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Marijuana legalisation Tax, and tax again America’s first market for recreational marijuana will be far from free Mar 9th 2013 | LOS ANGELES FREE-THE-WEED campaigners speak not of “legalising” marijuana but of “taxing and regulating” it. True to their word, the ballot measure they placed before Colorado’s voters last November, which won the support of 55% of them, was called the Regulate Marijuana Like Alcohol Act and contained provisions for a 15% excise tax. Now that the law is taking shape, the signs are that one of the world’s first fully legal marijuana markets (Washington state also backed legalisation) will have all the taxes and rules anyone could have wished for. Soon after Colorado’s law was passed John Hickenlooper, the governor, appointed a task-force to produce a set of proposals for its implementation. The 24-member group concluded its hearings on February 28th and will formally issue its findings to lawmakers next week. A bill should be passed by early May. I In what its co-chair, Jack Finlaw, calls “a crazy couple of months”, the task-force rattled through dozens of issues. Many of its ideas are straightforward enough: rules on labelling, restrictions on advertising and provisions to protect youngsters. Non-residents should be allowed to buy weed, though in smaller amounts than locals. Joe Megyesy, a pro-legalisation lobbyist, calls the proposals “thoughtful and responsible”. But they add up to a far more restrictive market than exists for alcohol. Most importantly, the group wants to maintain, for three years, the “vertical integration” model that has governed Colorado’s medical-marijuana industry. Under this system retailers must grow at least 70% of the dope they sell. This forces licence-holders to master a suite of skills from cultivation to distribution. The task-force also suggests that for the law’s first year, only established medical-marijuana dispensaries should be granted retail licences. Some campaigners mutter about protectionism, though grudgingly admit that dispensaries deserve some reward for their pioneering (and risky) work. Mr Finlaw admits that vertical integration makes it hard to apply the excise tax: licence-holders will have an incentive to undervalue their product. That may help explain another proposal: to slap a tax on marijuana sales, on top of existing state and local sales taxes and the proposed excise tax. No figure will be presented to the legislature, but an “example” of 25% was floated in hearings. Regulators say they need the funds to enforce their rules. But set taxes too high, fear campaigners, and you leave the illegal market in place, which destroys one of the principal purposes of legalisation in the first place. Either way, any new taxes will have to be approved again by Colorado’s voters, probably in November. Over-tight rules create opportunities for rent-seeking and cosy relationships between the industry and regulators. But Colorado’s legislators must perform a balancing act, because they are being watched by the federal government. Marijuana remains illegal under federal law, and should Barack Obama’s administration decide to crack down, as it has done in some medical-marijuana states, the work of the task-force would rapidly come undone. In December Eric Holder, the attorney-general, said the Department of Justice would issue its response to the votes in Colorado and Washington “relatively soon”; on February 26th he upgraded that forecast to “soon”. Some members of the prohibition industry are running out of patience. On March 5th the president of the International Narcotics Control Board, an arm of the UN, said that marijuana legalisation in America violated international treaties and threatened public health. Hours later, eight former heads of the Drug Enforcement Administration, which has led America’s drug war for decades, expressed alarm that federal laws were not being enforced. One predicted that stoned drivers would leave roads “littered with fatalities”. Cooler heads have prevailed in Colorado, at least for now. As the task-force wrapped up its work Mr Hickenlooper, a legalisation sceptic, told members that although he feared the unforeseen consequences of Amendment 64, he acknowledged the need for pragmatism. With luck, his attitude may prove infectious. http://f5web1.economist.com/news/united-states/21573135-americas-first-market-recreational-marijuana-will-be-far-free-tax-and-tax-again

Winding down the war on drugs Towards a ceasefire Experiments in legalisation are showing what a post-war approach to drug control could look like Feb 23rd 2013 | DENVER, LA PAZ, LISBON AND MADRID |From the print edition FROM the Colorado state capitol in Denver, head south on Broadway, one of the city’s main arteries, and before long you find yourself in “Broadsterdam”, a cluster of dispensaries with names like Ganja Gourmet and Evergreen Apothecary. They peddle dozens of strains of pot, as well as snacks, infusions and paraphernalia, to any state resident bearing a “red card”: proof of a doctor’s recommendation. Landlords in the area were struggling, says William Breathes (a pseudonym), whose reviews for a local paper make him, he says, America’s first mainstream pot critic. But when Colorado began to regulate the sale of marijuana for medical use in 2010, they saw an opportunity. In this section Towards a ceasefire Internship Shoots up and leaves Reprints Related topics Washington, DC Drug Enforcement Administration Mexico Europe Colorado Broadsterdam of 2013, and many places like it in America and Europe, would have been unimaginable in New York in 1961, when diplomats hammered out the Single Convention on Narcotic Drugs, which aimed to counter the “serious evil” of addiction. That treaty, with 184 countries signed up, underpins the prohibition policy of the past half century. Though an international debate on legalisation has barely started, experiments are already showing how the production and consumption of drugs could be regulated. Change is coming because the “war on drugs” is being convincingly won by drugs, and the powerful criminal gangs who deal in them. Since 1998, when the UN held an event entitled “A drug-free world: we can do it”, consumption of cannabis (marijuana) and cocaine has risen by about 50%; for opiates, it has more than trebled. And a swelling pharmacopoeia of synthetic highs is spinning heads in dizzying new ways. The UN reckons that 230m people used illegal drugs in 2010. They and their suppliers (usually the humblest ones) fill prisons in rich and poor countries alike. Drug convictions account for almost half of American prisoners in federal jails. Burned at both ends If efforts to stem demand have been futile, trying to control supply has been disastrous. The illegal-drug industry’s revenues are some $300 billion a year, according to the very roughest of guesses by the UN, and flow untaxed into criminal hands. Drug-running mafias corrupt and destroy the places where they operate. Of the world’s eight most murderous countries, seven lie on the cocaine-trafficking route from the Andes to the United States and Europe. Only war zones are more violent than Honduras. More than 7,000 of its 8m citizens are murdered each year. In the European Union, with a 500m population, the figure is under 6,000. Latin American leaders are tiring of this. Trying to stop the flow of narcotics is akin to the legendary Sisyphus futilely pushing a boulder uphill, says Fernando Carrera, Guatemala’s foreign minister. In recent years his country has laboriously cleared its San Marcos region of opium crops, only to see it replanted five times. The president, Otto Pérez Molina, now wants to see global legal regulation of all drugs, from hashish to heroin, albeit with strict controls. Juan Manuel Santos, president of Colombia, favours legalisation, but says that his country cannot lead the way. Last year Felipe Calderón, the outgoing president of Mexico, declared it “impossible” to stop the drugs business and called for “market alternatives”. Uruguay’s government has sent to congress a bill to legalise the sale of pot through state-backed dispensaries. Smokers would be allowed to buy up to 40g per week, with profits funding crime-prevention and anti-addiction schemes. In parts of the United States, change has already come. In November voters in Colorado and Washington backed proposals to legalise, tax and regulate cannabis for recreational use. State officials are now scrambling to draft the practical rules. On February 28th a task force charged with producing recommendations for the Colorado legislature will issue its report. Though non-binding, this will be the first glimpse of what a fully formed regulatory regime for legal cannabis may look like. Although plenty of countries (and 15 American states) have decriminalised cannabis possession, in many cases treating it as no worse than a traffic infraction, nowhere has fully legalised its supply. Within a year the entire supply chain in Colorado and Washington, from cultivation to manufacture to retail, will be within the law. State coffers will gain tax and fee revenues and save in law-enforcement resources (maybe $60m a year in Colorado). Licensed outlets will appear on the streets. Assuming, of course, that the federal government consents. Marijuana remains illegal under America’s Controlled Substances Act, the 1970 law that implemented the Single Convention in the United States and that is still the foundation of federal narcotics policy. The CSA classifies it as a “Schedule I” substance, meaning it can easily be abused and has no recognised medical value. (A federal appeals court recently rejected an attempt to have it reclassified.) In December Eric Holder, the attorney-general, said that the justice department would issue a response to the state laws “relatively soon”. But for the time being the department says only that it is reviewing the state initiatives, and that marijuana remains illegal under federal law. Shortly after Mr Holder’s statement, Barack Obama told a television interviewer that he would not make it a priority to prosecute pot smokers in the two states. But the federal government has never had the resources to target users, only big traffickers. One clue to the future comes from the 18 states plus Washington, DC, where medical marijuana is legal. The Feds have come down hard on some growers and distributors in states that have drafted their laws poorly. In 1996 California was the first state to approve medical marijuana but lawsuits clog the courts, competing regulatory ballot measures confuse voters, and in some cities pushy dispensaries unnerve residents. In better-regulated places (like Colorado) the federal authorities have done little. A big issue will be leakage of legal marijuana from Colorado or Washington to other states. After meeting Mr Holder in January, Jay Inslee, the governor of Washington, told reporters that the state would pay particular attention to this. For some, that is a futile gesture. “We’ll become the source for most of the rest of the country,” says a weary Tom Gorman, of the Rocky Mountain High Intensity Drug-Trafficking Area, a federal anti-drug outfit in Denver. Last year it tracked dozens of cases of diversion of Colorado’s medical marijuana, finding it in 23 states. Legalisation will add to the flow. Yet diversion also makes life more difficult for the criminal gangs of Mexico, which are reckoned to supply anything between 40% and 70% of America’s pot. Their trade reaps profits of $2 billion a year according to IMCO, a Mexico City think-tank; cocaine profits are $2.4 billion. Part of the business model is murder: of around 70,000 people over the past five years. But IMCO reckons that once Colorado and Washington’s growers get going, the Mexicans could lose nearly three-quarters of their American customers (though others question these numbers). Much will depend on how the state laws take shape. The Colorado task force has already suggested letting retailers serve non-residents, possibly in limited amounts. It also wants to relax restrictions on financial services for the industry. Many dispensaries struggle to obtain even basic banking and credit. Trying to stay upright Jack Finlaw and Barbara Brohl, who chair the task-force, are also pondering the “vertical integration” rules that have shaped the state’s medical-marijuana industry. Dispensaries must grow at least 70% of the marijuana they sell. Some cultivate it in-house; most grow it in off-site warehouses. This hampers distribution and wholesale markets. Rob Corry, a pro-legalisation lawyer, terms it “absurd, like a supermarket owning apple orchards”. As elsewhere, tight rules have costs. But they have also helped citizens get used to an unfamiliar trade. “We’ve shown that we can make the industry work here,” says Ean Seeb of Denver Relief, a leading dispensary. Public acceptance, plus a clever campaign (paid for partly by outside money), led to victory in Colorado. Washington’s medical-marijuana industry is less advanced, but opponents of legalisation there were even more widely outspent. More changes are looming. As with gay marriage (see chart), something that seemed revoltingly decadent to many Americans in past years has rapidly won acceptance. Campaigners are seeking further wins, mainly in the relatively liberal states of the west and north-east. Some dare to dream of changing federal law. Their foe is the mighty prohibition industry: officials and bureaucrats who have spent their professional lives combating illegal drugs. Law-enforcement officers and Drug Enforcement Agency (DEA) officials have written to Mr Holder urging him to uphold federal law. Yet others counter that legalising pot will boost consumption, particularly if it can be advertised and marketed. That brings fears of health and other risks. Others counter that smoking more dope would mean people drank less alcohol, which is arguably a more destructive drug. But the effect could be the other way round. What legal pot would mean for tobacco and cocaine use is also unknown. Cannabis policy is changing in Europe, too. At Santa María, a shop across the street from one of Madrid’s main hospitals, customers queue to buy fertilisers, potting earth and imported Dutch cannabis seeds. The owner, Pedro Pérez, cheerfully warns customers not to plant until late in March when the frosts have gone. Spain’s approach now rivals that of the pioneering liberal Dutch. Though selling is illegal, buying is not. One result is hundreds of cannabis “social clubs”, which allow members to pool their purchases. These range from small co-operatives where new members must wait six months for new cannabis to be grown before joining, to huge semi-commercial organisations, with thousands of “members” buying cannabis. One in Barcelona even made a €1.3m ($1.74m) deal with the country town of Rasquera to grow supplies on local land, better known for its almond trees. Similar experiments are under way in France, Belgium, Italy and Germany, says Tom Blickman of the Transnational Institute, a think-tank based in Amsterdam. In much of Britain, especially its big cities, the risk of prosecution for those using small quantities of soft drugs is vanishingly low. But the most comprehensive policy comes from Portugal. In 1997 opinion polls rated drug use the country’s biggest social problem. Now, 12 years since the decriminalisation of personal use of small amounts (meaning less than ten days’ worth) of all drugs, it ranks 13th. All parties now support the policy of treating drug use as a health issue, not a crime. HIV rates have plummeted, too, says João Goulão, the national drugs co-ordinator. But decriminalisation is not the same as legalisation. Portugal uses “dissuasion boards”, made up of doctors, psychologists and other specialists. They aim to get addicts into treatment and to prevent recreational users from falling into addiction. When necessary they can impose fines and community work. By removing the “fear and stigma” of criminal punishment, says Mr Goulão, drug users are encouraged to seek the help they need. Brendan Hughes, of the Lisbon-based European Monitoring Centre for Drugs and Drug Addiction (EMCDDA), an agency of the European Union, says Portugal stands out for its “consistency and comprehensiveness”. Other countries wanting to focus on health have only “tweaked” their criminal laws, he says. In 2009 the Czech Republic decriminalised possession of most drugs along Portuguese lines. In December it went further, fully legalising medicinal cannabis. The plan is for imports—probably Dutch or Israeli—to be sold in pharmacies, says Jindrich Voboril, the head of the government drugs council. If that works, it will then license a number of competing companies to grow supplies locally. The elusive molecules The other big policy innovation in Europe has been to drop punitive policies in dealing with heroin and cocaine addiction, in favour of harm reduction (see article). But a much bigger worry now is the rise of legal highs. The EMCDDA reports that a new psychoactive substance is found weekly, on average. These concoctions are openly marketed as “plant food” or “research chemicals”. Mephedrone and ketamine—both legal highs until recently—have become mainstream clubbing drugs in Britain, taken alongside ecstasy and cocaine. Tim Hollis of the British Association of Chief Police Officers says that the police are “flat-footed” trying to keep up. Many of the new drugs do more harm than the illegal narcotics that they are replacing. The legal regime governing cocaine is more controversial. Some countries, including Portugal, Mexico and Colombia, have decriminalised the possession of small doses of the drug, referring users to treatment rather than giving them a criminal record. But the harm cocaine does to health and its addictive nature make governments queasy about legalising its sale. High in the Andes, regulated cultivation for “traditional” use (coca leaves give a mild caffeine-like buzz and suppress hunger, cold and altitude sickness) has been going on for decades. In Trinidad Pampa, a tiny village in Bolivia’s mountainous Yungas region, the hillsides are divided into neat terraces, where coca saplings are planted after being cultivated in beds enriched with rice-husks and sand. The whole village is involved. Children and even toddlers help their parents. The 1961 narcotics convention banned coca along with cocaine (albeit with a long transitional period). But on January 11th Bolivia became the first country to negotiate a partial opt-out from the treaty. It was readmitted with a get-out clause for coca, having resigned last year over the ban on what its president, Evo Morales, calls the “sacred leaf”. A former coca-grower and union leader, he enjoys grandstanding against America (he expelled its ambassador in 2008 along with DEA officials). In 2004, following protests by coca growers led by Mr Morales (then in opposition), Bolivia brought most of its 28,000 hectares of coca fields within the law. The government claims that increases in population and heavy use among miners and truckers justify the extra growing-permits. But sales figures suggest that in fact most coca goes elsewhere. Leaves must be sold in state-controlled markets, which in 2011 bought just over 18,000 tonnes from farmers. The UN estimates that potential production was about 48,000 tonnes. Most of the missing 30,000 tonnes leaked into the cocaine business, reckons César Guedes, head of the UN drugs office in La Paz. This alarms Bolivia’s neighbours. Brazil believes it has the world’s second-biggest market (after America) for cocaine and the largest for crack; most of Brazil’s cocaine imports come from Bolivia. Usage of crack is up in Argentina, too. Yet keeping Bolivia outside the treaty was “infinitely more dangerous” than bringing it in, says an official from a nearby country. Supply increased a little after the regime was relaxed in 2004, before levelling out in 2008 and dropping by about 12% in 2011, to beneath 2004 levels. Letting farmers get on with it has allowed Bolivia to focus scarce police resources on organised crime. In 2011 it destroyed more than 5,000 cocaine processing factories, five times more than a decade earlier (though that could also show that trafficking has increased). Coca farmers still have a difficult relationship with the authorities in some parts of the country, but the abuses that accompanied the military-led eradication efforts of the 1990s have lessened. Partial reforms have their limits. Most drug crime is not cannabis-related. Moving from punishment to harm reduction may help drug users, but it leaves gangsters in control of supplies and revenues. Many countries still stick to prohibition. The votes in Colorado and Washington were hardly imaginable ten years ago and make deeper change likely. They weaken the Single Convention, the illegal trade, and the prohibition industry that feeds on it. Peter Reuter, an expert at the University of Maryland, says America should “evaluate the experiment and put up with international condemnation for a couple of years.” Even that counts as progress. http://www.economist.com/news/international/21572184-experiments-legalisation-are-showing-what-post-war-approach-drug-control-could-look

Cannabis as an investment The audacity of dope A fund seeks opportunity in the weed Feb 16th 2013 | New York |From the print edition For the focused investor BRENDAN KENNEDY received an engineering degree, started a software firm and sold its assets to Boeing, studied for a Yale MBA and then joined a Silicon Valley bank reviewing new-business proposals. His latest venture takes a sharp turn off the beaten path. Mr Kennedy has become an investor in the marijuana business. The business case for funding the cannabis industry rests on two things. The first is its scale. Many of the novel ideas Mr Kennedy appraised during his job in Silicon Valley, from electric cars (Fisker and Tesla) to daily coupons (Groupon), had potentially large markets. Marijuana is already an established business. After six months of research and interviews with growers, dispensaries, trade publications and political organisations, Mr Kennedy believes the American market to be worth $50 billion. The second is that despite its heft, the cannabis industry operates like, well, a grass-roots movement. The drugs legal status is messy: although medical marijuana is legal in 18 states and in the District of Columbia, cannabis is illegal elsewhere in America. For social reasons, too, the industry is unfinanceable through normal channels. People in the business lack expertise in everything from branding to staffing. Data are scarce. Formal benchmarks for quality, such as tests for the presence of contaminants including mould, mildew and pesticides, do not exist. Neither do proper classifications for the different varieties of the drug. Thousands of strains of cannabis can be grown, many with odd names like Apollo 11, Sour Kush, Broke Diesel and the less-than-mellow Chernobyl. Characteristics vary, too. Some strains depress; some stimulate; some suppress nausea, a key reason why marijuana is used by cancer patients undergoing chemotherapy. Consumers cannot compare what is legally produced in California with what is legally produced in Colorado to say nothing of what is illegally sold in New Yorks Washington Square Park (where a small army of salesmen all have the same patter: Smoke. The good stuff). At first, Mr Kennedy wanted to create a cannabis-focused venture-capital fund but concerns about legal liabilities, as well as a desire to take majority stakes in portfolio firms, led him and a few partners to set up a different sort of fund, called Privateer Holdings. Its first investment is a website, Leafly, which offers user reviews on dispensaries and varieties of cannabis. An app was created for both Android and iPhones and there are now 50,000 downloads a month (for the forgetful, the password hint is favourite strain). Work is proceeding on how to add information on things like each varietys content of tetrahydrocannabinol (THC), the active chemical in cannabis. Mr Kennedy says Privateer has received over 200 investor pitches since November: potential acquisitions include a testing lab and a clothing company. The fund is now raising another $7m privately, and a public offering is possible once the Securities and Exchange Commission finalises new rules on crowd-sourced funding and small public flotations. That will write a new chapter in the story of high finance. http://www.economist.com/news/finance-and-economics/21571898-fund-seeks-opportunity-weed-audacity-dope