THE ECONOMICS OF CRIME: a discipline to be invented?
Antonio Maria Costa served an unprecedented two terms as director general of the United Nations Office in Vienna and executive director of the United Nations Office of Drugs and Crime. Here he proposes a Nobel Prize for the best understanding of the economics of organised crime, including the role of drugs, and gives an authoritative overview
This article appears in the June/July issue of Intervene magazine.
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Say‚Äôs law, or the ‚Äėlaw of markets‚Äô, is an economic rule that production/supply is the source of demand. Drugs are a variation on the law of markets.
Some areas of crime are understood, such as the illicit markets of controlled substances like opium and its derivatives (heroin and morphine), cocaine, amphetamine-type stimulants (like ecstasy, meta-amphetamines) and marijuana.¬† About these markets there is a lot of information ‚Äď data pixels that provide a clear picture of all aspects of the drugs economy, as illustrated by UNODC‚Äôs annual World Drug Report.
We have numbers for the law of supply: about 850 tons of cocaine from the Andean countries, 550 tons of heroin from Afghanistan, about 600 tons of synthetic drugs and 40,000 tons of cannabis. These numbers ‚Äď at least for coca and opium ‚Äď are robust, based on data gathered by on-the-spot surveyors and backed up by satellite images. The numbers are crunched by UNODC analysts who measure the hectares under cultivation, the yield, potential production, prices, the number of households involved, and what the crop is worth as a percentage of countries‚Äô GDP.
We have numbers for the law of demand. It is measured by household surveys, and based on per capita consumption. About 200million people use drugs once a year, and about 25million are ‚Äúproblem‚ÄĚ drug users, people who are dependent on drugs.
In between are the traffickers, making about $300billion a year. We identify trends in trafficking by the amounts of drugs seized in combination with changes in drug prices and purities. We can also identify main trafficking routes, and volumes.
So, on the whole, drugs like other commodities follow the law of markets.
The one anomaly of Say‚Äôs Law is the recent boom in opium cultivation in Afghanistan. In the past five years, there has been so much production in that country that there is now an oversupply of some 12,000 tons ‚Äď enough to satisfy 2.5 years of global demand. Prices have fallen by about 20% a year but have not crashed. But growing supply has not created higher demand: opium and heroin (narcotics) are becoming less attractive on world markets, replaced by psychoactive substances such as ATS and cocaine.
Say‚Äôs law states that the production of goods creates its own demand. In 1803 (pp138-139), John Baptiste Say explained his theory as follows…
‚ÄúIt is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value.‚ÄĚ
This view suggests that the key to economic growth is not increasing demand, but increasing production.
Say‚Äôs views were expanded on by classical economists, such as James Mill and David Ricardo. John Maynard Keynes summarised Say‚Äôs law in his 1936 General Theory of Money:
‚ÄúFrom the time of Say and Ricardo, the classical economists have taught that supply creates its own demand…‚ÄĚ
The impact of illicit substances in our society is two-fold:¬† on drug addiction and thus an impact on health, and on drug trafficking with a consequent impact on crime. Opposing views have been expressed on how to contain these two markets, and corresponding economic principles. Some people dream a world free of drugs, and provide a simplistic model: eliminate the world‚Äôs supply of drugs and you solve the problem of addiction. In a similar vein, others with an equally simplistic view, dream of a world of free drugs, and say legalise drugs and you get rid of the criminal market. These two superficially seductive arguments are equally faulty.
Drug markets are not only perverse and criminal: they are, like all others, also imperfect. The equilibrium between aggregate supply of drugs and aggregate demand is perturbed by the totally inelastic behaviour of addicts. Even if, by some miracle, you eliminated the world‚Äôs entire supply of drugs, and intercepted all drugs being trafficked, there would still be at least 25million peoples suffering from addiction. That is why drug control depends first and foremost on reducing demand for drugs.
This is an economic argument, but is predominantly a health issue.¬† Addicts should be sent to treatment not to jail, and there should be more investment in prevention and treatment, not only law enforcement. Law enforcement would benefit from greater involvement by the economic profession in crime research. This is because current responses ‚Äď based on police activity meant to identify, seize and hold suspects ‚Äď are proving ineffective: criminals locked up in prison or physically suppressed are rapidly replaced by new recruits. The fight against transnational organised crime should instead be focussed on disrupting markets and illicit flows ‚Äď and to do so, knowledge of their size, nature and evolution is paramount.
DATA AND ORGANISED CRIME
Organised crime is a threat of macro-economic size and strategic impact. We face a growing threat from crime, which in the past quarter-century has become organised and transnational.¬† It has reached macro-economic dimensions. It has become one of the biggest winners of globalisation, taking advantage of open borders, competitive markets, ease of travel and communication, and growing economic integration.¬† It has penetrated economic entities and governments.
Criminals are the first-movers where there are opportunities to exploit. Crime has diversified from trafficking of drugs, people, arms or piracy into money-laundering, identity-theft, cybercrime and terrorism. In the process, it has become a major threat to international peace and security.
Criminals are faster to adapt than the international community‚Äôs ability to respond. There is a United Nations Convention against Transnational Organised Crime, agreed on in Vienna in 2000, a global legal instrument that entered into force in 2003. There is Interpol, regional intelligence-sharing centres, and national crime-fighting agencies. But we are chasing shadows:¬† we do not really know what we are talking about.
One of the biggest problems is lack of information and analysis on which to base policy. In 2009, work started at UNODC to fill the knowledge gap, following concerns expressed by the UN Security Council, the G8, and other international organisations about the threat posed by transnational organised crime, and the need to counteract it. Producing a first report, The Globalization of Crime, was a challenge but started to document the enormous power and global reach of international mafias and show the extent to which illicit flows affect the entire world.
Today, the criminal market spans the planet: illicit goods are sourced from one continent, trafficked across another, and marketed in a third.¬† Criminals use weapons and violence, but also money and bribes to buy elections, politicians and power ‚Äď even the military.
The main findings of The Globalization of Crime are overwhelming. They include the following…
>>¬† There are an estimated 140,000 victims of human trafficking for the purposes of sexual exploitation in Europe alone, generating a gross annual income of $3billion for their exploiters.
>>¬† Europe is the highest-value regional heroin market (US$20billion), while Russia is the single largest national heroin consumer in the world (70 tons). Narcotics kill 30,000-40,000 young Russians per year, twice the number of Red Army soldiers killed in the invasion of Afghanistan in the 1980s.
>>¬† The North American cocaine market is shrinking, because of lower demand and greater law enforcement. This has generated a turf war among trafficking gangs, particularly in Mexico, and new drug routes. Along the entire Atlantic coast of Latin America cocaine is trans-shipped into Europe via Africa.¬† Under attack, some West African nations risk failing.
>>¬† The countries that grow most of the world‚Äôs illicit drugs, like Afghanistan (opium) and Colombia (coca), receive the most attention and criticism. But most drug profits are made in the rich destination countries. For example, out of a global market of perhaps $55billion for Afghan heroin, only about 5% ($2.3 billion) accrues to Afghan farmers, traders and insurgents. Of the $72billion cocaine market in North America and Europe, about 70% of the profits are made by mid-level dealers in the consumer countries, not in the Andean region.
>> The global market for illicit fire-arms is estimated at US$170-320million per year.
>> The number of counterfeit goods detected at the European border has gone up 10-fold over the past decade, for a yearly value of over US$10billion. Half of medications tested in Africa and South East Asia are counterfeit and substandard.
>> Of the more than $100million annual income generated by ransom, only a quarter goes to the pirates, the rest to organised crime.
>> Over 1.5million people a year suffer identity theft estimated at $1billion, while cybercrime is endangering the security of nations.
ECONOMICS: THE KEY TO UNLOCKING CRIME
Unlike terrorists or insurgents, criminals don‚Äôt have a political agenda. They are out to make money, either moving illicit goods to market or using unlawful means to acquire and traffic licit commodities. Risk is low where there is little chance of being caught ‚Äď in other words, where the rule of law is weak. That‚Äôs why illicit activity often originates or transits areas of instability, like conflict zones or some of the poorer parts of the planet.
When crime takes root in vulnerable regions, it has a devastating economic impact. For example, the value of cocaine flowing through some West African countries is equivalent to twice their annual GDP. This is the wrong kind of FDI, foreign direct investment. It deepens vulnerability, causing the flight of foreign and human capital. Isaac Ehrlich‚Äôs work has demonstrated the damaging effects that this has on societies. The big winners are those at the top of the pyramid, including senior officials in the government, police and military. This undermines the rule of law, deepens corruption, and creates political instability.
Let‚Äôs be frank. This is also happening in developed countries. If we estimate that organised crime generates over $300billion a year ‚Äď making it the 21st biggest economy in the world, after Sweden ‚Äď that‚Äôs a lot of money to be laundered. Some of it goes through rogue jurisdictions and uncontrolled economic sectors, although the G20 is cracking down. But a lot also goes into the global economy. To cut them, we need to better understand these flows ‚Äď into real estate, tourism, entertainment and gambling facilities — as well as informal money flows like the hawala system.
A laissez-faire system cannot work if the invisible hand of the market is manipulated by the invisible, certainly bloody hand of organised crime. Markets and governments will fail if this dangerous externality is left unchecked.
We must also delve into the role of the private sector, putting emphasis on areas where the business world and the underworld come into contact. Data is crucial, and for that we need governments to help.
Current law enforcement-based approach is producing limited results. The breaking-up of criminal groups per se does not work, as those arrested or physically disposed of, are immediately replaced:¬† law enforcement against mafia groups will not stop illicit activities if the related markets and illicit flows remain unaddressed, including the army of white-collar criminals ‚Äď lawyers, accountants, realtors and bankers ‚Äď who cover them up and launder their proceeds. The greed of white collar professionals is driving black markets, as much as that of crime syndicates. And when states fail to deliver public services and security, criminals fill the vacuum.
So to those brainy colleagues in the academic profession who will apply their inspiration and perspiration to the noble cause of finding the appropriate definitions, the conceptual model, the logical framework and the suitable system of accounts to understand and quantify the economics of (organised) crime, I propose the best of such research for the next Nobel award in Economics.
Antonio Maria Costa‚Äôs book, The Checkmate Pendulum, is due to be published and will be available from Amazon. It will address “the links between crime, politics, and finance, in Europe and beyond… I have in mind a few financial tycoons, a few political leaders”.