On the cost side, high levels of conventional crime, just as high levels of corruption, add to the immediate costs of doing business in a country. In one of its latest World Development Report, the World Bank sums up its evolving thoughts on the issue: ‘crime...increases the cost of business, whether through direct loss of goods or the costs of taking precautions such as hiring security guards, building fences, or installing burglar alarm systems. In the extreme, foreign firms will decline to invest, and domestic ones will flee the country for a more peaceful locale’ (World Bank 2005).
In the business executives opinion surveys of the World Economic Forum respondents are specifically asked to identify the most important obstacles to doing business in their country. Business executives in many countries list corruption and/or crime and violence as the most or second most important impediments to doing business in their countries (WEF 2003). This is often the case in countries with comparatively high scores on our index for organized crime prevalence. These opinions of business leaders working in high crime countries confirm the negative impact of organized crime on investments. In recent Investment Climate Surveys, 15% of business executives reported that crime was a major constraint on investment (29% of African executives gave this response; Brunetti et al. 1997). In some instances rampant organized crime may also deter foreign tourists from visiting the country. Security concerns are known to be among the most important considerations for selecting holiday destinations (World Tourism Organization 1997).
In Mafia-infested countries the costs of crime may go far beyond company losses to ‘criminal leakage’ and ‘loss of customers’. In an important revision of the good governance theory, Kaufmann and Kraay (2002) have attributed the negative influence of high-level corruption on development to the intermediary factor of ‘cronyism’, the widespread interference of particular interest groups in rational decision-making in the economic domain.Footnote 8 Infiltration in the legitimate economy and political process is, as discussed, a defining characteristic of Mafia-type organizations. If such ‘crony capitalism’ is indeed the main impediment of economic development, organized crime, as an especially entrenched type of ‘cronyism’, may well be at the heart of the governance-related economic problems of many countries. The Sicilian economy, for example, seems to have been seriously hampered by the reign of the Mafia and started to prosper only after the local Mafia bosses were put on the defensive through the maxi-trials and community mobilization (Orlando 2001).Footnote 9 The experience with racketeering in New York also points to economic revitalization after the defeat of mob-related racketeering in several sectors of the local economy (Giuliani 2002).
Although organized crime groups are likely to be part of the problem of crony-capitalism, the overall impact of their criminal activities on the economy may not always be only negative. The production and trafficking of illicit commodities can result in considerable profits that are reinvested in the formal and informal economy of countries. Australian criminologist John Walker has estimated the total value of illicit drugs at wholesale value at $94 billion (World Drug Report 2005). This is the equivalent of the export values of the agricultural commodities meat and cereals combined. At retail level the total value of illicit drugs is estimated at $322 billion. Countries dominating the production and/or trafficking of illicit drugs will obviously benefit economically from their activities on these markets to some extent.
Narco dollars generated by the cocaine trade in the Americas are indeed known to have given a significant boost to national economies in Latin America in the 1990s. The total value of illicit drugs trafficking, annually injected into the Mexican economy in those years, has been estimated at over $25 billion, or 6% of the country’s GDP (Gonzalez-Ruiz 2001). In Tajikistan heroin trafficking revenues have been estimated as equivalent to 50% of recorded GDP (Reuter et al. 2004). More recently, estimated revenues from drugs in Afghanistan vary from 30% to as much as 60% of GDP. There can be no doubt that the heroin trade has fueled the Afghan economy as well as the economies of several transit countries since the defeat of the Taliban (UNODC, World Drug Report 2004). It is also widely assumed that countries with offshore centers specializing in money-laundering facilitation reap significant benefits of such illicit financial services.
To empirically explore whether orgnanised crime hampers or spurs economic growth, the correlations between the composite measure of organized crime prevalence and indicators of economic development were analysed. The index for organized crime prevalence was found to have a moderately strong negative correlation to the Human Development Index (r = 0.49). The negative relationship between organized crime prevalence and GDP per 100,000 population was even stronger (r = 0.76). Figure 4 shows results in the form of a scatter plot.
The results depicted in Fig. 4 lend empirical support to the hypothesis that on balance organized crime is bad for the economy. In the case of cultivation, production or trafficking in illicit drugs organized crime may generate sizeable illegal profits but its prominence deters investment and impairs the capacity of governments to promote sustainable economic growth. Countries where organized crime groups are insufficiently reigned in, are economically in dire straits.
The fairly strong inverse correlation between organized crime and collective wealth merits further examination. As discussed above there are good reasons to assume that the inverse relationship between organized crime and wealth is mediated by governance factors such as police performance, the rule of law and corruption at the political level. In our view organized crime is negatively related to police performance and the rule of law and positively related to grand corruption. Effective policing and adherence to the rule of law at their turn contribute to sustainable economic development. Organized crime, then, will reduce economic development through its negative impact on policing and on the maintenance of the rule of law and through its positive impact upon corrupt practices at the highest level of government. Unclear seem the possible direct effects of organized crime on the economy. Although the inversed correlation between organized crime prevalence and economic wealth is strong, there are, as Fig. 4 shows, several outliers. The scatter plot shows that some countries with very high levels of organized crime nevertheless enjoy reasonably high levels of wealth (they are in the middle range for GDP rather than near the expected bottom end). This category of economically ‘overperforming’ high-crime countries includes Mexico, Russia, Venezuela, Colombia and Guatemala. Their relative wealth in spite of rampant organized crime/corruption might point to the positive direct effects of organized crime through crime-related economic injections. Although none of these countries enjoy the stably high GDP levels of the OECD countries, they might perhaps have been even poorer without their criminally acquired riches.
To explore the crimino-economic dynamics outlined above, we have first carried out a multiple regression analysis with GDP per capita as dependent variable. As independent variables we used country scores on the Organized Crime Perception Index, an index for grand corruption, developed by Buscaglia and Van Dijk (2003), the Rule of Law Index of the World Bank Institute and our index for Police Performance. The four independent variables combined explained 74% of the variance in GDP scores of countries. Table 2 shows results.
The strongest negative relationship was that between corruption and GDP (beta = −0.551). The rule of law indicator showed a positive correlation, independently of corruption (r = 0.363). Police performance also contributes, independently of the other factors, to wealth. Somewhat surprisingly for a variable with a strong negative correlation with GDP in a simple, two-dimensional model, organized crime was positively related to GDP, after controlling for the effects of corruption and rule of law (beta = +0.256).
Table 2 Results of a stepwise multiple regression analysis with GDPpc as dependent variable (low–high)
One theoretically plausible model to explain these results assumes that organized crime leads to both lesser rule of law and weaker policing and to more corruption which all three lead to lower wealth. These indirect effects may fully explain the negative relationship between organized crime and wealth. The direct effect of organized crime on wealth, after controlling for the indirect effects, may disappear or even turn positive, as suggested by the outcome of the regression analysis.
In our final analysis, we looked at the independent effect of organized crime, rule of law, and corruption on wealth in a causal model representing the mechanisms just described. In this final analysis we used the Composite Organized Crime Index for organized crime, the corruption index of Transparency International for corruption and the Rule of Law Index of the World Bank.Footnote 10 The model explains 65% of the total variance in the level of wealth and can thus be considered as fairly strong. In the model the negative relationship between organized crime and wealth does once again changed into a positive relationship in a multivariate analysis, controlling for the strong indirect, negative effects through rule of law and corruption. Figure 5 shows the results.
Although the precise values found in this analysis should not be taken at face valueFootnote 11—replication studies (using other indicators) may result in slightly different outcomes—the results fully confirm the assumed dual impact of organized crime on the economy. On one hand organized crime goes together with compromised state institutions and rampant grand corruption. These factors hamper economic growth. On the other hand organized crime may bring in considerable profits from criminal activities which by itself may give a boost to the economy. This result should not lead to the conclusion that up to a certain point organized crime can be beneficial for national economies. The overall net effect of organized crime on the economy through the paths of weakened governance and rampant corruption, is strongly negative (see Fig. 4 above).
The finding that on balance significant revenues from drugs trafficking or other forms of lucrative crime slow down rather than strengthen economic growth may seem paradoxical or surprising on first sight. But this phenomenon is actually just another example of what development economists have called the ‘resource curse’ (McMillan 2005). As mentioned above, developing countries that are rich in natural resources such as oil or diamonds often experience reduced rather than enhanced economic growth. This is because their institutions are undermined by rampant corruption at the highest level of government. Some of the main drugs exporting countries seem to suffer from exactly the same predicament. In such countries drugs generate by far the most profitable opportunities for ‘rent seeking’ by corrupt officials (Reuter et al. 2004). While corrupt elites accumulate great personal wealth, their countries remain underdeveloped and poor.