This article was first published on the Stratfor website.
The author, George Friedman, is chairman and CEO of Stratfor, the
world’s leading online publisher of geopolitical intelligence.

STRATFOR argued March 13, 2008, that Mexico was nearing the status of a failed state.
A failed state is one in which the central government has lost control
over significant areas of the country and the state is unable to
function. In revisiting this issue, it seems to us that the Mexican
government has lost control of the northern tier of Mexico to drug-smuggling organizations,
which have significantly greater power in that region than government
forces. Moreover, the ability of the central government to assert its
will against these organizations has weakened to the point that
decisions made by the state against the cartels are not being
implemented or are being implemented in a way that would guarantee

Despite these facts, it is not clear to STRATFOR that Mexico is
becoming a failed state. Instead, it appears the Mexican state has
accommodated itself to the situation. Rather than failing, it has
developed strategies designed both to ride out the storm and to
maximize the benefits of that storm for Mexico.

First, while the Mexican government has lost control over matters
having to do with drugs and with the borderlands of the United States,
Mexico City’s control over other regions — and over areas other than
drug enforcement — has not collapsed (though its lack of control over
drugs could well extend to other areas eventually). Second, while drugs
reshape Mexican institutions dramatically, they also, paradoxically,
stabilize Mexico. We need to examine these crosscurrents to understand
the status of Mexico.

Mexico’s Core Problem

Let’s begin by understanding the core problem. The United States
consumes vast amounts of narcotics, which, while illegal there, make
their way in abundance. Narcotics derive from low-cost agricultural
products that become consumable with minimal processing. With its long,
shared border with the United States, Mexico has become a major grower,
processor and exporter of narcotics. Because the drugs are illegal and
thus outside normal market processes, their price is determined by
their illegality rather than by the cost of production. This means
extraordinary profits can be made by moving narcotics from the Mexican side of the border to markets on the other side.

Whoever controls the supply chain from the fields to the processing
facilities and, above all, across the border, will make enormous
amounts of money. Various Mexican organizations — labeled cartels,
although they do not truly function as such, since real cartels involve
at least a degree of cooperation among producers, not open warfare —
vie for this business. These are competing businesses, each with its
own competing supply chain.

Typically, competition among businesses involves lowering prices and
increasing quality. This would produce small, incremental shifts in
profits on the whole while dramatically reducing prices. An increased
market share would compensate for lower prices. Similarly, lawsuits are
the normal solution to unfair competition. But neither is the case with
regard to illegal goods.

The surest way to increase smuggling profits is not through market
mechanisms but by taking over competitors’ supply chains. Given the
profit margins involved, persons wanting to control drug supply chains
would be irrational to buy, since the lower-cost solution would be to
take control of these supply chains by force. Thus, each smuggling
organization has an attached paramilitary organization designed to
protect its own supply chain and to seize its competitors’ supply

The result is ongoing warfare
between competing organizations. Given the amount of money being made
in delivering their product to American cities, these paramilitary
organizations are well-armed, well-led and well-motivated. Membership
in such paramilitary groups offers impoverished young men extraordinary
opportunities for making money, far greater than would be available to
them in legitimate activities.

The raging war in Mexico derives logically from the existence of
markets for narcotics in the United States; the low cost of the
materials and processes required to produce these products; and the
extraordinarily favorable economics of moving narcotics across the
border. This warfare is concentrated on the Mexican side of the border.
But from the Mexican point of view, this warfare does not fundamentally
threaten Mexico’s interests.

A Struggle Far From the Mexican Heartland

The heartland of Mexico
is to the south, far from the country’s northern tier. The north is
largely a sparsely populated highland desert region seen from Mexico
City as an alien borderland intertwined with the United States as much
as it is part of Mexico. Accordingly, the war raging there doesn’t
represent a direct threat to the survival of the Mexican regime.

Indeed, what the wars are being fought over in some ways benefits
Mexico. The amount of money pouring into Mexico annually is stunning.
It is estimated to be about $35 billion to $40 billion each year. The
massive profit margins involved make these sums even more significant.
Assume that the manufacturing sector produces revenues of $40 billion a
year through exports. Assuming a generous 10 percent profit margin,
actual profits would be $4 billion a year. In the case of narcotics,
however, profit margins are conservatively estimated to stand at around
80 percent. The net from $40 billion would be $32 billion; to produce
equivalent income in manufacturing, exports would have to total $320

In estimating the impact of drug money on Mexico, it must therefore
be borne in mind that drugs cannot be compared to any conventional
export. The drug trade’s tremendously high profit margins mean its
total impact on Mexico vastly outstrips even the estimated total sales,
even if the margins shifted substantially.

On the whole, Mexico is a tremendous beneficiary of the drug trade. Even if some of the profits are invested overseas, the pool of remaining money flowing into Mexico
creates tremendous liquidity in the Mexican economy at a time of global
recession. It is difficult to trace where the drug money is going,
which follows from its illegality. Certainly, drug dealers would want
their money in a jurisdiction where it could not be easily seized even
if tracked. U.S. asset seizure laws for drug trafficking make the
United States an unlikely haven. Though money clearly flows out of
Mexico, the ability of the smugglers to influence the behavior of the
Mexican government by investing some of it makes Mexico a likely
destination for a substantial portion of such funds.

The money does not, however, flow back into the hands of the gunmen shooting it out on the border;
even their bosses couldn’t manage funds of that magnitude. And while
money can be — and often is — baled up and hidden, the value of money
is in its use. As with illegal money everywhere, the goal is to wash it
and invest it in legitimate enterprises where it can produce more
money. That means it has to enter the economy through legitimate
institutions — banks and other financial entities — and then be
redeployed into the economy. This is no different from the American
Mafia’s practice during and after Prohibition.

The Drug War and Mexican National Interests

From Mexico’s point of view, interrupting the flow of drugs to the
United States is not clearly in the national interest or in that of the
economic elite. Observers often dwell on the warfare between smuggling
organizations in the northern borderland but rarely on the flow of
American money into Mexico. Certainly, that money could corrupt the
Mexican state, but it also behaves as money does. It is accumulated and
invested, where it generates wealth and jobs.

For the Mexican government to become willing to shut off this flow
of money, the violence would have to become far more geographically
widespread. And given the difficulty of ending the traffic anyway — and
that many in the state security and military apparatus benefit from it
— an obvious conclusion can be drawn: Namely, it is difficult to
foresee scenarios in which the Mexican government could or would stop
the drug trade. Instead, Mexico will accept both the pain and the
benefits of the drug trade.

Mexico’s policy is consistent: It makes every effort to appear to be
stopping the drug trade so that it will not be accused of supporting
it. The government does not object to disrupting one or more of the
smuggling groups, so long as the aggregate inflow of cash does not
materially decline. It demonstrates to the United States efforts
(albeit inadequate) to tackle the trade, while pointing out very real
problems with its military and security apparatus and with its
officials in Mexico City. It simultaneously points to the United States
as the cause of the problem, given Washington’s failure to control
demand or to reduce prices by legalization. And if massive amounts of
money pour into Mexico as a result of this U.S. failure, Mexico is not
going to refuse it.

The problem with the Mexican military
or police is not lack of training or equipment. It is not a lack of
leadership. These may be problems, but they are only problems if they
interfere with implementing Mexican national policy. The problem is
that these forces are personally unmotivated to take the risks needed
to be effective because they benefit more from being ineffective. This
isn’t incompetence but a rational national policy.

Moreover, Mexico has deep historic grievances toward the United
States dating back to the Mexican-American War. These have been
exacerbated by U.S. immigration policy
that the Mexicans see both as insulting and as a threat to their policy
of exporting surplus labor north. There is thus no desire to solve the
Americans’ problem. Certainly, there are individuals in the Mexican
government who wish to stop the smuggling and the inflow of billions of
dollars. They will try. But they will not succeed, as too much is at
stake. One must ignore public statements and earnest private assurances
and instead observe the facts on the ground to understand what’s really
going on.

The U.S. Strategic Problem

And this leaves the United States with a strategic problem. There is
some talk in Mexico City and Washington of the Americans becoming
involved in suppression of the smuggling within Mexico (even though the
cartels, to use that strange name, make certain not to engage in
significant violence north of the border and mask it when they do to
reduce U.S. pressure on Mexico). This is certainly something the
Mexicans would be attracted to. But it is unclear that the Americans
would be any more successful than the Mexicans. What is clear is that
any U.S. intervention would turn Mexican drug traffickers into patriots
fighting yet another Yankee incursion. Recall that Pershing never
caught Pancho Villa, but he did help turn Villa into a national hero in

The United States has a number of choices. It could accept the
status quo. It could figure out how to reduce drug demand in the United
States while keeping drugs illegal. It could legalize drugs,
thereby driving their price down and ending the motivation for
smuggling. And it could move into Mexico in a bid to impose its will
against a government, banking system and police and military force that
benefit from the drug trade.

The United States does not know how to reduce demand for drugs. The
United States is not prepared to legalize drugs. This means the choice
lies between the status quo and a complex and uncertain (to say the
least) intervention. We suspect the United States will attempt some
limited variety of the latter, while in effect following the current
strategy and living with the problem.

Ultimately, Mexico is a failed state only if you accept the idea
that its goal is to crush the smugglers. If, on the other hand, one
accepts the idea that all of Mexican society benefits from the inflow
of billions of American dollars (even though it also pays a price),
then the Mexican state has not failed — it is following a rational
strategy to turn a national problem into a national benefit.

George Friedman is chief executive officer of Stratfor, the world’s leading online publisher of geopolitical intelligence. He is a widely recognized international affairs expert and author of numerous...