Cocaine Boss’s Capture Signals Progress in Mexico’s Drug War

The capture of the world’s most-wanted narcotics boss shows Mexico is making headway in a drug war that has curbed economic growth while helping to leave at least 92,000 people killed or missing since 2006.

Mexican security forces captured Joaquin “El Chapo” Guzman early Feb. 22 in the Pacific beach town of Mazatlan after trailing him for more than a week. Thirteen people were apprehended in all, with no shots fired. Authorities also seized guns, a rocket launcher and 43 vehicles.

Guzman’s arrest caps a 13-year manhunt by Mexican and U.S. authorities and marks a victory for President Enrique Pena Nieto, who took office in 2012 after pledging to scale back the military’s role in fighting organized crime to curb bloodshed. Further progress against drug trafficking could help boost gross domestic product, according to Alonso Cervera, the chief Latin America economist for Credit Suisse Group AG in Mexico City.

The capture “shows the determination of the current government to fight organized crime and illegal activities,” Cervera wrote in an e-mail. “Continued success on this front should help expand potential GDP growth while lowering further investors’ perceptions of Mexico’s political and social risk.”

Crime has shaved about 1 percentage point off of Mexico’s growth in recent years, Cervera estimates.

Trafficking Industry

Guzman was at the center of a cocaine, heroin and marijuana trafficking industry that converted swaths of Mexico into battlegrounds as competitors vied for lucrative trade routes and federal security forces attempted to restore order. The U.S. State Department had a bounty of as much as $5 million on Guzman, and Mexico was offering 30 million pesos ($2.26 million) for his arrest.

Investors now have “ammunition to say that maybe reform and changes are really taking hold,” said Alejandro Silva, a founding partner of Chicago-based Silva Capital Management LLC, which oversees $800 million of emerging-market assets. “It goes a long way in making the case that rule of law does apply.”

Gabriel Casillas, the chief economist and head of research at Mexico City-based Grupo Financiero Banorte SAB, said that while the market reaction to the news probably will be muted, arrests like Guzman’s will have an impact in the long term.

Mexico’s peso gained 0.1 percent to 13.2520 per dollar at 7:09 a.m. in New York. Economists project the currency will strengthen 3.6 percent by the end of this year, the most among 16 major dollar counterparts tracked by Bloomberg, as Pena Nieto pushes pro-economy laws such as opening the country’s oil industry to private investment.

‘Landmark Achievement’

Guzman is being held in a maximum-security prison near the central Mexican city of Toluca, according to the Attorney General’s Office.

Agents with U.S. Immigration and Customs Enforcement and the Drug Enforcement Administration helped gather the intelligence that led to Guzman’s arrest, according to a senior U.S. law enforcement official who requested anonymity because he wasn’t authorized to speak publicly about the investigation.

A breakthrough came in November when U.S. authorities arrested an associate of Guzman’s organization, generating intelligence that helped pinpoint the leader’s whereabouts, the official said.

Tunnel Network

Before his capture, Guzman had been moving among properties connected by a network of tunnels through the sewers, Mexico Attorney General Jesus Murillo Karam told reporters. In a recent attempt to detain him, authorities tried to knock down a door reinforced with steel. By the time officials broke through, Guzman had escaped through a tunnel, according to the prosecutor.

The newspaper Reforma reported that Mexican officials obtained a satellite phone number for Guzman earlier this month after making several arrests of lower-level associates. The DEA offered technological help in tracking the signal, and then accompanied Mexican agents over the ensuing days.

They detected a call from the phone as Guzman was trying to escape from Culiacan, Mexico, and the voice was confirmed as his, according to Reforma. Later in the day, the signal was picked up in Mazatlan. Agents watched him for almost a week to assess his movements and security detail. Early on Feb. 22, Mexican special forces entered the condominium building where he was staying. First they arrested his bodyguard, who led them to Guzman’s room, the newspaper reported.

Extradition Questions

Guzman gained fame in 2001 after escaping from a high-security prison and allegedly building up the Sinaloa Cartel, named after his home state and known for beheading its enemies or hanging their bodies in public places. These tactics, coupled with his business acumen, helped him build a personal fortune of about $1 billion, according to Forbes magazine.

Mexico’s Foreign Relations Ministry declined to comment on whether the U.S. is seeking Guzman’s extradition.

U.S. Representative Michael McCaul, a Texas Republican who heads the House Committee on Homeland Security, said yesterday on ABC’s “This Week” program that he wants Guzman extradited to the U.S., partly to ensure that “what happened in 2001 does not happen again.”

Eduardo Medina Mora, the Mexican ambassador to the U.S., told the New York Times that the issue of extradition had not been worked out. “I think it’s important that first he faces the charges against him in Mexico,” he told the newspaper.

Gang Wars

Guzman, who is in his 50s, overcame a poor, rural upbringing with limited education to become what the U.S. Treasury labeled in January 2012 as the “the world’s most powerful drug trafficker.”

He entered the drug trade in the 1980s and rose to direct the local cartel’s operations, according to Malcolm Beith, author of “The Last Narco: Inside the Hunt for El Chapo, the World’s Most Wanted Drug Lord.” Guzman’s rise was interrupted in 1993 when he was arrested in Guatemala and extradited to Mexico.

At Puente Grande prison in Jalisco state, Guzman bought off guards and inmates with funds provided by the cartel, according to Beith.

After Guzman’s escape, he returned to the Sinaloa Cartel, taking advantage of then-President Vicente Fox’s offensive on rival gangs.

Guzman’s arrest may trigger more violence in Mexico, especially in areas where pacts struck between his cartel and local drug gangs helped bring down murder rates, such as the border city of Ciudad Juarez, said Ioan Grillo, author of the 2011 book “El Narco: Inside Mexico’s Criminal Insurgency.”

“This is going to have massive consequences in the trafficking trade,” Grillo said in a phone interview in New Haven, Connecticut. “In recent years in Mexico, when major drug capos have been taken down, we’ve seen a clear pattern in short-and medium-term explosions of violence where their underlings are fighting for positions.”

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