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ANALYSIS

Mexico Piracy, Contraband in Perspective

CONTRABAND / 29 APR 2011 BY STEVEN DUDLEY EN

The head of one of Mexico’s most important business federations said recently that piracy and contraband represented a $74 billion industry in that country. It's time to put such claims into perspective.

Jorge Davila Flores, who heads the Confederation of Commercial, Services and Tourism (Confederacion de Camaras Nacionales de Comercio, Servicios y Turismo - CONCANACO), said that Mexico had become the world’s leader in contraband and piracy.

Flores also emphasized organized crime’s increasing role in the informal economy, without getting into specifics about how he reached his conclusions on how much money was at stake and who controlled it.

Flores’ comments come amidst a flurry of concern from large industries about piracy. Mike Robinson of the Motion Picture Association of America (MPAA) recently told Bloomberg TV that returns from piracy were greater than those from drug trafficking.

The MPAA estimates that piracy cost the film industry $6.1 billion worldwide in 2005, while the group's Mexican affiliate said that piracy costs the industry some $590 million per year in Mexico alone.

U.S. officials have also sounded the alarm, although some of the more knowledgeable sources have declined to give public estimates as to the value of the piracy market.

The comments from the U.S. focus on stamps that some criminal groups use to brand their pirated products. It is, they say, the ultimate illustration of the groups' total monopoly over organized crime in their territories.

The role of Mexico's organized criminal groups in piracy has indeed grown, as InSight has noted. However, the problem, while grave and broad, has been exaggerated and misconstrued.

Mexican criminal organizations, especially the Zetas and the Familia Michoacana, have attempted to monopolize criminal activity on the local level. Their modus operandi, according to numerous law enforcement and drug analysts interviewed by InSight, is to enter a territory and call meetings with the owners and leaders of the informal economy, in which they explain that they expect a percentage of the profits.

This percentage, known in Mexico as a “piso," does not mean these big groups are integral parts of the structure of any contraband or piracy markets. The relationship between those who control these markets and the larger organized criminal groups varies. The most common one is likely that of master and servant.

So the notion of a monopoly on the part of criminal groups is misunderstood, and the idea of total control overstated. What this means is these groups neither control the entire pirate industry (they do not want to), nor do they make that much money from it.

The profit margins of piracy activities is grossly overstated. Drug trafficking nets between $18 billion and $36 billion in profits in the United States for these criminal organizations, far surpassing the MPAA’s estimate for piracy in Mexico. Moving drugs often requires less infrastructure, personnel, and exposure than moving bulk quantities of contraband. And while contraband can be an interesting way to launder drug proceeds, it is a very small market and is only one means by which this goal can be achieved.

The MPAA's estimate of the Mexican piracy market also seems overstated. Even if every Mexican bought two pirated DVDs at one dollar a piece (normally, they cost less), then this would still only represent a $220 million market, less than half the $590 million the association says it is losing in Mexico.

Finally, the focus has been wrongly shifted to the poor and underemployed who are making a living in the informal economy and who have dealt in piracy and contraband for a very long time. The statements of Flores (and others) focus attention on this part of Mexico, which would collapse without that means to keep prices low. A full 47 percent of Mexicans still live below the poverty line, according to the World Bank, and these informal economies will shrink when that number drops.

Ironically, what Flores does not mention when he talks of this piracy and contraband are all the taxes that the Mexican elite and businesses are not paying. Mexico collects less than 11 percent of its GDP in taxes, far below the Latin American average of 16 percent and the world developing country average of 25 percent.

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