The Global Underworld

The editor of Foreign Policy explains how smugglers, traffickers, and copycats are hijacking the world economy


This past August Pakistani President Pervez Musharraf finally confirmed to the world that his country’s senior nuclear scientist and a national hero, A.Q. Khan, had independently sold Pakistani nuclear technology to other countries. Between 1989 and 2002, defying both international non-proliferation agreements and Pakistani law, Khan had helped Iran, Libya, and North Korea develop their nuclear programs. But he couldn’t have done it alone. The trade in nuclear materials would have required the support of a vast black market infrastructure that included middle-men, traders, shippers, and corrupt government officials across the globe.

This intricate and clandestine international network is neither limited to weapons of mass destruction nor confined purely to illegal goods, according to Moisés Naím’s new book, Illicit: How Smugglers, Traffickers, and Copycats Are Hijacking the Global Economy. In one of the first comprehensive looks at the illicit economy, Naím points out the connections between underground markets in designer clothes, human beings, drugs, weapons, and endangered species, and argues that the variety of illicit markets constitute a unified phenomenon that has been growing at a startling rate. Aided by increasingly open markets and advanced in technology, the international black market is moving faster, evading officials more easily, and earning more than ever.

The international market in contraband is never straightforward. Its actors are often ostensibly “upstanding” citizens—for instance, consumers buying fake handbags from street vendors in plain sight of New York policemen. And while the illicit market is undeniably stealing wealth from some, it can also help people—those who live in developing countries, for instance, can benefit from illegal immigration as well as illegal remittances sent back home. The illicit market can also allow us to see where and how government regulation is counterproductive. Naím, the editor of Foreign Policy, recently spoke candidly about his reporting and research on the illicit economy with Mother Jones.

Mother Jones: How did you become interested in developing a comprehensive understanding of the international underground market?

Moisés Naím: I was in Milan, walking the streets and bumped into a vendor that was selling very expensive Prada handbags for a fraction of the price that they were selling for two blocks away, in the official Prada store. And I started talking to the street vendor and very quickly discovered that he was just as illicit as the bag he was peddling. He was a West African, illegally-trafficked individual, who was literally working more or less as an indentured slave for the people who had trafficked him into the country. They had him working very long hours for almost no money selling these very fancy bags at a fraction of the price.

On my way back to the United States, I stopped in New York for business and was walking the streets and lo and behold, I find another street vendor that was selling exactly the same bag. And I also started talking to him. He was from a different West African country and had an incredibly similar—or actually identical story, as the guy I had been talking to in Italy.

That got me thinking and I started looking more deeply into this. Now, think of the stages this system involves: first, you have to steal the design from Prada, often before it even hits the markets; take it to China; procure the raw materials—the belts, buckles, zippers, and leather that go into the bags; then, manufacture it in the thousands; put it in containers that go to all the major cities in the world; and then use illegal immigrants from other countries as your merchandising network.

If you ask CEOs of any major multinational corporations, they will tell you that what I just described is a huge managerial and financial undertaking. The logistics, the operations, the management skills needed to pull it off are huge. If you then add the fact that many of the transactions I just described are crimes and have to be conducted under the table, or with—inevitably—government accomplices, then you get a better sense of the scale, the scope, and implications of this kind of illicit trades. It all ends up in money, and a lot of money moves in illicit trades. And so that took me to money laundering and then the many other topics that I discuss in the book. Each of these trades alone, in a fragmented, isolated way, have been amply discussed in depth and documented. What no one had completely done is to put them all together.

MJ: You write that 40 percent of ‘Proctor & Gamble’ and 60 percent of ‘Honda’ products are inauthentic—how representative is this of the overall global economy?

MN: They are quite representative, depending on the countries and industries. Most industries will tell you that it is simply an illusion that forgeries and counterfeits are only about DVDs, fancy garments, and branded products. What the book shows, and what is documented, is that we’re even talking about things like industrial parts. If you talk with the people from Caterpillar, they will tell you that they are dealing with a huge problem of counterfeit Caterpillar parts. British Petroleum, the oil company, found a fake BP gas station in Eastern Europe that had all the markings, the signage of a BP gas station, except that it wasn’t actually BP. The very well-known Wrigley chewing gum trucks were found in China without Wrigley’s own knowledge. In some countries of Latin America, almost a hundred percent of DVDs are counterfeit.

MJ: How big is the illicit economy?

MN: Recent estimates gauge that the illicit economy is about 10 percent of global GDP. Human slavery alone is worth an estimated $7 to $10 billion annually. And the volume of drug contraband seizures doubled between 1990 and 2002. But the clandestine trade extends to many other markets as well, including human organs, luxury goods, and forged currency.

The numbers are of course estimates that can be debated. All of the estimates for the size and volume of these trades are arrived at through indirect proxy measures, through sampling, and it’s a very imperfect science. What cannot be debated is that in the last ten years, despite government’s attempts to contain the growth, all these trades are today far larger than they were ten years ago.

It took four hundred years for the slave trade to bring 12 million people to America from Africa. It took less than ten years to traffic 30 million people in Southeast Asia in the last decade. So that gives you a sense of proportion.

MJ: Is black-market wealth simply removed from the legitimate economy or is it produced, in part, within it?

MN: This money is part of the global economy. It’s an integral part. Smuggling has been with us since time immemorial, but the black market has been transforming the world in much bigger ways now than it used to. The reason I can argue this is because the traffickers have gone global, whereas they used to be regional or national. Now, you have a far more global web of trafficking that links Ukraine to Columbia, and Morocco with Spain, and in turn with Russia. We have Nigerian traffickers working in northern Thailand.

Second, they have diversified the illegal economy. If you are in business, the first thing you do is to diversify your sources of revenue. And if all your sources of revenue are originating in a highly-risky, illegal economy, you have strong incentives to diversify into the legal economy. So all of these trades have in fact diversified into legal companies, which create a gray zone between legal and illicit enterprises, and that confounds our traditional definitions of legal and illegal enterprises.

Thirdly, these networks of traffickers have also regulated the behavior of legal companies by investing heavily in “government relations.” All regulated enterprises, everywhere in the world spend money in trying to influence their government regulators; some are very transparent and open. If you want to be elegant we can call it “lobbying,” and if you want to be precise, you can call it “buying governmental influence.” Well, the traffickers also are very regulated, inded they are banned, and therefore the return from trying to influence the government is huge.

MJ: Who’s losing out from illicit markets?

MN: Certainly owners of intellectual property are losing their ability to capture some of their returns. In some instances consumers are losing: when people buy medicines that they think are authentic but are really fake, and have less potency, or are lethal. People traveling in airplanes that rely on counterfeit, sub-par parts—which is known to have happened—can be losers. And the people who are trafficked, for example children and women, who are coerced into trafficking and exploited, are also losers.

MJ: Is the illegitimate economy undermining or reinforcing the legitimate one?

MN: In some industries it has undermined the legal economy, there’s no doubt about that. In other industries it has complemented the legal economy, for some countries.

For example, Latin America receives more money from remittances of Hispanics living oversees and sending money back to their families than it gets from all the multinational investments in the region. Some of those immigrants that are sending money back are illegal immigrants; some of the channels that they use to send money are not traditional banking channels but illicit channels. Therefore, both the immigrants living abroad and the channels they use to send money back to Latin America are illicit. But that is a form of illicit trade that is allowing a large number of Latin American families to live above the poverty line. And many families in Latin America would be indigent without the money sent by their relatives working abroad. The same is true of other regions.

MJ: You talk about legitimate businesses and individual portfolios blurring the line between legal and illegal economic activity. Are normal citizens intentionally participating in criminal activity?

MN: In the United States there is a much fretting about illegal immigrants and in Congress now there are proposals to build a fence or wall that will make it, in theory, impossible for illegal immigrants to come—which is a very bold, and improbable proposal. People forget that the immigrants come here because there are whole industries that depend on them. A lot of Americans eat at restaurants where the people working in the kitchen are illegal immigrants. Many of American senior citizens and children are taken care of by illegal immigrants. They are the cultural industry of this country, and therefore the food prices would go up without the work of illegal immigrants.

The fines that the American government has imposed on American companies that hire illegal aliens dropped 82 per cent since the early 1990s. The number of Americans companies fined by the government in 2003, which is the year we last have numbers, was exactly 124 companies. So hiring illegal aliens doesn’t seem to be that risky, and all industries and the population in general benefits from that.

The same applies to counterfeits. The companies that are victims of this are putting pressure in Congress to pass laws to forbid, contain, and regulate against countries that allow the production of these counterfeits. Yet, using counterfeits has become part of the lifestyle of wealthier people in the wealthier countries of Europe and in the United States. Having a counterfeit watch, watching a pirated DVD, using a fake bag whose original is very expensive—it’s almost a joke. In most of our cities, upright citizens walk the streets and buy these products from street vendors. And we can say the same about drugs, and the double-standards there.

MJ: In promoting “policies aimed at global integration”, the wave of liberalization in the 1990s promoted both globalization and the illicit trade. Was the economic benefit gained from liberalization in the normal market worth the losses made by the growth of the illicit market?

MN: Yes, I am of the opinion that the liberalization of trade has had both costs and benefits, and some of the costs are those that I talk about in the book, but I believe that the benefits outweigh the costs.

MJ: Is your book an argument for more stringent control of borders, trade and domestic economies?

MN: No, that’s only a minor part of it. This is an argument to be more intelligent and selective in prohibiting trades, an argument for realism and for bringing the national conversation to a more frank level. Asking governments to try to stop, ban, and prohibit certain kinds of trades is doomed to fail.

But I am in favor of strong government intervention, and strong prohibitions enforced by the governments, to stop the trade of children, women, and other coerced trafficked people. I am in favor of very effective government intervention in trying to stop the international trading of weapons of all kinds, and so on. But I am also in favor of a government that is more selective in what it bans and tries to contain, because doing it as widely as is now done really waters down and weakens the ability to be effective in the markets where it is most important to be effective.

MJ: Does the existence of the illicit market help point to some areas of government regulation that are unwarranted or too stringent?

MN: Yes, undoubtedly. There are many markets that for all practical purposes need to be decriminalized. A very good example is marijuana, which is amply available and the usage continues to be wide-spread. And despite massive government attempts at prohibiting, they have not succeeded, and it’s a source of major social cost.

MJ: What effect did 9/11 have on the ongoing war against illegal trade and markets?

MN: First, it created a huge appetite for new technologies that will reinforce and improve governmental efforts towards controlling these trades, monitoring borders, and having a better handle on international transactions. The other effect was creating a huge demand for anti-laundering measures, for example the Patriot Act, that were far more developed and strengthened.

What is very interesting is that now, almost five years after 9/11, we now know that many of these efforts are not working.

MJ: Which ones aren’t working?

MN: In the 1990s, the number of illegal immigrants entering the United States was 500,000 per year, on average. After 9/11, the government established a far more stringent set of controls over immigrants. But even after those controls, a recent study shows that the number of immigrants per year entering the United States continues to be 500,000. After 9/11, the government established very stringent controls on money laundering. But again, recent studies show that those stringent controls have not lowered the volume of money laundered and have not increased the risk that money launderers face in the United States or the rest of the world.

MJ: Communism, like many attempts at excessive regulation and prohibition, spurred black markets, but you say that liberalization has revolutionized illicit trade. What has a greater positive effect on the growth of illegal economic activity?

MN: It depends on the market. There are technologies that have created new markets, for example file sharing, and new technologies that are allowing for the international trade in human organs. These things did not exist during most of the Communist era and they are driven by technology. New forms of marijuana that are more potent and can be harvested in very cold climates in green houses, that has been brought about by biotechnology.

The tight controls that the Communist governments kept in a lot of global markets created huge incentives for black-markets in a variety of products. What induces smuggling is always government intervention. If you take away government policies smuggling will disappear, naturally.

MJ: Would regulation of smuggling benefit from greater international cooperation?

MN: Global illicit trades are essentially that, global. And therefore, it is almost impossible to try to tackle them by local initiatives. So there is a need for better international cooperation—but it’s not easy, and it’s not forthcoming, and it’s not been increasing now in any significant way.

MJ: How important is it to form international consensus on legal definitions and protocols for criminalizing illicit trade?

MN: It is indispensable, and one of the purposes of the book is to try to bring the conversation towards a more frank, honest discussion about all these things that are now plagued with double standards and hypocrisy.

MJ: Is there sufficient political incentive for cooperative political action?

MN: In some areas there is. And one of the areas in which progress has been made is in money laundering, even though the results have not been substantial.