Crime and Economic Development-BECKER

Even though official crime statistics are often suspect, there is no doubt that crime rates vary enormously from country to country. What is more interesting is that poorer and more slowly developing countries generally have higher incidences of crime, often much higher. There are several reasons why poorer countries and those that are growing slower would have more crime, but do higher rates of crime also contribute to poverty and weaker growth? I believe the answer is yes. That crime is negatively related to a country's income and its development is seen strongly in the data. For example, in the period 1998-2000, countries with the highest murder and kidnapping rates included Colombia, Jamaica, Mexico, South Africa, Russia, Zimbabwe, and others that were not then doing well economically. An economy that is doing poorly has more crime because crime flourishes when wages are low and unemployment is high. That is, crime is encouraged when legal alternatives to using time at crime do not pay well. The returns to education and other human capital usually are low in stagnant economies, so that young persons are then more inclined to drop out of school. Dropouts have the free time to engage in theft, the sale of illegal drugs, and other criminal activities. My remaining discussion concentrates on why high crime rates also slow economic growth and progress. One reason was made clear to me when speaking to a leading businessman in Mexico City, a city with extremely high rates of kidnapping, robbery, and theft. He said in many countries wives who are with their husbands in the United States encourage their husbands to give up their jobs and return home because the wives miss their families and friends. Due to the high crime rates in Mexico City, however, Mexican wives often do not want to return to that city because they feel it is not safe to raise their children there. Of course, for the same reason, foreigners with families are often reluctant to work in countries with much crime. High crime rates directly raise the cost of doing business. For one thing, foreign and domestic businesses, and wealthy individuals, need to spend considerable resources on providing security for valuable machinery and inventories, and for their employees. For example, wealthy Mexicans, Brazilians, and South Africans employ hundreds of security personnel simply to protect their families and high- level employees. Partly because more people drive to work and to shop because of the fear of crime if they walked or took public transportation, and because good highways and roads in poorer nations are scarce relative to this augmented traffic, the time cost of commuting to work and to go shopping is sizable. People who do walk in cities like Rio de Janeiro or Mexico City often remove their watches and jewelry, and make sure they are carrying a little but not too much money. High rates of crime are often the result of corrupt police and the judiciary who make little effort to catch criminals or prevent crimes. Acceptable standards of behavior by officials and others also tend to decline when crime is common. In addition, dishonest individuals are willing to work in law enforcement for low salaries when many crimes are committed because they can expect to supplement their income generously through bribes from criminals. It is then no surprise that police in high crime countries like Brazil and Mexico are paid very badly since there is no problem attracting enough (corrupt) candidates to work at low pay. Corruption in law enforcement encourages corruption in the enforcement of contracts and regulations. International evidence on corruption of officials in different countries indicates that high crime and high corruption levels tend to go together. To be sure, corruption of officials and judges sometimes help a country with bad laws do better by inducing weak enforcement of these laws (see the posts on corruption on August 28, 2005). Moreover, corruption may not be much of a problem when bribing officials to enforce contracts and reasonable laws is cheap. Still, studies of economic growth suggest that on the whole corruption retards economic growth by discouraging investments in physical capital, and perhaps also in human capital, because corrupt officials do not enforce contracts and regulations honestly, and the returns to hard work and investments generally are lower. The foreign investment capital that is crucial to economic development is particularly discouraged because foreigners often perceive-usually accurately- that contracts and regulations tend to be interpreted in favor of domestic businesses and against foreign ones. Production and distribution of drugs also flourish in environments with corrupt police and judges. What is worse, drug activities tend to corrupt officials and police, and hence weaken enforcement of other laws as well. Such an environment is hardly conducive to the creation of legitimate business and investments. The potential profits from the drug trade is sometimes so large-especially when trans shipment of drugs to the United States and other major markets is feasible- that even the top leaders of some countries have been heavily involved in the distribution of drugs. For all these reasons and others, countries with much crime have trouble achieving economic development.

Comments

[Cyril Morong]

Dr. Becker:

Does inequality play any role in this? In the 1990s, if I recall correctly, the crime rate fell in the USA while the Gini coefficient rose. How much crime, if any, does rising inequality cause?

[Ted Sternberg]

The observations about crime and development in poor countries are interesting, but I wonder how much of US GDP couldn't be considered transaction expenses of avoiding crime. How much did the middle class's abandonment of Newark, Detroit, St Louis and so many other cities cost? How much do we continue to spend on gasoline, cars, houses in "good" school districts, and roads, that we wouldn't need to spend if more of the inner cities were livable?

[Alberto Carrasquilla]

If the harm to development stems from the extra cost which high crime-rates force economic actors into incurring, then we can observe these extra costs. One candidate is the real interest rate: It should be higher in high-crime countries. Households and companies are forced into paying more for the ability to transfer resources intertemporally because future income/profits are more uncertain. In a normal country, risks are market related, whereas in a crime-ridden country one must add the probability that someone will steal them from you. If you compare the real (ex-post) interest rate in Colombia, a high crime country with at least three irregular armies operating for decades, with that in Costa Rica, a peaceful country with low crime and no army at all, you arrive at a startling conclusion: the two exhibit broadly equal real interest rates over the last few decades. This is puzzling and I would love to learn more.

[SMIP]

Dear Prof. Becker: I enjoy your blog very much. How do you define what is a crime? There is also the opportunity cost to consider. What the percentage of crime cost to the GDP for each country? I am wondering if special interest lobbying for certain subsidy is a crime.
Thanks.

[N.E.Hatfield]

As has been said, "Idle hands and minds are the Devil's workshop.", such that there is a pretty close correlation between crime and unemployment. When it becomes ingrained as corruption into the culture, the real problems begin. As Judge Posner comments, "It's the chicken or egg problem". In this glorious new globalized economy it's come time to put away our moral qualms and embrace corruption and crime as just another cost of doing business.

[Bill]

"There are several reasons why poorer countries and those that are growing slower would have more crime, but do higher rates of crime also contribute to poverty and weaker growth? I believe the answer is yes."

Well, duh.

[Ross]

Presumably where crime is widespread it lowers the incentives for legitimate work, because the proceeds of working can't be fully enjoyed and also because being a criminal may be more lucrative than getting a job. So wouldn't high crime rates damage the economy by removing a large pool of potential labour from the market?

[CamelotAkademie.de]

thanks and have a nice day.

[ed]

Dr. Becker,
Look for example at the early history of the USA and UK and you will find out that corruption and crime were at levels not dissimilar to developing countries nowadays. And yet the USA and UK have become rich countries, which contradicts your conclusion. Of course low crime and corruption rates must be good for economic development but they are neither necessary nor sufficient conditions.

[nakliyat]

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[Alex]

I think you are wrong about the data. The data I have suggests that crime is higher in developed countries. A useful example is that US ranks the first country in terms people in jail per year for many years.

[Charles]

You need not look abroad to see this taking form. Look to Detroit, a city rife with economic problems. In turn, as you accurately point out, there is a high rate of high school dropouts, street crimes, thefts, murders, and drugs. As a result the city is stuck in a terrible economic and developmental rut that is only being worsened by a young, unemployed, and uneducated male class.

[Haris]

"I think you are wrong about the data. The data I have suggests that crime is higher in developed countries. A useful example is that US ranks the first country in terms people in jail per year for many years."

This isn't a particularly useful statistic. If the US stopped arresting and jailing people, it would go down in the rankings, even though crime would be vastly higher. The number or persons jailed is a function of both the incidence of crime and the effectiveness of law enforcement. If you arrest no one, there's no one in jail. It doesn't follow that there is no crime. Imagine two countries with identical crime rates, but one jails 100% of offenders and the other arrests 50%. The former would rank higher in the stat you reference but it would not have more crime and would probably be the better country to live in.
I'm not saying that developed countries have, in fact, less crime. Just that the number or percentage of inmates is not a statistic that can help us determine this.

[verisimilidude]

I believe that it is the predictability of return that influences economic development. If there is a fear that any individual wealth will be snatched away without warning there is less chance that individual initiative will be expended, thus lowering the country's GDP. High taxes are predictable, even systematic bribery can be predictable. Europe began its travel to world economic supremacy when the wealthy imposed limits on the unpredictable actions of monarchs. Eventually this predictability was extended to all levels of society. Discrimination is a failure to provide this predictability of individual effort to certain classes and is the reason why discrimination has an economic effect.

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