State control of marijuana market should be seen as part of long and pragmatic tradition of market intervention and nationalisation

Inhaling deeply from a large joint of unadulterated cannabis, Marcelo Vasquez grins at the imminent prospect of his outlawed passion becoming Uruguay's newest state-sanctioned industry.

This week, the country's senate is expected to pass the world's most far-reaching drug legalisation, which should transform Vasquez from a petty criminal into a registered user, grower and ultimately, he hopes, a respected contributor to society.

That would be quite a change. After a police raid earlier this year, Vasquez – whose home doubles as a marijuana nursery – was jailed and 70 of his plants were confiscated. But the court case that followed now looks likely to go down as one of the last cannabis trials in his country's history.

The marijuana regulation bill, which has been passed by the lower house of the Uruguayan parliament, will allow registered users to buy up to 40g a month from a chemist's, registered growers to keep up to six plants, and cannabis clubs to have up to 45 members and cultivate as many as 99 plants.

Vasquez, who smokes four joints a day, is delighted. "It's a great step forward that couldn't happen anywhere but here," he says. "There's a lot more to marijuana than smoking and getting high."

This is not just the spliff talking. With the new law, Uruguay will go further than any other nation in exploring the potential benefits and risks of marijuana. The government is designing a new set of legal, commercial and bureaucratic tools to supplant a violent illegal market in narcotics, improve public health, protect individual rights, raise tax revenues and research the medical potential of the world's most widely used contraband drug.

The United Nations Office on Drugs and Crime estimates that there are 162 million cannabis users – 4% of the world's adult population (pdf). Most countries have followed a policy of prohibition for decades, but there are signs of change.

Amsterdam's coffee shops still offer cannabis on their menus despite a recent tightening of the rules in the Netherlands. Dozens of US states have decriminalised or ceased penalising users of the drug. Washington and Colorado recently introduced a cannabis tax and California has steadily blurred the line between medical and recreational use. In the UK, the deputy prime minister, Nick Clegg, has ordered a review of existing drug policies and is expected to recommend that Britain relaxes its controls.

But no government has put in place a structure as all-encompassing and supportive as that envisaged in Uruguay.

A supporter of the legalisation of marijuana at a rally in Montevideo in May this year. Photograph: Leo Carre O/Demotix/Corbis

"We'll be the first country to have a regulatory framework for marijuana production, distribution, sale, consumption and medical research," says Julio Bango, one of the legislators who drafted the bill. "This is an experiment without a doubt and it will have a demonstrable effect. That could be important for the world because it could be the start of a new paradigm."

Uruguay is trying to bring the cannabis market under state control by undercutting and outlawing the traffickers. If the bill is passed, the government will arrange for a high-quality, legal product to be sold in a safe environment at a price that competes with that offered by illegal dealers.

"If one gram costs $1 in the black market, then we'll sell the legal product for $1. If they drop the price to 75 cents, then we'll put it at that level," says Julio Calzada, a presidential adviser and the head of the National Secretariat on Drugs.

Most cannabis sold in Uruguay is of poor quality and smuggled in from Paraguay. In future, the government will license firms to produce local products grown in monitored conditions, which will then be sold to registered users through pharmacies. As in the case of tobacco, cannabis suppliers will not be allowed to advertise their product. Following moves to legalise same-sex marriage and abortion, this measure is likely to reinforce Uruguay's growing reputation as a bastion of tolerance and progressiveness in Latin America. But President José Mujica dismisses talk of liberality. A reluctant advocate of marijuana regulation, he says that this is the only way to stem the tide of the illegal drug trade, which has had dire consequences for individuals and wider society across Latin America.

"This is not about being free and open. It's a logical step. We want to take users away from clandestine business," Mujica tells the Guardian. "We don't defend marijuana or any other addiction. But worse than any drug is trafficking."

Rather than liberalism, Uruguay's actions are better explained by a long and pragmatic tradition of market intervention and nationalisation. The state controls core energy and telecoms industries, it fixes prices for essentials such as milk and water, and it pioneered some of the tightest controls on tobacco in the world.

This small country also boasts an impressive record for drug seizures, with an estimated 10% of the total market intercepted by law enforcement authorities, compared with a world average of less than 5%. Until recently, Uruguay had avoided the epidemic levels of illegal narcotic trafficking that are far more pronounced in Brazil, Colombia, Peru and Mexico.

The country is winning individual battles, says Mujica – but systematically losing the war.

The growing popularity of pasta base – a highly addictive, crack-like drug – and an increase in drug-related murders has prompted him to act against the dealers by destroying their competitiveness in the biggest illegal market: marijuana.

This is the heart of the drug problem, says Calzada.

"Ninety per cent of drug users in Uruguay and the world only use marijuana so illegal markets are structured around that even though there are other drugs with a better yield, such as cocaine and LSD. It's like an off-licence that earns its highest profits from selling whiskey, but makes much more money by selling beer because there are 100 beer sales for every one bottle of whiskey."

Marijuana also has the advantage of being less harmful, not accounting for even one of the 80 registered deaths linked to drug trafficking in Uruguay last year.

By opening the door to regulation of cannabis, Calzada says the government has an alternative to the "war on drugs" approach, which has created more problems than it has solved.

"For 50 years, we have tried to tackle the drug problem with only one tool – penalisation – and that has failed. As a result, we now have more consumers, bigger criminal organisations, money laundering, arms trafficking and collateral damage. As a control model, we're convinced that it is more harmful than the drugs themselves."

But critics say that Uruguay is taking a huge risk that could result in a wave of new addictions.

"If legalisation goes ahead, I think the social damage will be enormous," says Nancy Alonso, who runs the Manantiales Foundation, a private addiction treatment centre. "Marijuana may seem innocent, but it is addictive, 15 times more carcinogenic than tobacco and produces psychological disorders including depression, anxiety and occasionally schizophrenia."More importantly, she says cannabis is a gateway drug that leads users to harder narcotics. Juvenile residents at the treatment centre say their experience backs up such claims.

Uruguayan president José Mujicas is a reluctant advocate of cannabis regulation. 'We don’t defend marijuana or any other addiction,' he says. Photograph: Andres Stapff/Reuters

"I started with marijuana when I was 13 or 14 and then moved on to cocaine because I wanted something stronger," said Helen, a 15 year old. "If drugs are legalised, more people will consume them."

The public too have yet to be convinced. A Factum poll in October showed 29% approved of legalisation. Although sharply up from the 3% support levels of 10 years ago, this means the policy is still a potential vote loser.

Supporters of the measure hope hard data will win over the doubters. Once the marijuana business moves out of the shadows, its size will be clearer, monitoring will be easier and taxes can be levied and used to fund treatment of addicts and a more focused crackdown on harder drugs. Although the government is prepared to lose money to out-bid the traffickers in the initial stage, once the state has a monopoly, the potential revenues are considerable. The authorities estimate that 10% of adult Uruguayans – 115,000 people – smoke cannabis. Existing law permits consumption of "reasonable" amounts of marijuana, but forbids sales. The new law should clear up this legal contradiction.

The government will set up a Cannabis Research Institute, which will monitor the programme, handle approvals of seeds, establish policies for research and regulate the industry.

The market in Uruguay is estimated to be worth $30m a year, according to Martin Fernández, a lawyer working for the Association of Cannabis Studies, who says one in five Uruguayans have tried marijuana. But he admits the numbers are sketchy.

"It is hard to measure the illegal market, just as it is with human and illegal arms trafficking," he says. "But with legalisation, we should get a clear idea of the situation."

Many are eying new business opportunities. At street level, the passage of the bill is likely to boost shops selling growing kits. In downtown Montevideo, one such store, UruGrow, is already seeing a sharp rise in demand for soil, grow tents, fertiliser and other products.

"We're expanding fast," said one of the founders, Juan Andrés "Guano" Palese. "Six months ago, we sold 200 litres of soil a week, now it's more than 1,000 litres. Soon we'll need to move into bigger premises."

But the big money is more likely to come from the pharmaceutical industry, which will be freer to develop and test marijuana painkillers and other treatments in Uruguay than in any other country. According to Bango, several big international laboratories have visited Montevideo to discuss possible collaborations or investments.

"We have opportunities in the hemp industry and the spread of biotech and marijuana farming, I've just returned from a US conference on this subject. There are lots of potential products – creams, oils, sweets, capsules and products to treat multiple sclerosis and cancer. They all need scientific research to be validated. In other countries that is limited. We don't have that inconvenience," said Bango. "I think it will be a new industry for the economy."

Dope tourists could also be lured by cheap, legal, high-quality marijuana, but the authorities are adamant that they last thing they want is for Uruguay to end up as the "Amsterdam of Latin America". Only residents will be entitled to buy cannabis. Re-sales are prohibited. Coffee shop that put Indica, Sativa or Hash Browns on their menu will be closed down. "We are trying to learn from the mistakes made by other countries," Fernandez says.

Juan Vaz, a marijuana grower and long-time legalisation campaigner, hopes the regulation strategy can be applied to other narcotics.

"It would make a big health impact if we could do the same for cocaine, crack and other drugs so users could avoid accidental overdoses. That would also make a lot of profit for the government."

So far, however, Uruguayan officials have dismissed suggestions that they might use the same approach for harder drugs. They say the health risks posed by cocaine and heroin are far greater than those associated with marijuana so they require a different strategy.

Nonetheless if the senate passes the cannabis bill as expected, it won't only be the country's smokers who are delighted. Several Latin American leaders have also called for a shift from the current prohibition approach as the war on drugs takes a rising death toll with no sign of victory. Uruguay, once again, looks set to take the first step for the region.

Vaz, who spent 11 months in prison for marijuana growing, says he now feels responsible for making the policy a success. "I will celebrate. It will be a victory. For many years we have been asking for this. Now we can ask nothing more," he says. "Now it is up to us to make it work."

Additional research by Mauricio Rabuffetti