Impact of Crime on Business and the Investment Climate

in Jamaica

January 22, 2004

Overview of Presentation

Motivation for studyMotivation for study Business victimization surveyBusiness victimization survey Quantifying economic costs of crimeQuantifying economic costs of crime Policy optionsPolicy options

Why Estimate the Impact of Crime?

Most frequent issue in business and Most frequent issue in business and individual discourseindividual discourse

Third highest homicide rate in world (33 Third highest homicide rate in world (33 per 100,000)per 100,000)

Negative impact on investment climate:Negative impact on investment climate: Security costs, diverts investment, less Security costs, diverts investment, less

than optimal operating strategythan optimal operating strategy Losses from looting, arson, theft, Losses from looting, arson, theft,

extortion and fraudextortion and fraud

Why Estimate the Impact of Crime? (cont.)

Negative impact on investment climate Negative impact on investment climate (cont.):(cont.): loss of output (nightshifts, workdays lost)loss of output (nightshifts, workdays lost) loss of output from injury/murder of labor loss of output from injury/murder of labor shut-down or relocation of firmsshut-down or relocation of firms

Also, erodes development of human and Also, erodes development of human and social capital, and diverts public resources social capital, and diverts public resources away from productive usesaway from productive uses

High Crime– a Drag on Development

Jamaica' International Ranking, Selected Governance Indicators 2002/2003, Average Rank (80 countries) =100

0

50

100

150

200

Bureaucracy Quality Law and Order Crime Costs Infrastructure

Jamaica Dominican Republic Trinidad & Tobago U.S.

Selected Dimensions of Crime

Young males (14-24 yrs) most likely Young males (14-24 yrs) most likely victims as well as perpetrators of violent victims as well as perpetrators of violent crimecrime In 2001, of those arrested for major In 2001, of those arrested for major

crimes, 98% were males, and 53% were crimes, 98% were males, and 53% were 16-25 years old16-25 years old

Parish of Kingston and St. Andrew Parish of Kingston and St. Andrew accounted for 57% of total murders over accounted for 57% of total murders over 1984-2001, yet formed only 27% of total 1984-2001, yet formed only 27% of total population population

Selected Dimensions of Crime (cont.) High and increasing level of homicides, High and increasing level of homicides,

especially over 1990s, driven by increasing especially over 1990s, driven by increasing drug trans-shipment and distribution of drug trans-shipment and distribution of drugs, leading to “gang wars”drugs, leading to “gang wars”

Contrasting evolution with NY of murder Contrasting evolution with NY of murder rate (per 100,000)rate (per 100,000)

JamaicaJamaica NYNY RatioRatio

19701970 8.28.2 7.97.9 1.01.0

20002000 33.733.7 5.05.0 6.76.7

Estimating the Impact of Crime

Approach:Approach: Business Victimization Survey of 400 Business Victimization Survey of 400

firmsfirms Quantifying the economic costs of crimeQuantifying the economic costs of crime Econometric analysis (determinants of Econometric analysis (determinants of

crime)crime) Case studies of firmsCase studies of firms

Business Victimization Survey

Methodology:Methodology: Face-to-face interviews with 400 Face-to-face interviews with 400

Jamaican firms (2002)Jamaican firms (2002) Firms chosen by economic activity (12 Firms chosen by economic activity (12

types) and size, based on quota sampletypes) and size, based on quota sample Survival bias in sampleSurvival bias in sample 92 items in questionnaire, some based on 92 items in questionnaire, some based on

UN Inter-regional Crime Research UN Inter-regional Crime Research InstituteInstitute

Business Victimization Survey (cont.)

Patterns of VictimizationPatterns of Victimization 65% of firms in sample experienced 65% of firms in sample experienced

criminal victimization in 2001criminal victimization in 2001 27% face theft on quarterly basis, 9% 27% face theft on quarterly basis, 9%

weeklyweekly 22% experience fraud and 9% violent 22% experience fraud and 9% violent

victimization on quarterly basisvictimization on quarterly basis 5% of firms paid extortionists, 8% paid 5% of firms paid extortionists, 8% paid

for protection in 2001 (under-reporting)for protection in 2001 (under-reporting)

Business Victimization Survey (cont.)

Sectoral patterns: Sectoral patterns: Tourism: 72% of hotels reported theft Tourism: 72% of hotels reported theft

in 2001in 2001Agriculture: 81% of farms Agriculture: 81% of farms

experienced theftexperienced theftFinancial services: 65% reported fraudFinancial services: 65% reported fraud

Size: small firms appear to be more Size: small firms appear to be more vulnerable – barrier to entry for potential vulnerable – barrier to entry for potential entrants? entrants?

Business Victimization Survey (cont.)

Perceptions of RiskPerceptions of Risk 42% of managers perceived a risk of 42% of managers perceived a risk of

being murdered at the workplacebeing murdered at the workplace 66% perceived that their firms were likely 66% perceived that their firms were likely

to be robbed to be robbed Coping StrategiesCoping Strategies

Protective measures; adjusting the Protective measures; adjusting the organization of business activity to reduce organization of business activity to reduce opportunities for crime; and striking an opportunities for crime; and striking an accommodation with criminal networksaccommodation with criminal networks

Business Victimization Survey (cont.)

Coping Strategies (cont.)Coping Strategies (cont.) 37% of firms surveyed opted to close 37% of firms surveyed opted to close

before dark, thereby reducing effective before dark, thereby reducing effective productive capacity and capital productive capacity and capital productivityproductivity

20% would increase hours of operation if 20% would increase hours of operation if crime was lower; on average these firms crime was lower; on average these firms would remain open an additional 3.6 would remain open an additional 3.6 hours per days if located in safer areahours per days if located in safer area

Some key methodological issues in the measurement of the cost of crime

Estimate of cost of crime is lower boundEstimate of cost of crime is lower bound Value of human life is more than its Value of human life is more than its

contribution to the economycontribution to the economy Ignores value of property damaged or Ignores value of property damaged or

destroyed during violencedestroyed during violence Static analysis, does not include:Static analysis, does not include:

impact on structure of economic activityimpact on structure of economic activity potential investment foregonepotential investment foregone

Some key methodological issues in the measurement of the cost of crime (cont.)

Static analysis, does not include (cont.):Static analysis, does not include (cont.): loss of potential future earnings of loss of potential future earnings of

those murdered/disabledthose murdered/disabled high transactions cost of replacing high transactions cost of replacing

skilled and experienced workersskilled and experienced workers Value of stolen goods is considered social Value of stolen goods is considered social

loss in our approachloss in our approach

Annual Economic Impact of Crime

Cost of crime as % of GDP:Cost of crime as % of GDP: Medical expenses on crime related Medical expenses on crime related

injuries by government and individualsinjuries by government and individuals Loss of output arising from death and Loss of output arising from death and

injuryinjury Public expenditure on securityPublic expenditure on security

Annual Economic Impact of Crime (cont.)

Additional costs of crime:Additional costs of crime: Private expenditure on securityPrivate expenditure on security Direct business losses of firms e.g. Direct business losses of firms e.g.

extortion, fraud, theft and lootingextortion, fraud, theft and looting Impact on investment, expansion, life-Impact on investment, expansion, life-

span of firmsspan of firms

Cost of Crime as % of GDP, 2001

1.1. Healthcare costsHealthcare costs J$ 1.3bn (0.4% of GDP)J$ 1.3bn (0.4% of GDP)1.1. Public health systemPublic health system J$ 996mnJ$ 996mn2.2. Private CitizensPrivate Citizens J$ 255mnJ$ 255mn

2.2. Lost ProductionLost Production J$ 0.5bn (0.2% of GDP)J$ 0.5bn (0.2% of GDP)1.1. MortalityMortality J$ 194mnJ$ 194mn2.2. InjuryInjury J$ 337mnJ$ 337mn

3.3. Public expenditurePublic expenditure on securityon security J$10.5bn (3.1% of GDP)J$10.5bn (3.1% of GDP)4.4. Total 1+2+3Total 1+2+3 J$12.4bn (3.7% of J$12.4bn (3.7% of

GDP)GDP)

Additional Costs of Crime

Private expenditure on security, % of annual Private expenditure on security, % of annual revenue:revenue:

Micro firms (< J$5mn revenue)Micro firms (< J$5mn revenue) 17%17%Medium firms (J$10-20mn rev.)Medium firms (J$10-20mn rev.) 7.6%7.6%V.large firms (> J$100mn revenue)V.large firms (> J$100mn revenue) 0.7%0.7%

AverageAverage 2%2%

Additional Costs of Crime (cont.)

Extortion, fraud, robbery/burglary, arsonExtortion, fraud, robbery/burglary, arson Micro firms/ firms rev. J$20-50mn = Micro firms/ firms rev. J$20-50mn =

9% of revenue9% of revenue Other categories = less than or equal to Other categories = less than or equal to

2% of revenue2% of revenue

Additional Costs of Crime (cont.)

Losses from looting (70 firms)Losses from looting (70 firms)

57% of firms57% of firms <J$100,000<J$100,000

19% of firms19% of firms J$100,000-500,000J$100,000-500,000

4% of firms4% of firms J$1mn – 5mnJ$1mn – 5mn Avg. losses due to temporary firm closuresAvg. losses due to temporary firm closures

20012001 J$ 1 mnJ$ 1 mn

20002000 J$400,000J$400,000

Impact of Crime on Business Planning and Prospects

51% of firms stated that increased costs of 51% of firms stated that increased costs of security significantly impacted business security significantly impacted business practicepractice

39% of firms indicated that plans for 39% of firms indicated that plans for business expansion were adversely affectedbusiness expansion were adversely affected

Impact of Crime on Business Planning and Prospects (cont.)

37% of firms reported that plans to invest in 37% of firms reported that plans to invest in productivity improvement were negatively productivity improvement were negatively impactedimpacted

6% of firms expected to close-down in the 6% of firms expected to close-down in the next three years (concentrated in sectors next three years (concentrated in sectors important in GDP), 19% uncertain of important in GDP), 19% uncertain of prospects, if current level of crime persistedprospects, if current level of crime persisted

Policy Options

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.)

Identifying and measuring the crime problem Strengthen official data collection on crime Conduct frequent victimization surveys

Improving law enforcement for crime deterrence Upgrade investigative capacity of police

Policy Options (cont.)

Improving social and collective action Improve the quality of the school experience Form effective partnerships between police,

business and local communities Build Social Capital

Applying focused interventions Target high crime urban areas Target youth at risk