been blurred, and so we have a grayed sector where illegal companies are intertwined in almost invisible ways with illegal companies creating a gray market.

But then there are other areas of gray: you see people strolling the streets in New York not thinking twice about buying a counterfeited handbag that is at the end of a long chain of criminal activities.

Could you give some examples of how these organizations and networks are organized?
They are networks of networks, and they are not on the traditional hierarchical pyramid where you have a boss, and then the boss has lieutenants, and then they in turn have people reporting to them. These are networked organizations. There is no centrally-coordinated Counterfeited International Inc.

Different networks provide different services. One network, for example, provides copies of the design of a fake Prada handbag in Europe. Another in Asia provides manufacturing, another provides the money laundering, another the distribution channels that bring the bags to the United States. The chain continues down to the human resources that are in the streets pedaling these bags day in and day out, 18 hours a day. Very often, those people are illegal aliens who are themselves as illicit as the products they sell because they have been trafficked and are victims themselves. Many are effectively modern-day indentured slaves.

It is highly-decentralized. These networks link and de-link according to opportunities and business environments.

What allowed this illicit trade to become so prevalent?
These trades cannot be understood in isolation from the general trends in the global economy. An explosion of trade, an explosion of investment, an explosion of cross-border economic activity and explosion of far cheaper and less costly communication, transportation, and travel all play in.

As all of those expanded, illicit trade expanded. This came also on the heels of major economic reforms in countries that opened borders that used to be far more difficult to penetrate, and entire sectors that used to be under state control that went private. All of that is driving these illicit trades.

Are there countries or regions in the world that are particularly important for these networks?
In the 10-plus years that I have studied this trend, I have not found a single country that doesn’t have them, nor anyplace where they are not growing. In fact, there is no government in the world that can claim success, not in eradicating them, but even containing the growth.

Are there strategies that have had any sort of success?
There are different efforts that are being made for the various trades. And there has been some progress, but in general, when you splinter a cell or a network, the vacuum in that market is immediately filled by a newcomer.

There are massive efforts by both governmental and private sector entities to stop money laundering. Banks face stiff penalties if they donít know who their client is, yet the system continues to be imperfect, flawed, and porous.
Image: Corbix/China Daily
There are massive efforts by both governmental and private sector entities to stop money laundering. Banks face stiff penalties if they donít know who their client is, yet the system continues to be imperfect, flawed, and porous.
Some of the way you have been describing these organizations sounds like terrorist organizations. What sort of links are there between criminal systems and terrorist systems?
Terrorists are driven by God; illicit traders are driven by greed. Both are highly networked. They are both transnational, stateless, and highly-mobile. They’re well-endowed. They can operate and project their operations internationally, and the terrorists very often can benefit from the services of these illicit traders.

Illicit traders don’t like to deal with terrorists because that’s not what they exist for. They are not interested in blowing people up. They are interested in making as much money as possible. In fact, if you are running one of these trading networks, the last thing you want is to have terrorists as clients, because you already have enough problems with competitors, supply chains, distribution channels, and the law enforcement tasked with going after you. Why would you also want to add to the list of people that you have to worry about intelligence agencies, armies, and the various other counter-terrorism entities?

You said that these networks are ultimately economic organizations. Are there economic levers that have been at all useful in responding to their activity?
Not really. The dominant approaches to the fight against these illicit trades have been jails, schools and churches. By that, I mean the approach has been to criminalize them, educate people against doing these things, and appeal to moral values.

All of the three have a role but none is as powerful as the economic incentives that are driving some of the most lucrative markets in the world.

We also need to understand that we are dumping many different things into one category. The international trade in fake Harry Potter books is not the same as the international trade in kidnapped children. The trade in fake Prada bags is not the same as the trade in fake medicines that, instead of curing, kill.

How has the legal financial system played into this?
In Illicit, there is a whole section about that. These trades generate a lot of cash that needs to be laundered. It must somehow be morphed into the sort of instrument that can be moved in the global electronic financial systems, and there is an entire industry that specializes in doing that.

There are massive efforts by both governmental and private sector entities to stop money laundering. Banks face stiff penalties if they don’t know who their client is, yet the system continues to be imperfect, flawed, and porous.

How do we respond most effectively?
First, by raising awareness about the serious impacts of illicit trades. Make people aware of this as a threat to their lives and their communities. This is undermining society. It is weakening countries that are not currently threats but can turn into something dangerous to all of us.

Most important would be to break the systemic learning disability that has led to repeat failed policies. An example of this would be the war on drugs. The Washington consensus on this rests in two pillars: it is not working but we cannot change it. Seventy-six percent of Americans think it has failed but the policies are deeply-rooted in a politics that makes it very risky for politicians to openly discuss viable alternative.

The conversation around drugs has evolved into either total prohibition or total legalization which is a false dilemma. No one is seriously arguing for total legalization. There are intermediate possibilities that need to be explored, tested. Each one will have costs, risks, and defects, but perhaps they are less costly for society than total prohibition. Yet the political costs make change unlikely, which amounts to a dangerous and profound systemic learning disability.

Interview conducted and edited by Ted O'Callahan

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[This article has been reproduced with permission from Qn, a publication of the Yale School of Management]

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