The High Cost of Crime in Central America
In Central America, the human costs of crime remain one of the highest in the world. El Salvador, Guatemala, and Honduras—referred to as the Northern Triangle— account for about four-and-a-half percent of homicides worldwide despite only having about one-half-percent of the world's population.
The economic costs are also high. In Honduras and El Salvador, for example, widespread criminal activity is costing these countries 16 percent of GDP, which includes 13 percent of GDP directly (such as business closures) and three percent of GDP indirectly (such as lack of job opportunities). And Guatemala might be losing seven percent of GDP from crime—six percent directly and one percent of GDP indirectly.
Because these economic losses are severe for Central America, which is facing widespread poverty and inequality, bringing down crime rates can pay off. Our latest research from a staff study finds that a one percent increase in output per capita implies about a one-half percent decline in crime, while a decrease of about five percent in crime leads to about one percent increase in output per capita.
Latinobarometro surveys show that crime and corruption surpass employment and other economic challenges (such as income inequality) as the most pressing issue in the Northern Triangle.
Drug trafficking, availability of firearms, and youth violence are often cited as reasons for these high crime levels. However, as Nobel Laureate Gary Becker suggested in 1968, criminals are rational individuals who compare the expected cost and benefit of committing crimes with those of legal activities.
Given widespread poverty and lack of economic opportunities, as well as perceived corruption, it is not surprising that criminal activity becomes a viable option for some, potentially explaining why crime is high in Northern Triangle countries.
How large are the estimated costs of crime (indirect and direct)?
Crime has direct and indirect costs. The direct costs include output (goods) and resources (time and wages of both victims and criminals) lost due to criminal activity, and resources spent on security costs—both public and private—that otherwise could have been used for productive purposes.
Indirectly, crime lowers economic activity as individuals internalize the harmful effects of crime. Examples of the indirect costs include lower investment and employment opportunities, higher outward migration, the erosion of institutions, and corruption. All these outcomes, in turn, exacerbate crime, generating a vicious cycle.
While direct crime costs can be measured (for example by number of business closures), quantifying indirect costs can be challenging, because it requires a hypothetical state of the economy in which crime is absent, but all other economic mechanisms are present.
Our latest research fills this gap of how to measure indirect costs. By investigating the behavior patterns and rationale of unemployed individuals who weigh the costs and benefits of entering the workforce versus becoming a criminal within a conceptual framework, we find that the indirect crime costs are large. The good news is that once crime levels decrease, indirect costs decline as well, leading to a positive “multiplier” effect from fighting crime.
In Honduras, we find that in 2016, the indirect costs of crime amount to 3 percent of GDP and the direct costs are about 13 percent of GDP. In El Salvador in 2015, the indirect costs are 7 percent and direct costs are 20 percent, and in Guatemala from 2015-2017 the indirect costs of crime amounted to 1 percent of GDP, with the direct costs at 6 percent of GDP. This means, that, for example for Honduras, on top of observed costs of violence, estimated at 13 percent of observed GDP, the level of GDP could have been additionally 3 percent higher if crime did not alter economic incentives.
If individuals can choose between productive and criminal activities, crime becomes an equilibrium feature of the economy rather than an exogenous characteristic of individuals: if criminal opportunities still exist, somebody would accept them dampening the benefits of lower crime on economic activity.
For a country like Honduras in 2016 with a homicide rate of about 60 per 100,000 individuals, a decrease of about 5¼ percent in crime via a better judicial system leads to only a one percent increase in output per capita. However, a one percent increase in output per capita driven by higher labor productivity implies a ½ percent decline in crime. Importantly, these positive effects are larger if the corresponding change is larger, due to presence of significant but unobserved indirect costs.
Taken together, a virtuous circle exists between better economic conditions and lower crime—with a stronger spillover effect from improvements in both the macroeconomy and security. Therefore, improving policing effectiveness and the criminal justice system is important—especially for high crime levels. Likewise, a combination of stable and inclusive growth, higher returns to legal activities (including better labor productivity and higher quality prevention interventions), together with lower barriers to entry and friendlier business regulations to generate job opportunities are also paramount to consistently lower crime over time.