As Medellin Shakes Its Drug Habit...

What does a city do when its best known businessman falls in a hail of police bullets? If that city is Medellin, it breathes a sigh of relief and looks forward to better times. On Dec. 2, 1993, cocaine kingpin Pablo Escobar finally was hunted down, ending a reign of narcoterrorismo that included countless bombings, murders, and kidnappings--but that also brought a flood of cash. During his heyday, a saying was often heard around town: "Medellin may be doing poorly, but the economy is doing fine." With Escobar dead and the Medellin cartel broken up, local industrialists figured the city would really take off.

It hasn't turned out that way. Colombia's second city, which provided the motor for the country's nearly 40 years of steady economic growth, is still haunted by the drug trade in ways that have its leaders gnashing their teeth.

WREAKING HAVOC. True, Escobar is gone, while the three Ochoa brothers--Escobar's board of directors, so to speak--are in jail. As a result of a crackdown this year, so are six of the seven leaders of the Cali cartel. But traffickers in nearly every other Colombian city have picked up the slack, according to the U.S. Drug Enforcement Agency, and their new techniques are wreaking havoc on Medellin's industrial base. Police sources say that instead of simply flying planeloads of dollars into the country as in the freewheeling old days, the new drug lords launder money by buying massive amounts of goods in the U.S., smuggling them into Colombia, and dumping them to reap their profits in pesos.

This is undermining Medellin's anchor industries: textiles, garments, and tobacco products. Unemployment among the 2 million residents, at more than 10%, is higher than in any other Colombian city. And that's counting as "employed" the sidewalk vendors of smuggled cigarettes and clothing.

One favored sector is the tourism, restaurant, and bar trade. Colombians from all over the country once again flock to Medellin's annual flower shows and folk festivals, and locals have returned to sidewalk cafes. Hotel occupancy bottomed out at 40% in 1990, when death squads imposed a 9 p.m. curfew. Today, the bars and hotels are full.

TAKING ADVANTAGE. Direct investment has remained stubbornly low, with investors preferring to buy fixed-rate instruments or play the stock market. And Medellin is only beginning to seek foreign capital seriously. For centuries, the city was isolated because of its setting in the Central Mountain Range and its distinct culture, rooted in tightly knit Basque and Jewish communities. Now, a free-trade zone aimed at luring foreign investors is being developed near the airport. Ironically, city fathers are taking advantage of Medellin's recent notoriety. Says Antonio Picn, who heads the local chapter of the National Federation of Merchants: "Escobar at least did this for us: When I talk to foreign businessmen, they know there's a place called Medellin."

Escobar's death didn't bring the end of crime in Medellin, whose murder rate is four times that of New York. Instead, he left thousands of hit men and other cronies jobless, and they have taken to exceptionally violent crime. Carjackers, for instance, frequently murder drivers so as to leave no witnesses.

Escobar's men also help give Colombia the highest kidnapping rate in the world. Medellin's police say that through September, kidnappings were already up 60% over all of 1994.

Medellin industrialists sought refuge from narcoterrorismo in Bogota and Miami and learned to do business by fax. Some of them, relieved to be away from Medellin's crime-ridden atmosphere, never returned.

The Medellin business community is still wary of being infiltrated by traffickers. Membership in clubs and trade groups is by invitation only. The specter of Escobar was revived in September, when Medellin's mayor was questioned by the national Attorney General's office, possibly about former connections to the Escobar organization.

However, Medellin police chief Alfredo Salgado prefers to accentuate the positive. He says that trafficking in Medellin has been almost eliminated. Ask him how much cocaine the police seized last year, and he replies proudly: "Only a ton."

Before it's here, it's on the Bloomberg Terminal.