The high cost of crime

By Camilo Thame Business Co-ordinator

Wednesday, August 29, 2012    

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Lottery scam inflows may be Jamaica's third largest foreign exchange earner. Income from defrauding persons overseas only follows remittances and tourism earnings, if estimates of US$300 million a year are true.

The fraudulent activity was listed among the highest threats to Jamaica in the national security policy published by the Cabinet for public comment last Friday.

But the cost of crime and corruption, which includes higher cost of doing business, capital flight and loss of foreign investment, could have wiped out as much as 90 per cent of what the economy could have been today.

"The economy is now, at best, one-third of the size it should have been," said the report prepared by University of the West Indies Professor Anthony Clayton. "It may have shrivelled to just 10 per cent of the size that it should have been."

In calculating the impact of crime in Jamaica, economists have attempted to isolate the cost centres.

In 2003, UWI Professor Al Francis (and others) estimated that health costs associated with crime were 0.4 per cent of GDP, lost production was 0.2 per cent, and expenditure on security was 3.1 per cent, giving a total of 3.7 per cent of GDP.

"The allowance for security included defence, justice, correctional services and the police," said the report of Francis's estimate. "This is, of course, an over-estimate, as expenditure on security would not be zero even if Jamaica had a low crime rate."

On the other hand, that estimate didn't include non-monetary costs, such as long-term social damage caused by the cycle of violence, where children who are profoundly traumatised by violence are more likely to be violent as adults.

It also excluded indirect impacts of crime on businesses, which include undeclared losses to extortion, higher spending on security, and reduced access to borrowing, more expensive insurance and more costly capital, resulting from higher risk.

The UN and the World Bank went further in 2007, when they used regression analysis to suggest that Jamaica's economic growth rate would increase by 5.4 per cent a year if the homicide rate could be brought down to that of Costa Rica.

At the time, Jamaica's murder rate was 33.8 persons per 100,000 compared to Costa Rica's 8.1, according to the report - Crime, Violence, and Development: Trends, Costs, and Policy Options in the Caribbean. Since then, Jamaica's homicide rate climbed to over 60 killings per 100,000 persons.

In 2009, the Violence Prevention Alliance Jamaica estimated that productivity losses due to interpersonal violence related injuries accounted for approximately four per cent of Jamaica's GDP.

Adding the various costs suggests the cost of crime could be as high as 7.1 per cent of GDP

"The inflection point in 1972-73 marked the beginning of the country's decline," wrote Clayton in the security policy report, adding that the accumulated cost of crime over the past four decades could range from US$8.7 billion to US$16.7 billion.

"For comparison, Jamaica's public debt at December 2011 was US$18.7 billion, so the accumulated losses due to crime (at 7.1 per cent of GDP) would equal 89 per cent of that debt," said the report.

There are other ways to measure the impact of crime.

The report suggested that projecting forward from the rate of growth before Jamaica's descent into violence could provide an estimate for economic loss due to crime.

"If Jamaica had not lapsed into violence in the early 1970s, and the growth rate of the 1960s had continued, then today the economy would be almost 10 times larger than it is now," wrote Clayton.

Jamaica's tier one security threat, or issues which present clear and present danger to the country, include transnational organised crime, such as drug trafficking and money laundering, gang violence and corruption of officials.

Most recently, lottery scamming has gotten widespread media attention, with the country's largest remittance company - Western Union -- closing down more than 10 agent locations to conduct thorough systems reviews. It implemented tighter control measures on money transfers sent to and from locations in St James, including setting a stricter, US$400 transaction limit, after reopening a number of those locations.

Yesterday, Western Union said it was working on reopening the rest in the coming weeks. It listed ways that its customers could avoid money wiring scams, including never sending money to pay for taxes or fees on lottery or prize winnings.

The report recommends that targeting profit from crime and reforming the justice system were some of the things needed to be done in order to remove these threats.

"Criminals are not in the business of trafficking narcotics or weapons, or any other form of criminal activity," said the report. "They are in the business of making money."

The new policy being proposed is calling for a shift in focus from "street-level criminals to the bosses who enjoy and control the profits, and the people who handle the money".

To do this special task force aimed at targeting fraudsters and money-launderers would have to be established, along with a special court to prosecute them in, and deepened financial investigation, among other things.

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