MEXICO CITY – Mexico, a country that has been shaped by cartels for decades, is about to take an important step in drug policy. This week the House of Commons approved a landmark law legalizing recreational marijuana that would make it the world’s largest legal drug market.
Given that legalization is far from certain to garner Senate and President approval, many in the business world are predicting a Mexican green boom: a newly legal industry, tens of thousands of jobs, millions of dollars in profits for savvy entrepreneurs and welcome tax revenue for the US government.
However, many business analysts and economists are cautious, warning that the cannabis industry here is more of a green slip than a boom. The opening of a legal market is more legal and symbolic than economic in nature, they argue, citing relatively low domestic demand and low export opportunities for the product as well as seemingly restrictive regulatory measures.
“It’s hard to see any obvious far-reaching implications for the Mexican economy,” said Jeffrey Miron, an economist at Harvard University. “You will see a small drag on measured GDP,” he added, “but the people who claim that legalization will make this a big boost to the economy make no sense at all.”
But industry sponsors are excited about the prospects.
The cannabis industry “is finally going to generate income in terms of employment, in terms of the local economy, in terms of taxes,” said Erick Ponce, a Mexican entrepreneur and president of the Cannabis Industry Promotion Group, a local research and advocacy group.
“We definitely see it as a major economic boom for the country, especially in the middle of a pandemic,” added Ponce.
The Mexican marijuana industry could be worth up to $ 3.2 billion annually, and big cannabis companies like Canada’s Canopy Growth are already watching the market, according to a January report by a cannabis data analytics firm, New Frontier Data.
But Canada can be a cautionary story. Ahead of its own legalization in 2018, investors and analysts predicted a surge in cannabis cash, but the deal was not a sweeping success.
In the final quarter of 2020, the country’s national statistics agency estimated that consumers were spending Canadian $ 918 million (about $ 736 million) on legal weed products, significantly less than predicted prior to legalization. The result was sluggish and most manufacturers are still reporting losses running into the millions. In December, Canopy Growth announced it was closing five facilities and laying off more than 200 employees to accelerate profitability.
“The green rush part didn’t happen,” said Michael Armstrong, associate professor at the Goodman School of Business at Brock University in Ontario. “It was a positive boost for Canada, but by no means a dramatic one.”
Official figures show that Canada, with a much smaller population, has many more regular users than Mexico: Before legalization, around 15 percent of Canadians said they had smoked marijuana in the past three months, according to the national statistics bureau, a consumer base of more than 5 million potential users.
In contrast, a 2016 study by the Mexican government found that only about 1.2 percent of the population aged 12 to 65 said they had smoked a pot in the previous month, and 2.1 percent, about 1.8 Million, last year.
Legalization advocates argue that such numbers are misleading: in a country like Mexico, where the majority of the population is against weed legalization, many people do not admit to smoking it.
“Cannabis is a problem with stigma, with taboo,” said entrepreneur Ponce. “We don’t really know the impact of the local market because there are no real statistics.”
But even if surveys underestimate the number of potential consumers, most experts downplay the size of the market in Mexico.
“I don’t think there will be much demand,” said Jorge Javier Romero Vadillo, political scientist at the Autonomous Metropolitan University in Mexico. And “I don’t think this regulatory process will significantly increase demand.”
Romero said the new law’s stringent licensing requirements for the cultivation, packaging and sale of marijuana could keep smallholders and sellers out of the legal market.
“With the rules they want to apply, which are very restrictive, they are going to open a tiny market,” he said. “They are rules that are so strict, with a barrier to entry that is so high that few will choose to enter the legal market.”
California, which legalized recreational marijuana in 2018, had similar teething troubles: In the first year of legalization, legal vendors in the state sold $ 500 million less than the previous year when it was licensed for medical use only.
According to Daniel Sumner, director of the Center for Agricultural Issues at the University of California at Davis, strict regulations and high taxes kept the majority of California producers and sellers in the gray or black market. In many communities, marijuana-related businesses have faced severe local opposition.
Sales have increased significantly recently as the number of licensed growers and vendors has gradually increased and the state introduced cannabis taxes of $ 1 billion last year, according to Sumner.
“It’s a formidable business,” he said, but “it’s a drop in the ocean” in the context of California’s annual budget of more than $ 200 billion.
With a relatively small consumer base and complex regulatory measures, Mexico’s recreational market is unlikely to come close to that, analysts say.
Instead, some industry leaders say the real money in Mexico may be in medical cannabis, which has been legal in Mexico since 2017, as well as industrial hemp, which is also regulated in the new bill and could be used to make anything from plastics to paper.
“The marijuana market is a very small market,” said Guillermo Nieto, president of the National Cannabis Industries Association, a Mexico City-based trade group. “Agriculturally, liking industrial hemp legalization won’t help us.”
In the short term, some business people say Mexico’s biggest gains could be doing what Mexico is already best at: manufacturing – in this case, possibly cannabis products such as supplements and cosmetics.
Still, the biggest impact may be more symbolic than monetary: As the largest economy to legalize the drug to date, Mexico, home to around 128 million people, could encourage other countries, including its northern neighbor, to follow suit.
“Sometimes it’s nerve-wracking to be the first to step into a pond that could be infested with sharks,” said Miron, the Harvard professor. “But when four or five other people have done it and it’s okay, more people will try.”
