The Caribbean Country Management Team

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					Impact of Crime on Business
 and the Investment Climate
         in Jamaica

      January 22, 2004
      Overview of Presentation

 Motivation  for study
 Business victimization survey
 Quantifying economic costs of crime
 Policy options
    Why Estimate the Impact of Crime?

 Most frequent issue in business and
  individual discourse
 Third highest homicide rate in world (33 per
 Negative impact on investment climate:
    Security costs, diverts investment, less
     than optimal operating strategy
    Losses from looting, arson, theft,
     extortion and fraud
    Why Estimate the Impact of Crime?
 Negative impact on investment climate
    loss of output (nightshifts, workdays lost)

    loss of output from injury/murder of labor

    shut-down or relocation of firms

 Also, erodes development of human and
  social capital, and diverts public resources
  away from productive uses
         High Crime– a Drag on Development
        Jamaica' International Ranking, Selected Governance
       Indicators 2002/2003, Average Rank (80 countries) =100




      Bureaucracy Quality Law and Order     Crime Costs     Infrastructure

             Jamaica   Dominican Republic   Trinidad & Tobago   U.S.
     Selected Dimensions of Crime
 Young males (14-24 yrs) most likely
  victims as well as perpetrators of violent
    In 2001, of those arrested for major
     crimes, 98% were males, and 53% were
     16-25 years old
 Parish of Kingston and St. Andrew
  accounted for 57% of total murders over
  1984-2001, yet formed only 27% of total
    Selected Dimensions of Crime (cont.)
 High and increasing level of homicides,
  especially over 1990s, driven by increasing
  drug trans-shipment and distribution of
  drugs, leading to “gang wars”
 Contrasting evolution with NY of murder
  rate (per 100,000)
                 Jamaica NY            Ratio
   1970          8.2        7.9        1.0
   2000          33.7       5.0        6.7
       Estimating the Impact of Crime
   Approach:
     Business Victimization Survey of 400

     Quantifying the economic costs of crime

     Econometric analysis (determinants of
     Case studies of firms
       Business Victimization Survey
   Methodology:
     Face-to-face interviews with 400
      Jamaican firms (2002)
     Firms chosen by economic activity (12
      types) and size, based on quota sample
     Survival bias in sample

     92 items in questionnaire, some based on
      UN Inter-regional Crime Research
    Business Victimization Survey (cont.)

   Patterns of Victimization
      65% of firms in sample experienced
       criminal victimization in 2001
      27% face theft on quarterly basis, 9%
      22% experience fraud and 9% violent
       victimization on quarterly basis
      5% of firms paid extortionists, 8% paid
       for protection in 2001 (under-reporting)
Business Victimization Survey (cont.)
 Sectoral patterns:
       Tourism: 72% of hotels reported theft

        in 2001
       Agriculture: 81% of farms

        experienced theft
       Financial services: 65% reported fraud

 Size: small firms appear to be more
  vulnerable – barrier to entry for potential
    Business Victimization Survey (cont.)
    Perceptions of Risk
      42% of managers perceived a risk of
       being murdered at the workplace
      66% perceived that their firms were likely
       to be robbed
    Coping Strategies
      Protective measures; adjusting the
       organization of business activity to reduce
       opportunities for crime; and striking an
       accommodation with criminal networks
    Business Victimization Survey (cont.)

    Coping Strategies (cont.)
      37% of firms surveyed opted to close
       before dark, thereby reducing effective
       productive capacity and capital
      20% would increase hours of operation if
       crime was lower; on average these firms
       would remain open an additional 3.6
       hours per days if located in safer area
Some key methodological issues in the
  measurement of the cost of crime
    Estimate of cost of crime is lower bound
      Value of human life is more than its
       contribution to the economy
      Ignores value of property damaged or
       destroyed during violence
      Static analysis, does not include:
         impact on structure of economic
         potential investment foregone
Some key methodological issues in the
measurement of the cost of crime (cont.)
      Static analysis, does not include (cont.):
         loss of potential future earnings of
          those murdered/disabled
         high transactions cost of replacing
          skilled and experienced workers
   Value of stolen goods is considered social
    loss in our approach
     Annual Economic Impact of Crime

   Cost of crime as % of GDP:
     Medical expenses on crime related

      injuries by government and individuals
     Loss of output arising from death and

     Public expenditure on security
Annual Economic Impact of Crime (cont.)

   Additional costs of crime:
     Private expenditure on security

     Direct business losses of firms e.g.

      extortion, fraud, theft and looting
     Impact on investment, expansion, life-
      span of firms
     Cost of Crime as % of GDP, 2001

1.     Healthcare costs      J$ 1.3bn (0.4% of GDP)
     1.   Public health system            J$ 996mn
     2.   Private Citizens                J$ 255mn
2.     Lost Production       J$ 0.5bn (0.2% of GDP)
     1.   Mortality                       J$ 194mn
     2.   Injury                          J$ 337mn
3.     Public expenditure
       on security           J$10.5bn (3.1% of GDP)
4.     Total 1+2+3           J$12.4bn (3.7% of GDP)
        Additional Costs of Crime
   Private expenditure on security, % of annual

Micro firms (< J$5mn revenue)           17%
Medium firms (J$10-20mn rev.)           7.6%
V.large firms (> J$100mn revenue)       0.7%

Average                                 2%
    Additional Costs of Crime (cont.)

   Extortion, fraud, robbery/burglary, arson
     Micro firms/ firms rev. J$20-50mn =

      9% of revenue
     Other categories = less than or equal to

      2% of revenue
    Additional Costs of Crime (cont.)
  Losses from looting (70 firms)
57% of firms         <J$100,000
19% of firms         J$100,000-500,000
4% of firms          J$1mn – 5mn
 Avg. losses due to temporary firm closures
2001                 J$ 1 mn
2000                 J$400,000
    Impact of Crime on Business Planning
                and Prospects

 51% of firms stated that increased costs of
  security significantly impacted business
 39% of firms indicated that plans for
  business expansion were adversely affected
    Impact of Crime on Business Planning
            and Prospects (cont.)

 37% of firms reported that plans to invest in
  productivity improvement were negatively
 6% of firms expected to close-down in the
  next three years (concentrated in sectors
  important in GDP), 19% uncertain of
  prospects, if current level of crime persisted
              Policy Options

Survey: only 12% of managers support increased
 corporate taxes to fund crime control, but are
 more supportive to provide financial support for
 specific collective solutions that directly affect
 them and over which there is some direct
         Policy Options (cont.)

Identifying and measuring the crime problem
  Strengthen official data collection on crime
  Conduct frequent victimization surveys
Improving law enforcement for crime deterrence
  Upgrade investigative capacity of police
          Policy Options (cont.)

Improving social and collective action
  Improve the quality of the school experience
  Form effective partnerships between police,
   business and local communities
  Build Social Capital
Applying focused interventions
  Target high crime urban areas
  Target youth at risk