I guess it had to happen this way. The greatest social menace of the new century is not terrorism but drugs, and it is the poor who will have to lead the revolution. The global trade in illicit narcotics ranks with that in oil and arms. Its prohibition wrecks the lives of wealthy and wretched, east and west alike. It fills jails, corrupts politicians and plagues nations. It finances wars from Afghanistan to Colombia. It is utterly mad.

There is no sign of reform emanating from the self-satisfied liberal democracies of west Europe or north America. Reform is not mentioned by Barack Obama, Gordon Brown, Nicolas Sarkozy or Angela Merkel. Their countries can sustain prohibition, just, by extravagant penal repression and by sweeping the consequences underground. Politicians will smirk and say, as they did in their youth, that they can "handle" drugs.

No such luxury is available to the political economies of Latin America. They have been wrecked by Washington's demand that they stop exporting drugs to fuel America's unregulated cocaine market. It is like trying to stop traffic jams by imposing an oil ban in the Gulf.

Push has finally come to shove. Last week the Argentine supreme court declared in a landmark ruling that it was "unconstitutional" to prosecute citizens for having drugs for their personal use. It asserted in ringing terms that "adults should be free to make lifestyle decisions without the intervention of the state". This classic statement of civil liberty comes not from some liberal British home secretary or Tory ideologue. They would not dare. The doctrine is adumbrated by a regime only 25 years from dictatorship.

Nor is that all. The Mexican government has been brought to its knees by a drug-trafficking industry employing some 500,000 workers and policed by 5,600 killings a year, all to supply America's gargantuan appetite and Mexico's lesser one. Three years ago, Mexico concluded that prison for drug possession merely criminalised a large slice of its population. Drug users should be regarded as "patients, not criminals".

Next to the plate step Brazil and Ecuador. Both are quietly proposing to follow suit, fearful only of offending America's drug enforcement bureaucracy, now a dominant presence in every South American capital. Ecuador has pardoned 1,500 "mules" – women used by the gangs to transport cocaine over international borders. Britain, still in the dark ages, locks these pathetic women up in Holloway for years on end.

Brazil's former president, Fernando Henrique Cardoso, co-authored the recent Latin American Commission on Drugs and Democracy. He declares the emperor naked. "The tide is turning," he says. "The war-on-drugs strategy has failed." A Brazilian judge, Maria Lucia Karam, of the lobby group Law Enforcement Against Prohibition, tells the Guardian: "The only way to reduce violence in Mexico, Brazil or anywhere else is to legalise the production, supply and consumption of all drugs."

America spends a reported $70bn a year on suppressing drug imports, and untold billions on prosecuting its own citizens for drugs offences. Yet the huge profits available to Latin American traffickers have financed a quarter-century of civil war in Colombia and devastating social disruption in Mexico, Peru and Bolivia. Similar profits are aiding the war in Afghanistan and killing British soldiers.

The underlying concept of the war on drugs, initiated by Richard Nixon in the 1970s, is that demand can be curbed by eliminating supply. It has been enunciated by every US president and every British prime minister. Tony Blair thought that by occupying Afghanistan he could rid the streets of Britain of heroin. He told Clare Short to do it. Gordon Brown believes it to this day.

This concept marries intellectual idiocy – that supply leads demand – with practical impossibility. But it is golden politics. For 30 years it has allowed western politicians to shift blame for not regulating drug abuse at home on to the shoulders of poor countries abroad. It is gloriously, crashingly immoral.

The Latin American breakthrough is directed at domestic drug users, but this is only half the battle. There is no rational justification for making consumption legal but not the supply of what is consumed. We do not cure nicotine addiction by banning the Zimbabwean tobacco crop.

The absurdity of this position was illustrated by this week's "good news" that the 2009 Afghan poppy harvest had fallen back to its 2005 level. This was taken as a sign both that poppy eradication was "working" and that depriving Afghan peasants of their most lucrative cash crop somehow wins their hearts and minds and impoverishes the Taliban.

The Afghan poppy crop is largely a function of the price of poppies compared with that of wheat. The only time policy has disrupted this potent market was in 2001, when the old Taliban responded to American pressure by ruthlessly suppressing supply. Since the Nato occupation it has boomed, inevitably polluting Kabul politics and plunging western diplomats and commentators into hypocrisy over Hamid Karzai's corrupt regime. What did they think would happen?

The crop has shrunk because the wheat price has risen and the recession has dampened European demand. It will rise again. The policy of Nato and the UN's economically illiterate drug tsar, Antonio Maria Costa, of treating Afghan opium as the cause of heroin addiction, not a response to it, means trying to break supply routes and stamp out criminal gangs. It has failed, merely increasing heroin's risk premium. As long as there is demand, there will be supply. Water does not flow uphill, however much global bureaucrats pay each other to pretend otherwise.

The trade in drugs is a direct result of their unregulated availability on the streets of Europe and America. Making supply illegal is worse than pointless. It oils a black market, drives trade underground, cross-subsidises other crime and leaves consumers at the mercy of poisons. It is the politics of stupid. The incarceration (pdf) of thousands of poor people (11,000 in England and Wales alone) also deprives economies of a large labour pool.

As the Brazilian judge pointed out, the tide of violence associated with any illegal trade will not abate by only licensing consumption. The mountain that must be climbed is licensing, regulating and taxing supply, thus ending a prohibition now outstripping in absurdity and damage America's alcohol prohibition between the wars.

From the the deaths of British troops in Helmand to the narco-terrorism of Mexico and the mules cramming London's jails, the war on drugs can be seen only as a total failure, a vast self-imposed cost on western society. It is the greatest sweeping-under-the-carpet of our age.

The desperate politicians of Latin America have at last found the courage to grasp the nettle. Will Britain? According to the UN, it has the highest number of problem drug users in Europe. I imagine Gordon Brown and David Cameron agree with the Argentine supreme court, but they are too frightened to say so, let alone promise reform. In all they do they are guided by fear.

I sometimes realise that, if Britain still had the death penalty, no current political leader would have the guts to abolish it.