The economics of legalizing marijuana

Pay close attention to the breaking news coming from the world of marijuana. Mass social engineering has radicalised the status quo with a tidal wave of new thinking that is going to have serious socio-economic implications for Grenada and the whole Caribbean region.

Since the thirties, prohibition eradication campaigns have criminalised and outlawed marijuana to the violent underworld subculture of drug cartels and crime syndicates. The legacy we inherited from draconian prohibition laws includes money laundering, financing of global terrorism, weapons trafficking, and other negative externalities.

But now attitudes are changing and changing rapidly. The world’s 196 countries are nearly all signatories of the U.N. 1961 Single Convention Narcotics Treaty, and marijuana is a psychotropic, hallucinogenic narcotic.

Yet only Malaya, Indonesia, Philippines, Japan, and United Arab Emirates enforce zero tolerance policies on marijuana. In Europe, the Americas, and elsewhere the treaty conventions are deprioritised with watered-down regulations allowing the cultivation, possession, and use of marijuana for medicinal and recreational purposes and the change dynamics are trending steadily towards full legalisation and free market commercialisation.

Marijuana (alias pot, cali-herb, ganja, cannabis, demon weed) is a psychoactive drug that produces euphoria on the high side and paranoia, hallucination, even schizophrenia on the down side. But medical experts claim marijuana treats glaucoma, breast cancer, diabetes, Alzheimer’s disease, multiple sclerosis, and more.

Marijuana is a sedative not a stimulant as many believe, and a 1994 NIDA (National Institute of Drug Abuse) report ranked cannabis (9%) the least addictive drug compared with caffeine (11%), cocaine (17%), alcohol (15%), heroin (23%), and nicotine (32%).

The many high-profile supporters of legalisation include Nobel Prize economist Milton Friedman, U.N. Secretary General Kofi Annan, and U.S. Presidents Carter and Clinton. Nineteen (19) American States and 12 European countries have decriminalised recreational marijuana. Hundreds of medical dispensaries provide prescription marijuana in USA, England, Europe, Switzerland, and elsewhere. Netherlands government earns 600 million Euros annually in medical sales.

In 2013, Uruguay became the first country to legalise marijuana following the Washington and Colorado initiatives and Caribbean lawmakers debate legalisation in The Bahamas, Jamaica, Puerto Rico, and St Lucia.

In May 2013, forecasting impending legalisation, former Microsoft Corporate executive Jamen Shively proactively launched visionary and revolutionary venture capitalism acquiring hundreds of marijuana dispensaries across America. With 40 % share of the estimated U$200 billion global industry Shively envisions his company creating the first global marijuana brand.

It is clear where all this is going. The prognosis sees U.S. government declassifying marijuana from its controlled substance status by 2016 legalising production, distribution, and consumption.

When America “sneezes” it infects the world in contagion that would open a floodgate of legalisation in all countries including the Caribbean – and Grenada. The new dispensation would be a paradigm shift in regional socio-economic dynamics.

On the supply side, marijuana would become a specialty industry applying standard commercial best practices that would be replicated everywhere. Private ownership, property rights, and contract agreements will be enforced under the exigencies of civil law.

Thousands of manufacturing firms will grab market shares in the lucrative industry. A rigid regulation system will curb black marketers, unlicensed dealers, and tax evaders, and monitor advertising, packaging, and labeling.

It is estimated regulatory expenditure and the social cost of legalisation combined would be a fraction of current prohibition allocation.

Marijuana industries would use mass production technologies, scale economies, and modern industrial processes, generating economic activities throughout the supply chain with production subsidies, growers associations, and trade unions.

Market legalisation drastically reduces production costs, price plummets, and demand skyrockets. Removal of the monetary attraction of high risk premium and rapidly diminishing marginal (DMR) returns would decimate the criminal underground business.

As market demand grows exponentially, marijuana consumables differentiate to satisfy the needs of a diverse customer base. Spinoffs would include specialty food marts with gourmet marijuana edibles and high-end boutiques for tourists and elite connoisseurs of marijuana designer paraphernalia.

“Cannabis cafes” would compete with internet cafes. Marginal propensity to consume (MPC) projects price inelastic demand and negative income elasticity for gravitation to harder drugs. And analysts predict a consumer influx that doubles within five years.

The revenue side has a potential double bonanza for national budgets: millions in savings from prohibition expenditure cutbacks and millions in revenue collection. Throughout the marijuana value chain, from production to consumption, revenue streams would flow from multiple layers of taxation (excise, income, sales) and various fees, permits, and licenses.

The excise tax regimen adopts the tobacco model charging a fixed dollar amount on quantity per kilogram, but substantially higher. The fiscal dividend would close budgetary financing gaps with current account surplus for many governments.

Historically, lacking home-based expertise, technology, and industrial infrastructure Caribbean countries have exported their raw materials (cocoa, nutmeg) to manufacturing industrialised countries of America and Europe.

When the inevitable happens, and marijuana is fully legalised in these metropolitan destinations, we will be doing it again. This discussion is not advocacy, it’s economics.

Jay Bruno


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