How Much Does the Region Lose in Crime?

Because of factors such as business closures and lack of opportunities, it is estimated that criminal activity costs Honduras and El Salvador 16% of GDP, and in the case of Guatemala, its losses could amount to 7% of its production.

Thursday, January 16, 2020

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.

Of the report of IMF:

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.

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.

Read full report.



More on this topic

Growing Cost of Insecurity in Guatemala

March 2016

Companies have to allocate up to 15% of expenses to security services, as a result of the growing violence in the country.

A company wishing to operate in Guatemala has to allocate between 8 to 15% of its expenses to security in order to keep operating. The figure was provided by Victor Guillen, manager of purchases, imports and exports at Dagas, and published by Elperiodico.com.gt, who revealed that his company earmarked Q250 thousand ($32,000) per month for the security of its plants, trucks and workers.

Criminal Violence and Corruption Curbs Business

June 2013

The phenomenon affects much of Latin America, whose countries spend on average 8% of their GDP on security costs.

That was the conclusion reached during the forum "Connecting businesses as partners for prosperity with security in the Americas", organized by the Organization of American States (OAS) and the private sector, under the framework of the Guatemala Investment Summit.

Crime Affects Salvadoran Economy

May 2011

The costs generated by crime are equivalent to 11% of gross domestic product (GDP).

According to a recent World Bank report, crime and violence have an impact on economic growth not only in terms of loss of wages but it also affects the investment climate and diverts scarce government resources to strengthen the application of justice rather than promoting economic activity."

Crime and Violence: A Staggering Toll on Central American Development

April 2011

Growing crime and violence in Central America not only have an immediate human and social toll, they also pose a tremendous threat to development potential in the region.

Today, it is estimated that these sources of instability may decrease regional Gross Domestic Product (GDP) by 8 percent, once health, institutional, private security, and material expenses are accounted for.

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