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My paper will address the “lack of governance,” more precisely lack of “official or recognized governance,” in the domain of illicit economies. The analysis will center on illegal drug economies, but will be extended to other illicit economies as well. The paper will examine: How illicit economies arise? What are the regulatory requirements for functioning of illicit economies are; i.e. is no governance optimal? and What threats do illicit economies pose to states? It will further examine the relationship between criminal networks and belligerents, such as terrorists and insurgents, and argue against the simplistic assumption of a unity of interests and purposes of these two actors. It will draw on cases of Colombia, Peru, Afghanistan, Burma, Iraq, and Somalia for illustrations.Although illicit economies are on the one hand the manifestation of a lack of governance, their very existence is due to some kind of pre-existing regulation â€" state or international â€" that prohibits them. Such impetus for emergence of illicit economies can be criminalization of certain behavior, such as the consumption and production of illicit substances, or the imposition of some limitation on economic activity, such as requirement that all trade with legal goods be subject to taxation. Hence, economic sanctions also, although imposed on states to modify their behavior, frequently give rise to illicit economies. Second, the existence of an illicit economy presupposes some level of demand for the commodity or service that the economy generates. And third, the emergence of an illicit economy is also critically dependent on the inability-- (or unwillingness) of the state/ international regime to fully enforce its prohibition-- i.e., limits of the extent of the regulating entity’s governance. Although illicit economies thrive in ungoverned spaces where the regulating entity’s means of suppression are limited, illicit economies still frequently need some regulation. At minimum, the economy and its actors need some level of predictability and the assurance of property rights. The “wild” space is rarely fully wild; frequently, it is only differently governed. Since the state (or international organization/ regime) by defining the economy as illegal is committing itself to officially suppressing it, it cannot provide the minimum protection and regulatory functions that the economy needs for smooth functioning with limited transaction costs. Consequently, other actors fill the lacuna of governance: criminals â€" whether organized or not; armed actors, such as paramilitaries, warlords, insurgents, and terrorists; and corrupt government officials. But the relationship between criminals and belligerents is full of friction and fraught with problems. ..PAT.-Unpublished Manuscript [ABSTRACT FROM AUTHOR]

The exploitation of illicit economies, such as the illicit drug economy, has become an important feature of terrorism and many other military conflicts. But the current counter-narcoterrorism chic is too simplistic. Although belligerent groups do gain vast financial benefits from their participation in the illicit economy, they gain much more from their sponsorship of the illicit economy. Based on the cases of Peru, Colombia, Afghanistan, Burma, and Northern Ireland, the analysis will show that belligerents also gain freedom of operation, and crucially, significant political capital with the local population. The conditions that influence the size and the scope of the belligerents' gains from the illicit economy include a) the state of the overall economy; b) the character of the illicit economy; c) the presence of thuggish traffickers; and d) government response to the illicit economy. Far from being highly complimentary to the effort to defeat the belligerents, government efforts to suppress the illicit economy are frequently counterproductive to counterterrorism/ counterinsurgency objectives. [ABSTRACT FROM AUTHOR]