DARTMOUTH BUSINESS JOURNAL

November 2009 | Fall Issue

MAIN FEATURE:
The Mexican Drug Trade
A look at one of North America’s most profitable industries

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DARTMOUTH BUSINESS JOURNAL Fall 2009

Table of Contents

Transition in Tough Times - 3 Kunal Arya

Cheap Houses: Smart Investment or the Impatient Investors’ Trap - 5 Jun Liang

A New Automobile Market - 6 Daniel Rozenfeld

Interview with Valentina Rizzati - 7 GIulia Siccardo

The Common Agricultural Policy & the European Union - 9 Alex Lucey

Things are Heating Up at Jetboil - 11 Sarah Dowst and Alyssa Belisle

The Mexican Drug Trade - 12 David Rogg
Microfinancing is on the Rise - 14 RuDee Lipscomb

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DARTMOUTH BUSINESS JOURNAL Fall 2009 The responsibility of fighting the team (if they are company insiders
Leading operational stresses placed by such a and not the CEO’s own people) and
Transitions in transition on executives and certainly not to the rank and file
Tough Time: preventing this negative scenario managers who must be brought on
Challenges Facing from unfolding generally falls upon board if the transformation is to
a New CEO the CEO. A McKinsey Quarterly succeed. An example of such a
Kunal Arya
article on leading transformation problem would be if a strategic CEO
assigns four leadership functions to is brought in to save a large company
A change in top leadership, especially the CEO: making the transformation that is floundering by refocusing on
a CEO, is never an easy time for an meaningful, modeling the desired profitable businesses and divesting the
organization. The transition is even mindsets and behavior, building a rest. If the company’s culture prides
tougher when the new head executive strong and committed team, and its size, visibility, and the amount of
is an external hire, not an internal relentlessly pursuing impact. All of impact the corporations products
promotion from within the executive these tasks are much harder for a new have on American’s daily lives, the
team, and is brought in specifically to CEO to carry out effectively, yet they CEO’s vision of a lean, flexible
address the flaws in the company. As are absolutely critical to the success of company at the end of the
tough economic conditions have the transformation he or she was transformation will not resonate or be
exposed the cracks in the bedrock of hired to lead . meaningful at all. Thus, a new CEO
many large American companies, must be very careful that the result of
many of their boards have hired new For a CEO that is new to the the vision he articulates to the
leadership, hoping that a company, the first function of making company holds matches its culture
restructuring or downsizing to focus the transformation meaningful is and has meaning to its employees,
on core competencies or profitable much more difficult. Although a and is not only an embodiment of the
business lines can fix those flaws competent CEO should be able to principles he holds dear.
before the entire monolith crumbles. articulate a clear vision for the
However, organizational company after the restructuring or The second function of a CEO
transformations are notoriously downsizing, his or her lack of during transformative times is to
difficult, even for an entrenched understanding of the company’s serve as a role model, so that
leader who is familiar with the culture can lead to a vision that executives and managers will come to
workings of the company and has the clashes with the culture, and thus emulate the mind-set and behavior of
respect of his subordinates. holds no meaning to the executive a CEO they respect. The behavioral
The Journal of Organization
Change Management notes
that “The conditions within
which they are enacted tend to
hinder the use of
organizational change
management practices…
restructurings and
downsizings tend to be
mismanaged as a self-imposed
sense of urgency…prevail
over careful change
management planning and
implementation” (Marks
2007).

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DARTMOUTH BUSINESS JOURNAL Fall 2009 and mind-set changes required
during a restructuring can be so
enormous that logical necessity alone
cannot change the way critical
members of the executive team think,
making them unable to lead the
change and possibly an obstacle to
the transformation. The loss of even
one key executive during a major
transformation can be problematic,
and the loss of several can doom the
program. A CEO that has a long
relationship of mutual trust and
respect from his subordinates in the
company can leverage it to get those
members that are rejecting the
transformation to come on board,
potentially saving the project.
However, a new CEO does not have
access to this reservoir of goodwill,
and may even face ill will if his
predecessor was fired, so even if he for the management team to emulate leaders accountable for their
acts according the principles of the the CEO’s commitment and strength, decisions before and during the
change, he may not be emulated. especially if his vision for the post- transformation are probably best
Furthermore, symbolic actions or transformation company does not fulfilled by someone who does not
praise that would hold great value match their ideas about what it have deep personal relationship with
from an entrenched, respected leader means to “restore the company’s to their subordinates. However, simply
can seem empty from a new CEO; greatness.” One of the best ways a reviewing everything is not an
however, these actions are extremely new CEO can overcome these effective way for new CEOs to lead
important if the CEO is to convince obstacles is to be extremely empathic the transformations. They must roll
his subordinates to follow his good and try to understand the complex their sleeves up and get their hands
example. emotions the executives are feeling dirty. If the new CEO is from within
about his taking over and the the same industry, showing
For similar reasons, it might be transformation he is leading, so that operational knowledge is a great way
difficult for a new top executive to he can sally their fears and mental to start winning the respect that is so
build a strong and committed blocks to changing (Dean 2009). critical to the transformations success
leadership team. Either he brings in and energize the troops fighting for
his own people, which creates The last part of the CEO’s role in a change. If not, focusing on an easy
problems when they do not corporate transformation, be it victory, a key area where they can
understand the culture of the restructuring, refocusing, or quickly make a huge impact, might
organization or lack institutional downsizing, is to relentlessly pursue be the push the rest of the
knowledge that their predecessors impact. This may be the one area in organization needs to truly get on
took with them, or he must work with which a new CEO from outside the board and power a successful
the previous CEO’s senior company has an advantage. The transformation.
management team. If the latter tough decisions of reviewing the roles
happens, the same lack of mutual of various executives in the
trust and respect will make it difficult organization and holding these

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DARTMOUTH BUSINESS JOURNAL Fall 2009 depending on the length of the loan. of new homes seem to have reached
Cheap Houses: Many of the interest only loans that the bottom and are on the way back
Smart Investment were issued during the peak of the up. This recovery is due to other
or the Impatient housing market boom are due to full
amortizing payments in 2010, when
areas of growth in our economy.
Government stimulus packages gave
Investors’ Trap economists predict a drastic rise in consumers more money and
By Jun Liang foreclosures. confidence to spend, and this has led
to the slowing of job loss and
When is it over? Whether it is What does this mean? Should reinstatement of laid off workers.
government policy makers, factory investors begin preparing down The restructuring of less competitive
workers, or fledging college payments to clean up these cheap companies such as the General
graduates, this economic crisis has properties? Fannie Mae CEO Motor Company increased their
been painful to say the least. Many Michael Williams warns, “Investors stability and has led to new sectors of
people are beginning to see the end of and borrowers should
tunnel, and market optimism has led remain cautious.” It
to more liberal spending. However, appears that one of the
investment has not experienced a companies hit hardest
speedy recovery. The housing market, by the economic
which helped cause the economic downturn is taking
downturn, is still seeing slipping very little chances with
prices. financing mortgages in
the housing market.
According to Zillow’s home value The U.S. government
index, house prices fell by 9.9% in echoes Williams’
July compared to same time last year. concern as well. In the
Although it is an improvement over July 2009 Economic
the 10.5% drop in June, it also shows Letter by the Federal
that recent increases in home sales Reserve Bank of San
are not enough to offset the effects of Francisco, Janet Yellen,
foreclosures, which are still plaguing the President of the FRBSF, says, technological development in order
the market. “Economists are “The stock market has rallied and to compete with foreign companies.
expecting a meaningful rise in investor appetite for corporate bonds Stricter government regulations in
foreclosure filings over the next and other assets has rebounded, risky investment and lending (i.e.
several years due to planned rate restoring access to capital for healthy government control of Freddy Mac
resets on option adjustable rate companies. Even so, I am concerned and Fannie Mae) are restoring
mortgages (ARM) and interest-only that mortgage rates, which have risen balance in the economy.
of late, could
place a drag on The lesson for anyone looking to turn
a still very sick a quick profit is that the housing
“The housing market, which helped market is probably not the place to
housing market,
cause the economic downturn, is potentially do it, at least not yet. People who are
still seeing slipping prices.” driving home waiting to buy homes should seize the
prices still lower current market conditions as prices
and pushing are nearing an all time low. For
mortgage loans. A rise in foreclosures more borrowers into foreclosure.” current homeowners, the worst is
promises to increase the supply of almost over. With increased
existing homes which, in turn, exerts This poses an unfortunate paradox government spending and consumer
downward pressure on home prices.” for American homebuyers. If confidence, it won’t be long before
ARMs can force more foreclosures if investors are not expected to prices turn the corner. especially in
the interest rate on the loans rises. participate in the housing market, light of the changing nature of the
Interest rate-only mortgages allow the how can we see the economy recover? economy in light of consumer and
borrower to pay only the interest for While housing prices still have not corporate deleveraging.
the first 60 months or 120 months, recovered, purchase and construction

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DARTMOUTH BUSINESS JOURNAL Fall 2009
A New Automobile Market
By Daniel Rozenfeld

In the past year, international media

has been saturated with news of
automakers struggling with
overproduction in a climate of
declining demand. This problem
has been largely created by what
was, until now, the accepted
industry paradigm: making cars
increasingly bigger, more powerful,
and more luxurious.

Today, marks of the “Green”

movement are readily visible in
countless new and conceptual
automobiles from BMW’s
hydrogen-powered 7 Series to the
Honda FCX, which recently won
the World Green Car award.
However, this innovation doesn’t come cheap. In fact, it
seems that the salvation of the major automakers may
come in a different form, that of small, cheap, no-
nonsense cars targeted at emerging markets. The 2008
Winter issue of the DBJ featured the Tata Nano, the
world’s cheapest car, which is produced in India. While
the Nano is groundbreaking, it is not alone in its class.
According to Strategy Consultants GmBh’s Roland
Berger, “the worldwide market for vehicles priced under
euro 10,000 ($14,500) will grow by 22 percent to reach 18
million vehicles.” If this prediction holds true, dirt-cheap
cars will account for one fifth of all automotive sales in
the coming years. Major automakers are well aware of
this growing market. Toyota, which has struggled with
stagnant sales in China due to a “failure to anticipate the
demand for affordable, no-frill cars” and a product line
focused on larger cars, is planning to ramp up its
production of smaller vehicles, according to spokesman
Niu Yu in Beijing.
Ratan Tata, chairman of the makers of the Nano, touted
his car as revolutionary and humanitarian in nature.
According to Tata, “we need to think about the masses.
Should they be denied the right to an individual form of
transport?” The fact of the matter is that the financial
viability of automakers will depend on their ability to
capitalize on the demand for these cars.
While a humanitarian claim can be made for the Tata
and its competitors, empowering individuals aside, they
may do more harm than good. GreenPeace as well as the
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Delhi’s Center for Science and Environment have
protested the Nano. Michael Walsh, a pollution
consultant for the EPA has stated that such a car lacks the
technology necessary to keep its emissions stable over
time and “could be producing four to five times its initial
pollution level” within a few years. Furthermore, the price
of such cars will result in consumption levels that will far
outweigh any fuel efficiency they may have as a result of
their small size.
Another major concern is safety. In order to make a car
extremely cheap, manufactures must cut corners on
materials, resulting in much lighter and more dangerous
vehicles. The harsh road conditions in rural areas that
make up a large proportion of the vehicle’s target
consumers further exacerbate this issue.
Whether “dirt-cheap” cars will go mainstream in Europe,
Japan, or the United States is up for debate, but the
demand in the emerging markets, including India and
China, will be unprecedented, and this demand will be
the lifeline that international automakers so desperately
need. At the same time, this will be an enormous step
backwards in sustainability. Small, cheap cars may be an
easy and seemingly humanitarian fix for the problems of
automakers and inhabitants of developing countries alike,
but individual transportation as we now know it, no
matter how cheap, is not a viable option for the future. A
sustainable future lies in prevalent, efficient, and
convenient public transportation systems, not in millions
of tiny gas guzzlers.
 Interview with Valentina Rizzati
DARTMOUTH BUSINESS JOURNAL Fall 2009

An Economics Exchange Student from Italy

By Giulia Siccardo

This issue, the DBJ was able to interview

one of the five exchange students on
campus from Bocconi University in
Milan, Italy. Bocconi, a top European
economics university, runs an exchange
program with Dartmouth during Fall
term. This term, Dartmouth has the
pleasure of hosting Nicolò Fiaschetti,
Camilla Gai, Cristina La Marca, Milos
Milovanovic and Valentina Rizzati. I
spoke with Rizzati and learned about her
experiences thus far.

DBJ: What was the reason you decided to spend a

term at Dartmouth? Rizzati: I decided to spend a term at Dartmouth
because of the great reputation that
this college has around the whole world. Moreover, I was
surprised by the striking and very positive opinions shared
by all the Italian exchange students who came to
Dartmouth in past years.

DBJ: How competitive is the process for applying to the

Dartmouth program?

Rizzati: It is very competitive. Apart from the

complexity of the procedure regarding
the Exchange Program per se, I think it is appropriate to
point out that a GPA
greater than 29.00 on a scale of 30.00 was needed in
order to be admitted to Dartmouth.

DBJ: How do you compare Bocconi and Dartmouth from an

academic perspective?

Rizzati: The Bocconi system, which reflects the Italian

one, is founded largely on attending lectures in
quantitative terms (with a greater number of total hours
of lecture).
Moreover, even though assignments and research
work are required in most courses, they are not supposed
to be handed in during the course, but only at the end of
it, on the exam's date. In fact, the Italian system gives
more weight to the exam per se. Each midterm grade is
worth 50 % of the total grade; the final grade is a
weighted average between the two midterm grades.
On the contrary, the Dartmouth system, requires
a much greater workload by the student, who not only
has to study for the exam but also get prepared for each

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 and every lesson and work on assignments and papers
DARTMOUTH BUSINESS JOURNAL Fall 2009
to be handed in during the course. Obviously, the great
advantage is that a diligent student will be able to study
everything well in advance of the exam date. However,
the student has to bear a great burden in terms of stress
and risks of not being able to handle all other campus
activities.
an academic and personal point of view. It is certain
that a study abroad experience always enriches a person
and broadens one’s perspective of the world. In
particular, I believe that I will benefit from a new life
experience in this environment, so different with respect
to the one I am used to; I will appreciate all the positive
aspects this life can offer me, and learn to cope with
new difficulties and problems.

“[T]hree Economics courses is very
demanding from an academic point
of view. It requires an excessive
workload on the part of the
student.”
DBJ: Are there major differences in student life between
Bocconi and Dartmouth?
Rizzati: Actually, for what concerns the life in college,
I absolutely prefer Dartmouth. In fact, I particularly
appreciate the "campus-life" because it
enables students to interact more efficiently and to feel
like part of a social network that strengthens
relationships within the entire community. Still, I want
to stress that from the academic point of view, I
consider both schools to be at a very high caliber.
DBJ: Would you have any advice on how to improve this
program in the future?
Rizzati: I think that taking three Economics
courses is very demanding from an academic point
of view. It requires an excessive workload on the
part of the student. I would suggest that in the
future students be advised to balance the level of
difficulty of the courses they choose to take at
Dartmouth. This will enable the student to enjoy the
"campus-life" I mentioned earlier a bit more.
Also, it would be wonderful if Bocconi University
recognized more courses available at Dartmouth instead
of exclusively those in the Economics Department
recognized. That way, Bocconi exchange students would
be able to explore different, less intensive subjects as
well.

DBJ: What is your most favorite aspect of Bocconi

University?

Rizzati: My favorite aspect of Bocconi University is

that it allows the student to independently organize
one’s time, not mandating any fixed requirement during
the course schedule.

DBJ: What is your most favorite aspect of Dartmouth

College?

Rizzati: My favorite aspect of Dartmouth college is

definitely the Dartmouth community, a social network
that protects students and enriches them culturally,
favoring useful social interactions between its members.

DBJ: What do you expect to gain from your study experience

abroad?

Rizzati: I expect to gain a great experience, both from

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DARTMOUTH BUSINESS JOURNAL Fall 2009
How is the Common
Agricultural Policy Played
Out in the European
Union?
What implications does its recent history
and overall effectiveness have for the
2014-2020 budget meeting?

By  Alex  Lucey

Among claims of developed-world hypocrisy over free

trade policy, the European Union’s Common
Agricultural Policy is likely the example most frequently
pointed to as protectionist and harmful to developing
world economies. Economists and INGOs argue that,
by providing more-than-generous subsidies and
implementing production quotas, the EU is stifling
developing countries’ capacity to compete in global
agriculture trade. The EU (and many of its allies) have
stood fast in claiming that their policy encourages the
production of extra food, which can be provided as aid
or cheaply-sold sustenance to the poor of developing
countries. Whether or not EU policymakers believe in
the legitimacy of this claim, the CAP is one of the main
policies of the Union, eating up 40% of its 100B Euro
annual budget. The devotion of such a large portion of
its budget implies widespread benefits for all 27 member-
states, but the assistance provided by the CAP is very
unequally distributed. Tension inspired by these
inequalities has largely been swept under the rug, but
with budgetary meetings coming up for the 2014-2020
fiscal period, they are becoming just as contentious within
the EU as outside of it.
The CAP is paid from the budget of the European
Union, which consists of taxes on imports, a value-added
tax, and a proportional payment of gross national income
(GNI). The largest contributors to the budget, therefore,
are Germany, France, Italy, and the U.K. When it comes
to agriculture, however, only two of these—Italy and
France—have large industries, and therefore receive a
disproportionately large payout when compared with
what they pay in. This has led to a divide within the EU
between economies with major agriculture sectors—in
addition to France and Italy, Spain, Ireland, and Greece
—and manufacturing- or service-based economies such
as the U.K., Germany, and the Netherlands.
This divide came to an impasse when, in 2003, an EU
panel reviewed and dismissed the CAP as an ineffective
and anachronistic policy. The focus of the review was to
emphasize the need for more spending on technology and
wealth creation in the EU, which would require money
currently being spent on the CAP. The report also
suggested that agricultural supports be administered on a
country-by-country basis. France immediately opposed
these recommendations, citing the importance of food
security and the livelihood of its constituency. In August
of 2009, France admitted that between 1992 and 2002 it
had been privately subsidizing French farmers,
supplementing EU subsidies in order to ensure the
continued survival of its unsystematic agriculture sector.
Eliminating Union-provided subsidies would have
increased the French government’s obligations to its
farmers to an unsustainable level.
Luckily for France, Germany—one of the CAP’s most
outspoken opponents at the time—was willing to
negotiate. While Germany was the largest net contributor
to the CAP budget (the difference between what it paid to
the budget and what it received in agriculture subsidies
was the largest of any European Union member-state),
but France was a net recipient and the number-one gross

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DARTMOUTH BUSINESS JOURNAL Fall 2009
“[T]he CAP is one of the main
policies of the [European] Union,
eating up 40% of its 100B Euro
annual budget.
beneficiary of the CAP. When subsidies are included in
the calculation, Germany was contributing 112E per
capita to the overall budget, while France was
contributing 20E. President Jacques Chirac and
Chancellor Gerhard Schroeder, however, met in 2003
and agreed upon maintaining the structure of the CAP
through 2013. In return for German cooperation, the
leaders agreed that CAP payments to the new members
of the EU (the Republics of Hungary, Latvia, and
Lithuania, among others) would come from eliminating
inefficiencies in the current budget, not from increasing
the budget size. In addition, Germany would gain
favorable access to French markets for its manufactured
goods.
The other large contributor and minor beneficiary of the talks, where attendees are stressing the importance of
CAP, the UK, was not as acquiescent, and continues its
push for the reform or abolition of the current CAP
today. Because it’s agriculture sector was (and still is) a or not the Doha talks can make significant progress
small part of its economy, the UK arranged a tax rebate towards phasing out subsidies in developing countries
in 1984 to ensure that they did not contribute
significantly to the CAP. They then relaxed that rebate by for the 2014-2021 fiscal period.
20%, contingent upon the condition that the extra
10
revenue would not be used
for CAP funding. Now,
however, the UK is at the
forefront of the push for an
overhaul of EU spending
—and the CAP is first on
the list to go. Several EU
member-states are intent
on transforming the EU
into the innovation and
knowledge capital of the
world, which would require
large-scale budget
reallocation towards
funding for research
projects and higher
education.
Both various INGOs and
EU member-states agree
that budget overhaul is the
best policy, though for
different reasons. However,
their consensus faces more than just stubborn French
President Nicolas Sarkozy. Joining the French are the
Germans and Angela Merkel, who have shown signs of
uniting to redefine the balance of power within the EU.
Sarkozy and Merkel are focused on bringing the center
of politics and economic policy-making back to
continental Europe, instead of its traditional home in
the UK. They have decided on establishing a separate
headquarters for EU defense, and (with special
importance to Germany) on support to Europe’s
“industrial champions.”
While it is clear that dispute over the CAP exists not only
between developed and developing governments, but also
between the countries of the EU itself, the new Paris-
Berlin alliance may prolong its existence. The UK has
shown its willingness to contribute more to the EU budget
to fund the growth in knowledge creation and innovation,
but the commercial interests of France (farm subsidies)
and Germany (manufacturing support) may prove to
outweigh Britain’s vision of the EU as the world center
for high-skill labor and innovative technology. Britain
may get a boost, however, from the revival of the Doha
putting agricultural subsidies in both the EU and the US
on the table. It will largely come down to timing: whether
before the EU meets in late 2010 to map out its budget
DARTMOUTH BUSINESS JOURNAL Fall 2009
Things are
Heating Up at
Jetboil
By Sarah Dowst and Alyssa Belisle
We got the chance to speak with Philip
Tabor, Dartmouth ’04 and Thayer ’05,
who now works as a design engineer at
Jetboil, Inc. in Manchester, NH. Since
the company was co-founded by
Dwight Aspinwall, Dartmouth ’84,
Jetboil has established their product
line of high-efficiency camping stoves
and accessories as one of the leading
producers within their niche in the
outdoor industry. Our conservation
with Philip illustrated that design is
especially crucial for start-up
companies in order to take an idea and
turn it into a company that is
profitable.
DBJ: What made you decide to work
for Jetboil?
Tabor: I was looking for an
internship in the summer of 2004
when I got a mass blitz from Thayer
about Jetboil recruiting. Jetboil
looked like a really interesting
company—their product, high-
efficiency camping stoves appealed to
me personally because of my interest
in backpacking. I was given the
responsibility of spearheading the
design of a coffee press to accompany
the stove that summer. Then, in
December of 2005, Jetboil offered
me a job while I was finishing my
Bachelor of Engineering at Thayer
School.
DBJ: What are the main challenges
specific to being an engineer at a
start-up company?
Tabor: Jetboil is a small company, so
I wear a lot of hats to fulfill multiple
rolls. I see the whole process through,
from initial conception to prototyping
to production. I also get involved in
marketing and getting reviews back
from end users—a somewhat non-
11
traditional role for an engineer,
but one that I have enjoyed.
Working for a smaller company
allows me to define certain
aspects of my position in a way
that I would not be able to at a
larger company.
DBJ: What are the challenges unique the USA. Pictures and sketches
to a smaller company? become crucial because of the
language barrier, which translators
Tabor: Patience is a virtue when it cannot always bridge because they
comes to smaller companies because lack the technical background.
small companies do not have all the International manufacturing
resources of larger companies. We definitely requires more work and
clearer procedures. There is no
face the challenge of creating a
substitute for face time with the
product that is a solution to an
existing problem or shortcoming of vendors in order to ensure they have
the compatibility to make parts at
existing similar products. Our
philosophy is that quality starts with Jetboil’s quality level. In the end, it
the end user, and part of that involves all boils down to good
having a design that is simple for the communication.
end user. Quite a bit of thinking that
goes into finding that design, and we DBJ: The Dartmouth network
work every day to repeat what we helped you find your career path.
have already done successfully. Does Jetboil have an ongoing
relationship with the network?
DBJ: When it comes to
manufacturing, what are the crucial Tabor: We use the Dartmouth
elements to have a good relationship network in recruiting for research and
with your supplier? design positions. We have a whole
series of interns and we sponsor
Tabor: The key to building a good engineering 190 and 290 class level
manufacturing system is building student projects.
good relationships with the supply
partners. Both companies’ business DBJ: What is your advice to
models have to fit with one another— Dartmouth students and young
our expectations of what we need engineers?
must align with their ability to meet
these expectations. At Jetboil, we Tabor: There are three keys to
have a specific idea of what we want engineering: one, keep track of your
for our product. It cannot just look units, two, think about how
right, it has to be right, and getting something will break and how it will
what we need from our suppliers is fail, three, how are you going to make
crucial to this. it and how are you going to make it
profitably. Businesses fail when they
DBJ: Do you deal with any run out of money, and if you cannot
international suppliers or do you make the product reliably and
remain domestic? profitably, the product is not going to
make a business.
Tabor: We currently deal with
suppliers in the United States as well
as in China. However, we cannot
assume in China what we assume in
DARTMOUTH BUSINESS JOURNAL Fall 2009

The Mexican Drug Trade

By David Rogg

If you have been reading the paper in the last year,

“The United States accounts
you are probably aware of a little industry south of
the border known as the Mexican drug trade. for over 60% of the demand for
Headlines have been filled with bloody accounts of illegal drugs.”
murder and torture, and each day it seems that
more soldiers and police
are dispersed to fight the
rising tide of drug dealers
and pushers. There has to
be a reason for the
explosive growth of this
industry, and that reason is
pure economics.

The Mexican drug

industry is one of the
largest and most
established industries in
North America. The
United Nations has
estimated that Mexican
cartels move roughly
$14.2 billion per year of
cocaine, heroin,
marijuana, meth-
amphetamines, and other
illegal drugs. Mexico is a
middleman for 70-90% of
the cocaine entering the
United States each year.
In fact, drug lord Joaquín
Guzmán, a gangster
affectionately known as
“El Chapo”, sits at
number 701 on Forbes’
listing of the world’s
richest people with a net
worth near $1 billion. Who are the producers in this deadly industry and
The drug industry has had such explosive growth how do they organize their businesses? These
due to the highly beneficial profit structure of the producers take the form of drug cartels that, like in
business. The cartels are able to grow one pound of any good oligarchic system, have fought each other
marijuana for roughly $25 on a hidden farm in for a greater share in the Mexican drug industry
Mexico and then sell it in Phoenix for at least $550. over the past several years. One of the largest of
While marijuana was one of the founding forces the cartels is the Sinaloa Cartel. This cartel supplies
behind the drug industry, the industry has Colombian cocaine, Mexican marijuana,
expanded widely as other drugs have become more methamphetamines, and heroine imported from
popular. Southeast Asia to the United States. Sinaloa’s

12
DARTMOUTH BUSINESS JOURNAL Fall 2009

business model utilizes various local gangs in a varietals. The cartels have responded with changes to
number of states to distribute its goods. their business model, now cultivating marijuana on
public land in the United States that gives them easy
Another important drug cartel is the Gulf Cartel. This access to their demanding consumers.
cartel traffics cocaine and marijuana from South
America and across the border between Texas and  While this industry and its characteristics may seem
Mexico, dominating the drug trade of eastern Mexico. far removed from life at Dartmouth, the Mexican drug
The Gulf Cartel also works in tandem with the Los trade has quite a few implications. Whether one’s
Zetas Cartel, which functions as a paramilitary force. interest in the subject is economic, moral, or just
This cartel works as a conglomerate of drug gangs factual curiosity, this industry provides a unique
that supplies narcotics to Mexico’s east coast. All of perspective into a booming illicit trade. There is much
these cartels have gained power as they have taken to learn about operations on a large scale and how a
over a large part of the Colombian drug trade and firm can conduct a multinational business, especially
have begun their own production of heroin and while avoiding oversight and confrontation. This all
methamphetamines. just goes to show what can happen when a Dartmouth
economics education goes bad.
These cartels have been able to reach such a
developed state due to the incredible level of demand
for their goods. Not surprisingly, in the words of
Secretary of State Hilary Clinton, “[America’s]
insatiable demand for illegal drugs fuels the drug
trade.” The United States accounts for over 60% of
the demand for illegal drugs and, in a 2005 study,
nearly 20 million American citizens reported the use
of illegal drugs. In order to satisfy this incredibly high
demand, Americans trade weapons for drugs,
providing the drug cartels with the armaments
needed to make these groups so dangerous. It is
estimated that 90% of the weapons used by these
cartels comes from the United States.

Despite their well-designed business models, Mexican

drug cartels face serious obstacles to their operations.
As would be expected, the powerful cartels are
confronted with the continual risks of public
condemnation and military assault. Various forms of
legislation have been passed to inhibit the operations
of the cartels in both Mexico and America, including
the Merida Initiative, with the stated purpose “To
confront criminal organizations whose illicit actions
undermine public safety, erode the rule of law, and
threaten the national security of the United States.”

Even more of a threat to these cartels, though, is the

increasing power of the United States’ homegrown
marijuana industry. The passage of a number of state
laws allowing for the production and use of
marijuana for medical reasons is providing American
growers with a competitive advantage over their
Mexican counterparts. Nearly half of the marijuana
consumed in the United States is now produced
domestically by minor growers who use greenhouses
and indoor gardens to produce “high-end” marijuana

13
DARTMOUTH BUSINESS JOURNAL Fall 2009
The Rise of Microfinancing
By RuDee Lipscomb
Despite the global financial meltdown, microfinance is
booming. From its roots as a social experiment in
Bangladesh to new research led by Dartmouth’s own
Paganucci Fellows, the practice is quickly emerging as a
promising new asset class for debt and equity investors
worldwide. According to the World Bank website, nearly
three billion people in developing countries have little or
no access to formal financial services (World Bank
Online). After microfinance pioneer Mohammad Yunus
was awarded the Nobel Peace Peace in 2006, the practice
of providing nominal amounts of money through low
interest, short-term loans to individuals otherwise
ineligible for bank funding has drawn media attention
and gained credibility as a tool in alleviating global
poverty.
14
“Realize that right now, you can
make a significant impact through
your work and life.
-David Stone ’76, Founder of FIrst Rate
A few social entrepreneurs have taken this concept to a
new level and work to provide loans to citizens living
under governments with notoriously complicated
relationships with US fiscal and political policy. Whether
on an individual, corporate, or diplomatic level, these
groups overcome significant obstacles to provide financial
options to citizens of Nigeria, Afghanistan and The Gaza
Strip.
Organizations such as the United Nations Relief and
Work Agency (UNRWA), headquartered in New York
City, offer loans specifically to women and low-income
professionals in the West Bank region. The agency has
worked in the Gaza Strip since 1991 and recently
incorporated microfinance as part of a comprehensive
community development program. In many cases,
DARTMOUTH BUSINESS JOURNAL Fall 2009
women use the funding to learn new trades or create what services are truly helpful to individual communities
small sales and service business to better support their and to move past assumptions of what global poverty
families. To date, URNWA has provided $70 million loans relief looks like. He writes that the current work of many
to more than fifty thousand businesses in the industrial, wealthy nations and their aid agencies is often
service, trade and commercial sectors. compromised by “preconceived or assumed expectations
about what services will provide the most value. The
From Dartmouth, David Stone ’76 has led major reality is, no one knows what provides the most value.
innovations in providing microfinance and education We muddle through and learn as we go along.” Part of
resources in Afghanistan. As an undergraduate, his this learning process is dealing with the significant
dreams of mission work in the country were derailed by difficulties inherent in any developing social or financial
the Soviet invasion. After building his company, First system. A report from MIT’s Poverty Action Lab shows
Rate, into a multi-million dollar technology and finance that worldwide, a significant number of borrowers spend
hub, he was finally able to schedule a philanthropic visit-- their microfinance loans on personal purchases and
just two months after September 11th. Stone and his family celebrations, or to pay down personal debts.
company have invested heavily in microfinance projects Additionally, UNRWA often struggles with both the US
through HOPE International and technology outreach, and Israeli governments to obtain import clearances on
particularly teaching computer science skills to local items like textbooks, broom handles, and instruments to
women and teens. Stone says his goal in Afghanistan is to support their loan holders in the Gaza Strip. One of
help the country’s people “create an independent and self- David Stone’s pilot investment programs, a textiles
sustaining infrastructure through education and direct training and marketing project for Afghan women, was
investment”. shut down within two years after on-the-ground support
faltered. While public opinion greatly favors
microfinance as a far-reaching solution, the realities and
“While public opinion greatly methods of successful implementation are far from
perfect. At a recent Tuck forum, Stone acknowledged
favors microfinance... that these obstacles are part of any international
implementation [is] far from endeavor and challenged students with a desire to
perfect.” impact global poverty to get started as soon as possible.
“Realize that right now, you can make a significant
impact through your work and life. He urged the lecture
participants to consider both short and long term
Acción Inter national, a prominent US-based projects, saying, “You don’t have to have a major
microfinance company, has recently taken a more overtly company established to offer your skills.”.
diplomatic approach and partnered directly with the
Central Bank of Nigeria. Acción licensed themselves as a A recent study conducted by JP Morgan Global
unit bank under Nigerian financial laws, which allows Research shows that microfinance is on the right track.
Acción to leverage government support as they work The loans frequently outperform traditional banks in
throughout the country. This direct link to Nigera’s terms of successful return on investment and boast
government also offers Acción a rare opportunity to offer stronger asset utility than traditional loans. This
input as the country establishes more functional rules of successful combination of idealism and capitalism is
financial transparency and compliance. bridging gaps in policy, distance and political ideology to
make an impact on business and financial security
Dartmouth is also making substantial research worldwide.
contributions to the field. The annual Paganucci
Fellowship program sees both students from the Tuck For interested readers, an immediate, easy way to get
School of Business and Dartmouth undergraduates work involved is through Kiva.org. This website features
as a ‘consulting team’ though the academic year on data hundreds of microfinance entrepreneur profiles and
synthesis and research. In summer, these students road allows users to contribute to existing projects or to
test their theories with a hands-on project. Traditionally, sponsor new borrowers. On campus, the Tucker
economic data has cited the creation of local, self- Foundation and Dickey Center have supported several
contained financial markets as an effective means to interns and provide grants specifically for students
create tangible community improvement. However, as working on domestic and international microfinance
James Wang ’10 commented on the Paganucci Project with companies of all sizes.
blog, the larger purpose of their research is to find out

15
DARTMOUTH BUSINESS JOURNAL Fall 2009

Current Officers Contributors

President: J. Alexander Gonzalez Alex Lucey
Treasurer: David Kellenberger Daniel Rozenfeld
Secretary: Alexander Villar Sarah Dowst
Layout Editor: Ellena Kim Alyssa Belisle
Kunal Arya
Head of Finance: Alexander Villar
Jun Liang
Head of International Business: Giulia Siccardo Giulia Siccardo
Head of Domestic Business: Kunal Arya David Gonzalez
Head of Editorial: Kedar Malpuri RuDee Lipscomb
Head of Interviews: J. Alexander Gonzalez

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ghost.aspx?ID=/Organization/Talent/The_CEOs_role_in_leading_transformation_1912Mitchell Lee http://www.flickr.com/photos/attator/3565669047/
Marks.  2007. A framework for facilitating adaptation to organizational transition. Journal of
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Harris, Tim. "Fannie Mae CEO Speaks About Housing: Real Estate Market Predictions
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"About the IMF." International Monetary Fund. 1 May 2009 <www.imf.org>

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