The Economics of Crime: Lessons For and From Latin America

by Rafael Di Tella, Sebastian Edwards, Ernesto Schargrodsky

Overview

Crime rates in Latin America are among the highest in the world, creating climates of fear and lawlessness in several countries. Despite this situation, there has been a lack of systematic effort to study crime in the region or the effectiveness of policies designed to tackle it. The Economics of Crime is a powerful corrective to this academic blind spot and makes an important contribution to the current debate on causes and solutions by applying lessons learned from recent developments in the economics of crime.
The Economics of Crime addresses a variety of topics, including the impact of kidnappings on investment, mandatory arrest laws, education in prisons, and the relationship between poverty and crime. Utilizining research from within and without Latin America, this book illustrates the broad range of approaches that have been efficacious in studying crime in both developing and developed nations. The Economics of Crime is a vital text for researchers, policymakers, and students of both crime and of Latin American economic policy.

Product Details

ISBN-13:	9780226791852
Publisher:	University of Chicago Press
Publication date:	06/15/2012
Series:	National Bureau of Economic Research Conference Report
Edition description:	Reprint
Pages:	488
Product dimensions:	6.00(w) x 8.90(h) x 1.20(d)

About the Author

Rafael Di Tella is the Joseph C. Wilson Professor of Business Administration at Harvard Business School and a research associate of the NBER.


Sebastian Edwards is the Henry Ford II Professor of International Economics in the Anderson Graduate School of Management at the University of California, Los Angeles.

Ernesto Schargrodsky is a professor and dean of the business school at Universidad Torcuato Di Tella.

Read an Excerpt

The Economics of Crime

Lessons For and From Latin America

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The University of Chicago Press

Copyright © 2010 National Bureau of Economic Research
All right reserved.
ISBN: 978-0-226-15374-2

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Chapter One

Understanding High Crime Rates in Latin America The Role of Social and Policy Factors

Rodrigo R. Soares and Joana Naritomi

1.1 Introduction

Latin America has been traditionally seen as a particularly violent region of the world. This perception is not new, even though it may have been enhanced over the last decades with the escalation of violence in countries such as Brazil, Colombia, and Venezuela (see Aguirre [2000]). Still, despite the fact that several candidate explanations have been put forth, there is no consensus regarding the reasons behind this phenomenon.

Table 1.1 presents mortality rates due to violence and statistics related to various dimensions of development for regions of the world (comprising seventy-three countries for which mortality by cause of death is available from the World Health Organization [WHO]). The occurrence of deaths due to violence is much more common in Latin America than in any other region: it is roughly 200 percent higher than in North America and in the Western Pacific, 450 percent higher than in Western Europe, and 30 percent higher than in the Former Communist block. The region is also significantly poorer and less educated than the developed countries, but statistical analyses have failed to establish an unequivocal and quantitatively significant link between these variables and crime. In addition, Latin America enjoys higher levels of income and life expectancy than most of the Former Communist block, but still displays substantially higher violence levels.

Crime and violence have many potential welfare implications. The loss in life expectancy at birth due to violence in violent societies can be higher than one year and sometimes even above two (as in Colombia in the 1990s). Recent estimates have shown that increases in mortality represent a quantitatively significant welfare loss, be it directly from the reduced welfare due to a shorter life span, or from the indirect effects of a shorter planning horizon on investments in physical and human capital (see Murphy and Topel [2003] and Lorentzen, McMillan, and Wacziarg [2008] for example). In addition, material costs, including both direct costs and expenditures on criminal justice and crime prevention, add up to a significant fraction of overall production across different regions of the world (Bourguignon 1999). Finally, loss of human capital and productivity of those deceased, incapacitated, and incarcerated add yet another layer to the social inefficiencies generated by crime.

The economic relevance of this phenomenon has been widely recognized in recent years, both in the research community and in the public debate. Today, the causes and consequences of crime are common themes in economic research. They are also among the main topics in the popular media in Latin America, and often bring the region to the headlines in the major media outlets worldwide (see, for example, The Economist [2006] and The Washington Post [2007]). In reality, crime and violence have been identified as the second most important public policy issue in the region, ranking first for countries such as Argentina, El Salvador, and Venezuela (Latino-barómetro 2006).

There are many possible explanations for the differences in violence observed across regions of the world and the particularly high levels observed in Latin America. These range from distinct definitions of crimes and different reporting rates (percentage of the total number of crimes actually reported to the police), to real differences in the incidence of crime due to inequality, degree of repression, effectiveness of the government, and age composition of the population. The goal of this chapter is to discuss the pattern, causes, and consequence of the high crime rates observed in Latin America. We argue that crime in the region represents a significant welfare loss and a potentially serious hindrance to growth. We then conduct a preliminary assessment of the relative strength of the alternative hypotheses raised in the literature.

In pursuing this goal, we take the rational choice perspective typical from the economic theory of crime. In this setup, criminals respond to economic incentives in the same way that legal workers do (Becker 1968; Stigler 1970). In Stigler's words, "[the criminal] seeks income, and for him the usual rules of occupational choice will hold" (530). Particularly important from our point of view is the fact that the relative attractiveness of criminal activities is intimately related to variables that undergo significant changes during the process of economic development, such as income distribution, institutional development, government effectiveness, and demographic composition of the population. We ask how the economic and social landscape of a society affects the incentives of its citizens to engage in criminal behavior, and confront it with the actions that the government takes to reduce the incidence of crime and violence. From this interaction of forces-the supply of potential criminals faced with the repressive measures imposed by the State-an equilibrium level of crime and violence emerges. We therefore concentrate our discussion on the dimension of crime that is economically motivated and is subject to a cost benefit analysis on the part of the perpetrator.

Our analysis shows that, despite being extremely high, the incidence of crime in Latin America is not much different from what should be expected based on socioeconomic and public policy characteristics of its countries. Estimates from the empirical literature suggest that most of its seemingly excessively high violence can be explained by three factors: high inequality, low incarceration rates, and small police forces. In addition, country-specific experiences in the recent past have been heterogeneous in many respects. There are examples of countries that maintained reasonably low violence levels throughout the last decades and also of countries that, starting with very high violence, were able to achieve levels comparable to that of some developed countries. Still, some other countries went through the last thirty years experiencing increasingly high and seemingly uncontrollable crime rates. As a whole, the evidence suggests that it is possible to have an effective policy toward violence reduction, and that this goal has indeed been attained by certain local governments in the region.

The position of some Latin American countries as major producers of drugs or as routes for the international drug traffic has important implications for organized crime and sometimes also for the institutional stability of its states (see, for example, Keefer, Loayza, and Soares [2010]). Here, we deliberately leave this dimension out of the discussion and try not to look at Latin America as being particular. Instead, we look at the more ordinary factors and policies thought to be related to the incidence of crime and ask what they can tell us.

There are numerous experiences of high and low, increasing and decreasing crime rates not accompanied by systematic differences in drug activity. Similarly, there are various other consuming and producing centers around the world that do not display remotely similar crime rates. In Latin America itself, there are today various successful experiences of local crime control that did not confront directly the broader issue of drug production and trafficking. Though drugs may be very important fuels for violence and institutional instability in particular countries (such as Colombia in the 1980s and 1990s) and particular regions of certain countries, we do not believe that they are a major factor determining the high levels of violence observed in Latin America, or explaining the bulk of the distribution of crime in the region. Our analysis suggests that one can go a very long way toward understanding the incidence of common crime and violence in Latin America without resorting to the role of drugs.

The remainder of the chapter is structured as follows. Section 1.2 discusses the welfare implications of crime and violence. Section 1.3 summarizes the main issues in the measurement and comparison of crime rates across countries. Section 1.4 presents the pattern of crime in Latin America, both across countries and through time. Section 1.5 analyzes some candidate explanations for the levels of violence observed in the region. Section 1.6 conducts a preliminary assessment of the relative importance of these candidate explanations based on estimates available from the empirical literature. Section 1.7 discusses the strategy and institutional context of some successful experiences of violence reduction in Latin America. Finally, section 1.8 concludes the chapter.

1.2 Welfare Implications

Crime and violence are a burden to society in several dimensions. There are straightforward consequences to the quality of life, such as reduction in life span, widespread feeling of insecurity, and change in behavior through reduced time on the streets. There is also the social waste from the value of goods lost and destroyed, the public and private expenditures on prevention, and the costs related to criminal justice and prison systems. In addition, and far less straightforward, crime has important nonmonetary welfare consequences, possibly reducing productivity and shortening planning horizons on investments in physical and human capital. It is therefore deleterious to welfare in different ways, and possibly an actual hindrance to development.

From this perspective, the Latin American situation is particularly worrisome. The region fell behind in terms of growth in the last twenty years and is remarkably violent by international standards. According to the International Crime Victimization Survey (ICVS), about 44 percent of Latin Americans are victims of some type of crime every year (average for the 1990s). During the last decade, the region had systematically the highest rate of deaths due to violence in the world: 21.8 per 100,000 inhabitants. This position has given Latin America headlines in major international media outlets and has made it infamous throughout the world. A recent example is a report stating that 729 Israeli and Palestinian minors were killed as a result of violence between 2002 and 2006, while 1,857 minors were reported murdered in Rio de Janeiro, Brazil, during the same period (The Washington Post 2007).

Measuring the magnitude of the negative consequences of crime, however, is a difficult task. There are multiple dimensions that one should take into account, and there is no unified framework in the literature to tackle the problem. The material costs of crime and violence, including both direct costs and expenditures on criminal justice and crime prevention, have been estimated to add up to a significant fraction of production across different regions of the world. This number is thought to be around 2.1 percent of the gross domestic product (GDP) per year for the United States, and 3.6 percent for Latin America (see, for example, Bourguignon [1999] and Londoño and Guerrero [1999]). Considering monetary costs related to property crime, the number rises to 2.6 percent for the United States and 5.1 percent for Latin America (Bourguignon 1999). There is, however, debate in the literature on whether this is actually a social cost, rather than a transfer of resources between members of society. Glaeser (1999) argues that, since generally the goods are valued less by the criminals than by the people who lose them, it should indeed be considered a social loss. The value should equal, in equilibrium, the opportunity cost of criminal's time-that is, the time spent on crime instead of legal activities-and this does correspond to a welfare loss.

On top of material costs, one of the most important direct consequences of crime is the increase in injury and mortality rates. Economists have recently developed tools that allow the estimation of the social cost from reductions in life expectancy and have shown that these can be quantitatively very important. In the case of violence, this has been shown to represent a substantial welfare loss, of the same order of magnitude of direct material costs of crime. Based on a willingness to pay approach, Soares (2006) estimates that one year of life expectancy lost to violence is associated on average with a yearly social cost of 3.8 percent of the GDP. This estimate still leaves out the costs due to injury and reduced health, for which there are no trustworthy economic-based estimates available.

The nonmonetary dimension reinforces the severity of the Latin American scenario. In the 1990s, individuals born in Latin America had life expectancies on average 0.6 year lower because of violence (see table 1.1). This number was at least two times higher than the loss in life expectancy for any other region, except for the former Communist countries. It reached its peak in Colombia, where 2.2 expected years of life were lost because of violence. To put these numbers in perspective, reductions in life expectancy due to violence represented social losses analogous to a permanent decline of 9.7 percent of yearly income for Colombia, as compared to only 0.9 percent for the United States (Soares 2006).

Figure 1.1 shows the discounted present social value of violence reduction as a share of GDP for several countries, as estimated by Soares (2006), ordered from highest to lowest. From the nine frontrunners, eight are Latin American: Colombia, with an astounding 281 percent, followed by the Philippines (280 percent), Venezuela (95 percent), Chile (86 percent), El Salvador (73 percent), Belize (71 percent), Suriname (67 percent), Mexico (67 percent), and Brazil (65 percent). The eleven remaining countries that complete the top twenty in figure 1.1 are all Latin American and Caribbean or former Communist. In the other extreme of the distribution, the ten lowest values are all Western European countries, plus Japan.

Mortality due to violence in high-violence areas is a particularly perverse phenomenon due to its concentration at prime ages. Figure 1.2, panels A and B show the age profile of mortality by violence for selected countries. In addition to illustrating the extent of difference between the various countries, the figure also highlights that violent countries such as Brazil, Colombia, and Russia have the vast majority of mortality due to violence concentrated between ages fifteen and forty.

The nonmonetary dimension of the costs of crime, together with its specific age profile, induces also indirect economic consequences. These are effects from changes in behavior induced by reductions in the length of productive life, such as decreased investments in human capital and health, reduced savings and investments in physical capital, and, therefore, reduced long-run growth.

Shorter life horizons reduce the incentives for individuals to take actions that generate long-term benefits and short-term costs, such as investing in education and saving for the future. One of the main channels linking mortality to growth is fertility (Lorentzen, McMillan, and Wacziarg 2008). There is a positive relationship between mortality and fertility, and a negative relationship between these two variables and investments in human capital. In countries with a high HIV prevalence, for example, parents have on average two more children when compared with countries with low HIV prevalence (Kalemli-Ozcan 2006). This connection leads to a negative correlation between adult mortality and investment in human and physical capital, and it can be a source of poverty traps.

Finally, there are intangible costs in the labor market and negative effects to business climate. According to Londoño and Guerrero (1999), intangible costs of crime-deterioration of productivity, consumption, and labor force-constitute the major part of Latin American's estimated cost of violence, corresponding to 7.1 percent of the region's GDP. Nevertheless, these dimensions are conceptually less clear and difficult to estimate in a convincing way. Still, it is important to highlight the impact of crime on institutional stability and business environment, particularly where there is a significant presence of organized crime. Gaviria and Vélez (2002) argue that crime has a perverse effect on economic efficiency, reducing investment and employment in poor urban Colombian communities. In Brazil, more than 50 percent of managers rank crime as a major business constraint (World Bank 2006b).

The perverse effects of crime are therefore multidimensional and the magnitude of its costs depends on what is taken into account. In any case, costs of crime and violence represent a significant share of aggregate production, and particularly so in Latin America, where crime rates have been high for most of the last decades. In order to illustrate this point, we draw on the literature discussed before and gather in table 1.2 a set of estimates related to various dimensions of the costs of crime and violence. These are the dimensions over which there is not much theoretical controversy and for which comparable estimates exist for the United States and Latin America.

(Continues...)

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Table of Contents

Acknowledgments

Introduction

Rafael Di Tella, Sebastian Edwards, and Ernesto Schargrodsky

I. Overview: Latin American Exceptionalism?

1. Understanding High Crime Rates in Latin America: The Role of Social and Policy Factors

Rodrigo R. Soares and Joana Naritomi

Comment: Alejandro Gaviria

II. The Economics of Crime Meets Latin America

2. Capital Crimes: Kidnappings and Corporate Investment in Colombia

Rony Pshisva and Gustavo A. Suarez

Comment: Juan Pantano

3. The Cost of Avoiding Crime: The Case of Bogotá

Alejandro Gaviria, Carlos Medina, Leonardo Morales, and Jairo Núñez

Comment: Alfredo Canavese

4. Do Conflicts Create Poverty Traps? Asset Losses and Recovery for Displaced Households in Colombia

Ana María Ibáñez and Andrés Moya

Comment: Martín González-Rozada

5. Crime Distribution and Victim Behavior during a Crime Wave

Rafael Di Tella, Sebastian Galiani, and Ernesto Schargrodsky

Comment: Lucas Ronconi

6. Assessing São Paulo’s Large Drop in Homicides: The Role of Demography and Policy Interventions

João M. P. de Mello and Alexandre Schneider

Comment: Lucas Llach

7. The Quality of Life in Prisons: Do Educational Programs Reduce In- Prison Conflicts?

María Laura Alzúa, Catherine Rodriguez, and Edgar Villa

Comment: Andrés Borenstein

III. International Evidence

8. What Do Economists Know about Crime?

Angela K. Dills, Jeffrey A. Miron, and Garrett Summers

Comment: Philip J. Cook

9. Peaceable Kingdoms and War Zones: Preemption, Ballistics, and Murder in Newark

Brendan O’Flaherty and Rajiv Sethi

Comment: Guillermo Cruces

10. Crime Displacement and Police Interventions: Evidence from London’s “Operation Theseus”

Mirko Draca, Stephen Machin, and Robert Witt

Comment: Catherine Rodriguez

11. The Impact of Incentives on Human Behavior: Can We Make It Disappear? The Case of the Death Penalty

Naci Mocan and Kaj Gittings

Comment: Lucía Quesada

12. Does Arrest Deter Violence? Comparing Experimental and Nonexperimental Evidence on Mandatory Arrest Laws

Radha Iyengar

Comment: Rafael Di Tella

Contributors

Author Index

Subject Index