Impact of Crime on Business and the Investment

Impact of Crime on Business and the Investment Climate in Jamaica January 22, 2004

Overview of Presentation n Motivation for study n Business victimization survey n Quantifying economic costs of crime n Policy options

Why Estimate the Impact of Crime? Most frequent issue in business and individual discourse n Third highest homicide rate in world (33 per 100, 000) n Negative impact on investment climate: u Security costs, diverts investment, less than optimal operating strategy u Losses from looting, arson, theft, extortion and fraud n

Why Estimate the Impact of Crime? (cont. ) Negative impact on investment climate (cont. ): u loss of output (nightshifts, workdays lost) u loss of output from injury/murder of labor u shut-down or relocation of firms n Also, erodes development of human and social capital, and diverts public resources away from productive uses n

High Crime– a Drag on Development

Selected Dimensions of Crime Young males (14 -24 yrs) most likely victims as well as perpetrators of violent crime u In 2001, of those arrested for major crimes, 98% were males, and 53% were 16 -25 years old n Parish of Kingston and St. Andrew accounted for 57% of total murders over 1984 -2001, yet formed only 27% of total population n

Selected Dimensions of Crime (cont. ) High and increasing level of homicides, especially over 1990 s, driven by increasing drug trans-shipment and distribution of drugs, leading to “gang wars” n Contrasting evolution with NY of murder rate (per 100, 000) Jamaica NY Ratio 1970 8. 2 7. 9 1. 0 2000 33. 7 5. 0 6. 7 n

Estimating the Impact of Crime n Approach: u Business Victimization Survey of 400 firms u Quantifying the economic costs of crime u Econometric analysis (determinants of crime) u Case studies of firms

Business Victimization Survey n Methodology: u Face-to-face interviews with 400 Jamaican firms (2002) u Firms chosen by economic activity (12 types) and size, based on quota sample u Survival bias in sample u 92 items in questionnaire, some based on UN Inter-regional Crime Research Institute

Business Victimization Survey (cont. ) n Patterns of Victimization u 65% of firms in sample experienced criminal victimization in 2001 u 27% face theft on quarterly basis, 9% weekly u 22% experience fraud and 9% violent victimization on quarterly basis u 5% of firms paid extortionists, 8% paid for protection in 2001 (under-reporting)

Business Victimization Survey (cont. ) Sectoral patterns: t Tourism: 72% of hotels reported theft in 2001 t Agriculture: 81% of farms experienced theft t Financial services: 65% reported fraud n Size: small firms appear to be more vulnerable – barrier to entry for potential entrants? n

Business Victimization Survey (cont. ) n n Perceptions of Risk u 42% of managers perceived a risk of being murdered at the workplace u 66% perceived that their firms were likely to be robbed Coping Strategies u Protective measures; adjusting the organization of business activity to reduce opportunities for crime; and striking an accommodation with criminal networks

Business Victimization Survey (cont. ) n Coping Strategies (cont. ) u 37% of firms surveyed opted to close before dark, thereby reducing effective productive capacity and capital productivity u 20% would increase hours of operation if crime was lower; on average these firms would remain open an additional 3. 6 hours per days if located in safer area

Some key methodological issues in the measurement of the cost of crime n Estimate of cost of crime is lower bound u Value of human life is more than its contribution to the economy u Ignores value of property damaged or destroyed during violence u Static analysis, does not include: t impact on structure of economic activity t potential investment foregone

Some key methodological issues in the measurement of the cost of crime (cont. ) Static analysis, does not include (cont. ): t loss of potential future earnings of those murdered/disabled t high transactions cost of replacing skilled and experienced workers Value of stolen goods is considered social loss in our approach u n

Annual Economic Impact of Crime n Cost of crime as % of GDP: u Medical expenses on crime related injuries by government and individuals u Loss of output arising from death and injury u Public expenditure on security

Annual Economic Impact of Crime (cont. ) n Additional costs of crime: u Private expenditure on security u Direct business losses of firms e. g. extortion, fraud, theft and looting u Impact on investment, expansion, lifespan of firms

Cost of Crime as % of GDP, 2001 1. 2. 3. 4. Healthcare costs J$ 1. 3 bn (0. 4% of GDP) 1. Public health system J$ 996 mn 2. Private Citizens J$ 255 mn Lost Production J$ 0. 5 bn (0. 2% of GDP) 1. Mortality J$ 194 mn 2. Injury J$ 337 mn Public expenditure on security J$10. 5 bn (3. 1% of GDP) Total 1+2+3 J$12. 4 bn (3. 7% of GDP)

Additional Costs of Crime n Private expenditure on security, % of annual revenue: Micro firms (< J$5 mn revenue) Medium firms (J$10 -20 mn rev. ) V. large firms (> J$100 mn revenue) 17% 7. 6% 0. 7% Average 2%

Additional Costs of Crime (cont. ) n Extortion, fraud, robbery/burglary, arson u Micro firms/ firms rev. J$20 -50 mn = 9% of revenue u Other categories = less than or equal to 2% of revenue

Additional Costs of Crime (cont. ) Losses from looting (70 firms) 57% of firms <J$100, 000 19% of firms J$100, 000 -500, 000 4% of firms J$1 mn – 5 mn n Avg. losses due to temporary firm closures 2001 J$ 1 mn 2000 J$400, 000 n

Impact of Crime on Business Planning and Prospects 51% of firms stated that increased costs of security significantly impacted business practice n 39% of firms indicated that plans for business expansion were adversely affected n

Impact of Crime on Business Planning and Prospects (cont. ) 37% of firms reported that plans to invest in productivity improvement were negatively impacted n 6% of firms expected to close-down in the next three years (concentrated in sectors important in GDP), 19% uncertain of prospects, if current level of crime persisted n

Policy Options Ø Survey: only 12% of managers support increased corporate taxes to fund crime control, but are more supportive to provide financial support for specific collective solutions that directly affect them and over which there is some direct accountability

Policy Options (cont. ) Ø Identifying and measuring the crime problem Strengthen official data collection on crime Ø Conduct frequent victimization surveys Ø Improving law enforcement for crime deterrence Ø Upgrade investigative capacity of police Ø

Policy Options (cont. ) Ø Improving social and collective action Improve the quality of the school experience Ø Form effective partnerships between police, business and local communities Ø Build Social Capital Ø Applying focused interventions Ø Target high crime urban areas Ø Target youth at risk Ø