By Cristobal Vasquez
In 2012, Uruguayans were asked if they agreed with the legalization of marijuana. 66 percent of interviewees said no. Ignoring public opinion, Uruguay’s outgoing president, José “Pepe” Mujica, proposed and signed a law making Uruguay the first Latin American country to legalize the recreational consumption of marijuana. Mujica’s arguments for legalization included absorbing the high profits of the black market, reducing crime, and controlling consumption. However, there are significant costs in enacting this law, one of which is implementing this regulatory structure to oversee its distribution.
Several Columbia University economists note that the biggest issue in implementation is the development of the right tax structure that would both maximize the collection of taxes and eliminate the black markets. While some have considered placing a high tax on marijuana—much like cigarettes in the United States—there is a danger that such a policy will backfire, and that it will neither be a source of revenue nor a deterrent for drug abusers. Instead, buyers will continue to rely on the black market, which offers cheaper, and potentially higher quality alternatives. To avoid this reality, Uruguay plans to enforce an adjustable tax rate. “The central objective of this variable fee is competing with the black market. So if marijuana is selling on the street for 25 pesos [$1 a gram], the fee, which is a percentage, must allow companies to sell legal cannabis at 25 pesos [a gram],” said Julio Calzada, Secretary General of the National Drug Board of Uruguay.
Any adjustable tax rates, however, will have to take into account that the demand for marijuana is elastic to the price. An elastic good is one that is cost dependent. In Colorado and Washington, two U.S. states were marijuana was recently legalized, as both consumption and production increased, prices decreased. Additionally, according to the 2014 World Drug Report issued by the United Nations Office of Drugs and Crime, it is estimated that for each 10 percent drop in price, there will be an approximately 3 percent increase in the total number of users, and a 3-5 percent increase in youth initiation.
“I believe the demand will absolutely increase over time based on this legalization decision,” says Javier Vazquez, a prominent Uruguayan businessman and investor, adding, “legislators have considered multiple factors, and they have taken pains to look forward and determine how increased demand and usage might lead to public risks.”
In addition, Vazquez is certain that with legalization there will be an increased emphasize on developing the kind of technology that can cater to growing demands. “I would expect new technology in growing equipment, personal or commercial, to begin expanding within the year, leading to massive range of choices for consumers and marijuana industry entrepreneurs.”
In addition to promoting technological innovation, legalization will reduce the number of individual criminally prosecuted each year for distribution and/or possession of marijuana. The costs of such prosecution and jail time could then be redirected toward investigating more serious criminal offenses—such as large-scale drug cartels, trafficking cocaine and heroine.
However, before funds can be reallocated to other criminal prosecutions, much money will need to be invested in implementing a new regulatory structure and launching a series of prevention and education initiatives to ensure public understanding of the risks associated with recreational use. “Cannabis-related activities, such as cultivation, sale and distribution, will continue to require routine monitoring owing to explicit limitations set forth in the legislation,” says the UN World Drug Report.
And then, of course, there is the issue of health. As these technologies go into effect, however, new health issues may emerge. Young initiators, who are most likely to partake in the fruit of legalization, are prone to drug abuse. Side effects include lung problems, cognitive impairment, and poor memory skills. According to the U.S. Department of Justice’s National Drug Threat Assessment Summary, between 2006 and 2010, even before states began to legalize marijuana, there was a 59 percent increase in cannabis-related emergency visits and a 14 percent increase in cannabis-related treatment admissions. With legalization, these numbers could very well rise.
World trends in the prevalence of use of different Drugs, 2009-2012. UNODC
Despite these potential causes for concern, Vazquez still believes in the strength of the marketplace. “I absolutely believe that growth via a single product – or, more appropriately, a single sector – can revitalize an economy.” Currently, Uruguay’s illegal marijuana market is valued at $30 million per year. With increased production and easy means of dispersion at pharmacies across the country, there may be potential for increased revenues. Though it might not be enough to alter the course of Uruguayan history, it is certainly an innovative approach to revitalizing the economy.
And perhaps, as Vazquez notes, innovation is the key to development. A nation grows when “enterprising citizens make the decision to put their resources and their brainpower into ideas that stem directly from market demand and consumer needs.”
Cristobal Vasquez is an editorial assistant at World Policy Journal.