Jansen, A.C.M. (2002), The economics of cannabis-cultivation in Europe. Paper presented at the 2nd European Conference on Drug Trafficking and Law Enforcement. Paris, 26&27 September, 2002.

© Copyright 2002 A.C.M. Jansen. All rights reserved. The economics of cannabis-cultivation in Europe Subtitle A.C.M. Jansen [*] 1. Introduction Eurocannabis represents a rather new cannabis variety. It is mainly, but not exclusively, produced indoors, under artificial light. It is grown on specially enriched soils or with hydroponics, and its growth cycle has been shortened to less than three months. Compared with cannabis from traditional producing countries, Eurocannabis has a different 'appearance', a different taste and smell, as well as a different 'high'. In terms of THC content, the new product may be called 'strong' when compared with marihuanas from overseas. But Eurocannabis doesn't generally exceed the strength of hashish, the refined products from countries such as Morocco, Libanon and Pakistan. To economists, Eurocannabis presents a rather interesting case of 'import substitution'. Only a few decades ago, the growing of psychotropic cannabis was largely confined to regions outside the Western world. Cannabis products had to be imported. Nowadays Eurocannabis is taking over this - illegal - market in a rather spectacular way. It is estimated that around 25% of European cannabis consumption is accounted for by indigenous production. Countries like Switzerland and the Netherlands even reach levels of around 75%. And at an international scale the Dutch cannabis sector even shows signs of 'a competitive advantage'. Economic theory provides an explanation for both the import substitution tendencies and the resulting global shift of cannabis production towards the Western world. 2. The Western cannabis guerrilla Eurocannabis, its taste, its economic structure and development, its high levels of innovation and growth, its rates of return, et cetera, et cetera, could not have emerged and cannot be explained without referring to the illegal status of cannabis. The worldwide prohibition of cannabis has of course not prohibited the supply. As worded in an old economic law: "Where a demand emerges, the supply will follow". The high prices for imported cannabis in the Western world have provided the economic feasibility of cannabis production under artificial light. 'Theoretically', attempts to substitute imports of cannabis could have taken place anywhere in the world, and indeed, to some extent this has been the case anywhere in the Western world (Clarke, 1998). But, during the eighties, the Netherlands presented itself as a rather ideal 'incubation environment' for further developing both the genetics and the production techniques of Eurocannabis. In this country, the breeding of new strains, suitable for different (climatic) conditions, could take place in a legal way. At the time, the production of hemp seeds was not against Dutch law. The same applied to experiments with new production techniques. They were highly innovative - and they had to be. But the experiments could nevertheless benefit from the existence of a 'cluster' of enterprises offering services and equipment for intensive horticulture, which in the Netherlands already had enjoyed a rather impressive 'competitive advantage' on the world market for some decades. These two favourable circumstances explain why, already halfway the eighties, a rather high-quality outdoor-grown cannabis could be produced in the Netherlands. Nevertheless, this outdoor-grown cannabis, called 'Netherweed', has never been very successful on the market. Crops were either taken by the police or, more importantly, were stolen by robbers. So, in the second half of the eighties the 'infant' cannabis industry moved from 'outdoor' to 'indoor' cultivation (Jansen, 1993). The feasibility of growing cannabis under artificial lights had already become clear in the United States, where experiments with indoor cultivation were inspired by harsher cannabis policies during the second half of the seventies (Bergman, 2002). An influential American handbook (by Cervantes) for indoor growing was published as early as 1983 - and was translated into Dutch in 1988. The American insights were further developed in a rather spectacular way, again facilitated by the existing Dutch horticultural cluster. It would go too far here to describe the development of all innovations which brought about the exceptional increase of 'floor productivity'. Suffice it to say that, eventually, some four crops a year proved to be possible, which means an annual yield of over one kilogram of Eurocannabis per square meter. Innovations did not only relate to genetics, fertilizers, lighting, air conditioning and pest control, but also to the fighting of smell and the prevention of noise. It goes without saying that all technical (and managerial) innovations reflect the illegality of Eurocannabis. 3. The Dutch 'Green Avalanche' By the end of the eighties, in terms of both quality and 'indoor productivity' rate, Eurocannabis could be considered as a 'commercial product'. However, 'market forces' specific to the Netherlands prohibited an easy and early commercial success. Remarkably, in the eighties the so-called 'hash coffee shop' proved an impediment rather than an inducement to selling Eurocannabis. During the eighties, high-quality hashish from all over the world was offered in coffee shops on an almost permanent basis, and this refined product with a high THC percentage was preferred by most Dutch cannabis consumers. Until 1990, hardly any coffee shop had the new cannabis variety 'on the menu'. Eurocannabis, with its different colour, taste and smell, obviously didn't appeal. Therefore, its production volume was negligible and - with a few exceptions - growing it was not very profitable. A rather sudden and massive change of 'consumer preference' was brought about largely by rumours in the regular Dutch press - rumours which were corroborated by analyses of confiscated cannabis. 'Peaks' of no less than 25% THC were reported. These reports were not quite truthful. Extensive research in the second half of the nineties showed that Eurocannabis offered in Dutch coffee shops contained an average THC percentage of around 10%, well below the 'strength' of foreign hashish varieties offered in the same establishments (Niesink , 2000). But this way of 'official advertising' did open the backdoors of the Dutch coffee shops for Eurocannabis at an amazing speed. Unlike the eighties, when the coffee shops rather prevented an early success of Eurocannabis on the market, during the nineties these very same establishments suddenly became of strategic importance for a very swift process of import substitution. The exploding demand for Eurocannabis had to be met - and indeed was met - by an avalanche-like growth of production. The 'Green Avalanche' would indeed be an appropriate economic metaphor to describe the sector's developments during the nineties in the Netherlands. Within a period of ten years, more than 80% of the domestic demand for cannabis in the Netherlands was met through domestic production. Obviously, the worldwide prohibition created the right circumstances for a very successful cannabis guerrilla. Field research (Jansen, 1993; 1996; 2002) makes it rather certain that the 'Green Avalanche' has been brought about mainly (though not exclusively) by tens of thousands of small, mostly urban, producers. By looking at the menus in coffee shops and, of course, through conversations with coffee shop owners and cannabis producers, one can make rather sure that the backdoors of the coffee shops were not so much visited by 'organized crime' but, generally, by producers with an annual production of less than 10 kilograms. In other words, not only consumer preferences changed dramatically during the nineties, the distribution patterns changed as well: local suppliers and a direct supply of Eurocannabis to coffee shops got the upper hand. 4. 'Grow shops' The emergence of shops where all requirements for an illegal cannabis production are available without legal impediment - the so-called 'grow shops' - have been of strategic importance for the unprecedented growth of small pseudo or part-time entrepreneurs in the last decade of the twentieth century. Where less than 10 of these grow shops were counted in the early nineties, no less than 300 of them existed at the end of the decade. The indoor production of marihuana requires extensive knowledge. Even nowadays -way past the experimental stage of the eighties - a successful indoor production still takes quite some learning and expertise. Face-to-face contacts and a free exchange of information, always essential to the early stages in the development of a product, have facilitated the 'Green Avalanche'. The grow shops sold the requirements for indoor cannabis production but, more importantly, they also distributed knowledge and expertise in a rather efficient way. They may be seen as centres of learning. The close contacts between grow shops and producers, moreover, are a reason to see these shops as centres of continuous innovation as well. Obviously, the high profit rates have encouraged large-scale operations. Even during the eighties, large-scale growing operations and even 'internationally organized crime' have been observed in the Netherlands. And indeed, large-scale operations nowadays seem to play a substantial role in a new stage of sector development following a decade of 'import substitution'. But again, because of the emergence of hundreds of grow shops and the existence of more than a thousand coffee shops, a multitude of small-scale producers could be recruited. They have played a dominant role in bringing about the 'Green Avalanche' in the Netherlands that has been responsible for the stunning pace at which import substitution took place during the nineties. 5. From import substitution to a 'competitive advantage' Not only the Netherlands, but other countries in the Western world as well (Switzerland, Canada, Australia, New Zealand) have reached similar high levels of cannabis import substitution. Of course, circumstances of these countries accounted for different developments. (Avalanches in Switzerland and the Netherlands consequently differ.) But in the Netherlands (and possibly Canada) import substitution seems to have evolved into a stage of 'competitive advantage', by which the economist Michael Porter (1990) means that an industry is able to compete successfully at international markets. Indeed, Porter's theoretical insights on the importance of innovation as well as the importance of local conditions of demand and production are illustrated abundantly in the economic history of Eurocannabis (Jansen, 2002). A local market of critical consumers, quite characteristic for the Dutch cannabis sector in the eighties, provided the conditions for a future 'competitive advantage', because they induced quality improvements. The emergence of a multitude of lcal producers has stimulated the efficiency of production and has contributed to the development of both a 'knowledge base' and an 'economic infrastructure' which provided all sorts of goods and services to support product quality and the level of competitiveness. Obviously, Porter's 'diamond' of four 'determinants' (see figure 1) shows a variety of vital interactions between economic activity on the one hand and a supporting local environment on the other. Porter doesn't consider specific governmental measures to promote 'a competitive advantage' to be of great benefit. On the contrary, they may even be counterproductive. Government help that removes the pressure on firms to improve and upgrade, may prevent these firms from reaching the stage of 'competitive advantage'. As figure 1 illustrates, government policy influences the national 'diamond' rather than being part of it. The economics of an illegal production such as Eurocannabis makes a government a very powerful influencer of the 'diamond'. The worldwide prohibition of cannabis has indeed provided the circumstances for high levels of innovation and growth, which generally characterizes cannabis industry in the Western world. Figure 1. Porter's model of competitive advantage. 6. A 'competitive advantage' Compared to the Netherlands, most European countries show rather modest levels of import substitution of around 25%. Hashish from overseas still seems to be preferred in most European countries, a situation similar to that in the Netherlands during the eighties. Apart from consumer preferences, import substitution will probably never take on the avalanche-like characteristics that occurred in the Netherlands, if only because of the absence of a tolerated network for cannabis in the other European countries. Moreover, traditional producing countries have responded to the challenge of Eurocannabis by offering cannabis products of higher quality. Even in the Netherlands, domestic producers are once more facing tougher competition from hashish from traditional production countries. At the same time, however, the Dutch cannabis sector seems to be benefiting from a 'competitive advantage', which means that the Dutch product seems to be able to increase its market share at the European level. Nowadays, production figures in this country exceed domestic demand already several times. One should perhaps not so much emphasize the final product Eurocannabis, but rather the 'competitive advantage' of Dutch seeds, equipment and other requirements for growing cannabis indoors. Dutch innovative products, specifically developed to boost both productivity and the quality of Eurocannabis and to evade police attention, continue to provide the very basis for import substitution at the European level. And although, as already mentioned, import substitution of cannabis appears to be rather modest in most European countries, growth rates will continue to be spectacular, whatever government policy will be at stake. 7. Profit levels of Eurocannabis Efforts to eradicate the production of cannabis at a world scale have not resulted in less production, but in other ways of production. The global shift of cannabis production towards Western countries actually shows the superiority of Western guerrilla techniques, compared to those used by producers from traditional cannabis countries. Because of eradication programmes, producers in traditional cannabis countries have taken refuge in peripheral areas or made their crops less visible by small-scale production, hidden between other crops. In the Western world, with the help of science and technology, production could be hidden as well: indoors, under artificial light. That new way of guerilla production proved not only feasible, but turned out to be much and much more profitable as well. Producers in traditional cannabis countries ultimately do not receive much more than a few percent of the price that Western consumers pay for their product (see e.g. Nadelmann, 1989). Guerrilla farming in the Netherlands and elsewhere turns out to be a lot more profitable. Producers of Eurocannabis get at least 50% of consumer prices. To put it differently: import substitution could (and can) benefit hugely from exorbitant commercial profits made on the import of cannabis from outside. These circumstances, as well as Porter's theoretical insights, show the futility of the attempts to eradicate cannabis production. As a reaction of these endeavours, the economics of cannabis have become 'versatile' if only because of the profitability of a single square meter. It goes without saying therefore that, in the Netherlands, all governmental efforts to brake the 'Green Avalanche' have been in vain. They certainly have not resulted in reduced production, and they have kept prices high. Quite obviously, these efforts have induced innovations in the industry (and criminality). Literature Bergman, D. (2002), Made in the U.S.A. Hoe Amerikaanse kwekers de Nederwiet uitvonden. Essensie, nr 65, pp. 42-46 Cervantes, J. (1988), Marihuana binnen. Drachten: Educare B.V.

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