24.4.19

The costs of crime

The Scandinavian Journal of Economics has published a work of mine in which I evaluate the costs of the crime. They are huge.

I have analyzed  a sample of 94 countries for the year 2005, the value of the indexof business costs of crime relative to the United States ranks from 0.70(Iceland) to 4.79 (Venezuela); its average is 1.40, the standard deviation is 0.78, the average of the first decile is 0.73, and the average of the lastdecile is 3.21.

According to my estimations:

1) In the United States, US GDP per worker is 82.5 percent of the GDP per worker in the economy without predation, and US consumption per worker is 81.4 percent. Therefore, according to the model, the US welfare costs of crime represent a loss of 18.6 percent of consumption per worker and GDP per worker is reduced by 17.5 percent.

2) For a country in the average of the sample (i.e., with the value of the index at 1.40) predation reduces consumption per worker and GDP per worker by 25.1 and 23.8 percent, respectively. For a country in the average value of the last decile, consumption per worker and GDP worker are reduced by 57.8 percent and 55.9 percent, respectively

3) In the United States,78.6 percent of the reduction in long-run consumption per worker caused by an increase in predation is due to waste of resources, while 21.4 percent are deadweight losses. For a country in the sample average of the distribution of the index of business costs of crime, these percentages are 75.5 and 24.5 percent. However, for a country in the average of the last decile, these percentages are reversed as 21.5 and 78.5 percent.

I built a quality index of formal institutions securing property rights in each country using the following variables: judicial independence, impartial courts, protection of property rights, military interference in the rule of law and political process, integrity of the legal system, legal enforcement of contracts, regulatory restrictions on the sale of real property, and reliability of the police. The arithmetic average of these eight variables is calculated.

The resulting index relative to the United States is used as a proxy of quality of formal institutions securing property rights in each country. It ranks from 1.18 (Finland) to 0.37 (Burundi); its average is 0.81, the standard deviation is 0.21, the average of the first decile is 1.15, and the average of the last decile is 0.47.

The results of my simulations show that improving the quality of formal institutions securing property rights can have a large positive impact on the productivity of countries at the bottom of the distribution.

Therefore, the improvement of the quality of formal institutions securing propertyrights could be a successful development policy strongly enhancing productivity by reducing predatory activities.

In particular:

4) If the institutional quality index increases by one standard deviation, then, for a country with a value of the index equal to the average value of the last decile of its distribution, the ratio of business costs of predation to GDP decreases by 36 percent, while its GDP per worker increases by 23 percent TFP increases by 12 percent and the ratio of capital to GDP increases by 6 percent

5) Therefore, most of the increase in GDP per worker is due to the increaseof TFP, not to the increase in the ratio of capital to GDP.