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The economics of legalising New Zealand’s marijuana market

Source : stuff.co.nz

Auckland’s Hemp Store is looking flash. It’s added a little cafe during its move to the gentrifying K Road area, on the hill above the CBD.

Inside, manager Chris Fowlie is spinning discs and making coffees. All manner of balms, bongs and books line the shelves. Tables are set up at the perfect rolling height.

Fowlie knows which way the smoke is blowing. He was in Colorado the day cannabis became legal. Three other states have followed suit, and about 20 more plan to put it to the vote this year. Canada has promised to legalise pot. Closer to home, Victoria has just become the first Australian state to give medicinal use the green light.

“That makes it unstoppable here, and I think the government recognises that,” says Fowlie.

Hemp Store manager Chris Fowlie has been fighting for cannabis law reform for decades, and reckons public opinion is changing.
Hemp Store manager Chris Fowlie has been fighting for cannabis law reform for decades, and reckons public opinion is changing.

Besides the international sea change, there could be half a billion reasons compelling New Zealand to follow.

The economic argument

Economists sniffed out the potential gains long ago. More than 500 top boffins – including the American, Nobel laureate economist, Milton Friedman – signed a letter calling for legalisation in the United States back in 2005.

The combination of cost savings and tax income would generate a fortune, they said.

The crime bill

While the US led the costly war on drugs, prohibition has also come at a price in New Zealand. A new Drug Harm Index (DHI) released this month found police were spending about $90 million a year on cannabis-related “interventions”, with another $109m of costs in the courts and justice system.

Back in 2011, the Law Commission recommended legalising medicinal cannabis, and less punitive measures for recreational use.

Among other anomalies in the current law, possession of a bong (a glass pipe used for smoking) is technically punishable by a year in jail. Based on prison costs of $250 a day, that would total $90,000 of taxpayer dollars, or funding for six breast cancer surgeries.

The effect on society

The criminal system also comes at a high personal cost, with several thousand people prosecuted for cannabis possession or use each year. Drug Foundation executive director Ross Bell says the number has more than halved in the last few years. While it’s almost de facto decriminalisation, relying on police discretion is not enough.

“The law has a huge negative impact on Maori families,” says Bell. “They don’t get the diversion or pre-charge warnings that other people get.”

Youth are also over-represented, and Bell says convictions weigh on education and job prospects.

“We’re actually punishing people for a lifetime. It becomes this intergenerational problem.”
The tax story

Politicians love to be seen as tough on law and order. But if there’s one thing they love more, it’s the clinking of tax dollars streaming into the coffers.

The new DHI estimates just how much revenue the government is missing out on. It puts foregone GST at $68.3m, and company tax at $145.8m. That’s based on an overall market valued at $558m worth of natural and synthetic cannabinoids (the chemical compounds found in cannabis).

New Zealand might be the land of the long green cloud, but the true size of the market is hazy. The DHI figure falls roughly in the middle of a $190m estimate from 2001 and reports putting it closer to a billion dollars. The wilder numbers can involve valuing helicopter crop busts as if the entire plant, ‘cabbage’ and all, was sticky, street-ready bud.

“Bless them, but the police always overestimate the scale,” says Bell.

Whatever the real number, cannabis is a huge cash crop. As the nickname suggests, weed is easy and cheap to grow, with much of the black market price related to risk. A US study found the cost per pound could be as low as US$70 (NZ$100) in a legal commercial greenhouse. On the higher side, estimates range to US$400 or $500 a pound.

If the cost of pot fell sharply, Economics 101 suggests consumption would increase. Any tax windfall could be destroyed by a blowout in health and social costs.

The academic perspective

Massey University’s Chris Wilkins has a doctorate in economics, and has spent years researching drug use and policy.

“The overall lesson from decriminalisation is it doesn’t seem to have resulted in a large increase in use,” he says.

Legalisation could be a whole different ballgame, depending on policy settings.

“Colorado is probably the frontrunner, but even then it’s way too early to answer some of the important questions,” says Wilkins. “What impact does it have on use and dependency?”

The NZ Initiative’s head of research Eric Crampton, reckons it’s possible to legalise without increasing health costs. The key would be keeping the price of marijuana at the same level by loading an excise tax on sales.

“If price to consumers doesn’t much change, consumption won’t much change.”

Colorado now collects more tax from marijuana excise than it does from alcohol, investing it in the likes of new schools, drug education and youth programmes.

In a New Zealand legal market, production and distribution costs could drop to about $100 to $150 an ounce, and possibly lower. That’s much cheaper than the black market price of $350; a gulf which Crampton suggests could be filled with a combination of GST and excise.

According to the DHI, New Zealanders smoke their way through a staggering 27,440 kilograms of cannabinoids a year. That’s just shy of a million ounces, meaning the tax haul from consumers could be around $200m to $250m. Add back the company tax and police and court costs, and the total take is over half a billion.

However, the numbers are impossible to predict with any degree of accuracy. Police would still need to enforce a regulated cannabis market. Wilkins says there are a huge number of unknowns about what that would look like. Tax, age restrictions, and licensing would all influence the degree to which the black market shrinks away.

It’s possible users might have to register to buy cannabis, which would be off-putting. But Wilkins still reckons the legal market would be attractive. Buyers would be able to choose the potency and strain, get better health information, and avoid dealing with criminals.

There’s some grounds to think legal dope could be priced at a premium over the black market, Wilkins says.

“I think the majority would be quite happy to go to a legal outlet, and pay a little bit more.”

While Colorado has a booming pot tourism industry, it’s unlikely ‘Bud and Breakfasts’ will be popping up here. Tourism Industry Association boss Chris Roberts says people are unlikely to fly across the world purely for the purpose of using cannabis. It’s a long way to come for a joint, especially for those in North America and Europe with closer options on their doorstep. But Roberts says there might be a few Aussies who make the trip, and it could be factored into choice of destination more generally.

The export market has brighter opportunities. New Zealand products tend to attract a ‘clean, green’ branding premium, and Fowlie reckons pot would be no different.

“We grow some of the best cannabis in the world.”

Crucially, New Zealand could supply its northern neighbours during the off-season, he says. The US is already looking to invest big bucks in plantations in the likes of Uruguay or Australia to keep up with demand.

Fowlie says the New Zealand climate means cannabis can be grown outdoors pretty much anywhere. There’s already expertise in the horticulture industry, and infrastructure in the form of sophisticated greenhouses using leading science.

“Instead of growing tomatoes for $5 a kilo, you can grow cannabis for $5000 a kilo.”

The raw product itself is only the tip of the iceberg, with tinctures, oils, medicines, nutraceuticals, and edibles starting to become big business too.

The politics

Associate Health Minister Peter Dunne says the war on drugs has been “an abject failure”. He’s leading a New Zealand delegation to a crucial United Nations meeting this week, which could result in changes to prohibitionist international treaties.

However, Dunne says legalisation is not on the Government’s agenda.

Legal weed remains a pipe dream for now, but Fowlie is patient. He co-founded the Hemp Store 20 years ago, and has been advocating for cannabis reform for even longer. If or when it finally arrives, he’ll be ready and waiting.


The economics of legalising New Zealand’s marijuana market