Can Uruguay Handle the Pot Business?

One of the most notable aspects of Uruguay’s history-making legalization of marijuana on Tuesday is how ill-prepared the government is to handle the pot business.

First, a plug: Uruguay’s President Jose Mujica is from that rare strain of leftist politician who deserves some respect. Not only is he taking on a new approach to the U.S. government’s failed war on drugs, but he also has the political backbone to support a law that almost two-thirds of Uruguayans reject. His administration has passed several progressive laws such as legalizing gay marriage. Plus, Mujica is running manageable budget deficits and low enough debt levels to earn investment-grade credit scores from the three top rating agencies.

Having sound political priorities is one thing, but knowing how to control a business that’s considered illegal in most of the world is something else. Mujica apparently admitted as much to Uruguay’s Telebuendia television program as he sat at a Montevideo bar on Tuesday. “We are not totally prepared,” he said. This could be a problem considering that under the law, the state would control the entire marijuana value chain, with some space left for the private sector. (The government is involved in the liquor business, so it’s no stranger to managing production of a legal drug.)

Mujica sees the law as a needed “experiment” and likened the illegal marijuana trade to a wild animal that must be subdued: “Just like those tamers who in one hand have food and a whip in the other … one has to have some courage and some audacity to look for new roads.”

The president has sent mixed signals to Uruguay’s potential cannabis growers and distributors. In August, he told Agence France Press that if pot legalization “overwhelms us and goes above us, we can reverse course. We don’t have to be fanatics.” Last week the government started a campaign to warn consumers that marijuana consumption can be dangerous. Diego Canepa, pro-secretary for the presidency, had to reassure Uruguayans that the campaign, called “All drug consumption has risks,” did not contradict the government’s legalization plans.

Another concern is how quickly the government will be able to get marijuana to consumers. The first legal sale of cannabis probably won’t happen until the second half of 2014 at the earliest. This would give black-market suppliers time to limit supply and benefit from the increase in consumer demand that comes with legalization. There’s already talk that pot cartels are hoarding their product to benefit from the law change. It’s still unclear who will receive permits to produce marijuana for the state.

Julio Calzada, head of the National Drugs Board and the country’s pot czar, doesn’t deny hoarding can happen, but he downplayed such a scenario in Uruguay’s El Pais newspaper this week. Marijuana “cannot be stocked” for too long, he said, because “the product becomes degraded.”

Just how much marijuana consumers will demand is another open question. Calzada’s estimate that Uruguay is home to fewer than 200,000 regular pot smokers whose demand can be met with fewer than 25 acres of cultivated marijuana (plus pot-growing clubs and people licensed to grow a small amount at home) may not be realistic. For starters, Uruguayans might smoke more pot now that it has become legal. Uruguay has already seen a record amount of marijuana seized this year, the highest in a decade, which suggests demand may be growing. And although the law will permit pharmacies to sell 40 grams (1.4 ounces) of pot per month to registered adult residents, tourists will probably get pot from locals, further stimulating demand.

Uruguay may have an increasingly aging population, but with marijuana to be had freely, who will be able to prevent pot-hungry college students from cramming planes bound for Montevideo? A Tuesday tweet from Jesus, who has the Twitter handle @PocosFolloWe and describes himself as a computer-science student from Mexico, gives a hint of what Uruguay could expect: “They legalized marijuana in Uruguay. I know where I’m heading next year.”

Putting a price on marijuana is also a tricky issue. The government has talked about charging $1 per gram of cannabis in order to price traffickers out of the market. Senator Lucia Topolansky, Mujica’s wife, has said the state may provide “cloned seeds,” which allow for a traceable type of plant, to best identify legal pot from the illegal kind. If making quality marijuana available cheaply sounds too good to be true, it probably is. “The costs of production will be higher so the only way to match” illegal pricing “will be a subsidy,” Senator Jorge Larranaga, an opponent of the law, argued in the National Party’s magazine.

The new pot-growing clubs may find costs far too high as well. Uruguay’s law puts a cap on 45 members per club. Laura Blanco, president of Uruguay’s Association of Cannabis Studies, has called this an “expensive proposition when it comes to sharing the cost burden, above all the fixed costs.”

Giving Uruguay’s government such a large business to oversee may not inspire confidence. Still, it’s encouraging to see a leftist government in Latin America exploring ways to create a market out of an illegal enterprise. The law is arguably more than what most leftist regimes in the region have achieved in decades. But the Uruguayan government will need to take this seriously; daydreaming will have to be reserved for the customers.

Raul Gallegos is the Latin American correspondent for the World View blog.

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