When crooks get rich, the entire ‘crime-organised economy’ benefits

Just doing his bit for the economy. joaood, CC BY

Gangsta rappers are experts in micro-economics. Their particular specialism being the micro-economics of crime, an expertise gained, apparently, through a thorough knowledge of street corners. Such experience turns the axiom “crime doesn’t pay” on its head.

The Harlem rapper Cam’ron (not to be confused with the politician) admonishes his listeners to take a career path less travelled, or certainly one not for the risk averse: “Skip a loose, get an ounce, flip a deuce, hit the stoop / Remember stupid I’m here to tell you that I’m living proof: CRIME PAYS!”.

But this is not typical rap braggadocio, glorifying crime in the jostle for chart positions. Evidence suggests that the supply of illegal goods and services can be a lucrative business venture; with the potential monetary benefits outweighing the grim costs of prison or premature death. Modern criminomics has its fair share of millionaires and billionaires. Take Paul Yearsley, a former council recreation officer turned middle-ranking drug supremo, whose £6m palatial home was featured in the Lancashire Magazine, the north west of England’s answer to Hello! Yearsley is now incarcerated.

Despite banksters and corporate hucksters being hit by record fines, white-collar crime and corruption still pays. Handsomely. This is the view of Gary Becker, the recently deceased Chicago University economist, Nobel Laureate and America’s leading dismal scientist. For Becker, the costs of corporate crime (in the form of fines) are too low, which has the effect of incentivizing pin-stripe crime. Becker’s crime calculus shows that fines, in Western jurisdictions, can range between 10-40% of profits. Based on a (fantasy) detection rate of 50%, corporate crime may lead to fines that cost between 10-20%. On a realistic detection rate, well below 10%, it would seem you would be foolish not to dabble in a bit of corruption.

What about the contribution of crime to the wider economy? Another Nobel-winning Chicago economist, Milton Friedman, was just as admiring of illicit markets as he was of their licit counterparts, if a PBS interview given in January 2000 is anything to go by: “The black market was a way of getting around government controls,” he said. “It was a way of enabling the free market to work. It was a way of opening up, enabling people.”

Crime gives

Crime not only pays, in other words, it also gives. And recent developments in both the world economy and domestically would suggest that it gives in many different ways.

Take the global financial system. In 2009, the Italian economist at the helm of the UN’s Office on Drugs and Crime dropped something of bombshell: Antonio-Maria Costa claimed that organised crime helped to bail out a global banking system on the verge of fiscal Armageddon in 2008. The banking system at the time was starved of liquid capital. The wise guys offered a lifeline. Monies from criminal activities – something to the tune of US$352 billion of drug profits according to Costa – provided a number of banks with much needed capital to prevent them going over the cliff into oblivion, a situation brought about by the casino of mortgage backed securities.

Costa refused to name the names of institutions bailed out by the cosa nostras and camorras of this world. That said, HSBC – and this is a matter of public record – between 2006 and 2010 helped the Mexican Sinaloa cartel and the Colombian Nortre del Valle cartel launder close to US$1 billion. To paraphrase the investigative journalist Matt Taibbi, the laundering by banks like HSBC was so brazen it could have probably been spotted in their annual reports to shareholders.

Crime works

The economic value of crime and its profits are not confined to global finance. It also makes a difference on the ground. Take jobs and living standards. From the 1980s onwards, real wages in OECD countries have declined for those in unskilled and semi-skilled occupations, that is, a good majority of the labour market. If wage stagnation was the order of the day in the West, you can imagine that developing states were hardly lands of milk and honey for ordinary workers.

Take Mexico following the signing of the NAFTA agreement in 1994; this ushered in privatisation by the back, front and side doors. By 1996, if you were not one of Mexico’s 8m unemployed, you worked legitimately in the maquiladoras sweatshop assembly plants or in the informal economy. Poverty became endemic. Fast-forward to 2012 and a banner appears above a highway in Monterey, placed there by one of the countries “big four” cartels:

Operating Group ‘Los Zetas’ wants you … We offer a good salary, food, and we care for your family. Do not suffer bad treatment … We will not feed you Maruchan (noodle) soups. Do not hesitate to call 8671687423.

To Mexico’s legion of economically disenfranchised, Los Zetos are really making an offer they cannot refuse. And the available figures prove as such: the drug industry employs around half a million people – the fifth largest employer in Mexico. Those employed in the drug trade are required to possess a unique skillset – the ability to variously murder, torture, kidnap, mutilate and rape. But this is not the whole story.

The illicit narco economy creates a virtuous commercial circle of sorts. The narcoeconomy not only employs directly but sustains a network of existing or new support industries and business ventures: banking and finance, IT, logistics, farming and transportation, pharmaceuticals, industries which have transformed backwater towns into thriving local economies.

Mainstreaming crime

Britain maybe some way from being a fully-fledged narcoeconomy but we should not underestimate the economic contribution of illicit markets and their criminal agents. Take the City of London, international citadel of high finance and favoured port of call for international criminals and organisations looking to wash their dirty or corrupt cash.

According to David Clarke, City of London’s police fraud investigator, London is attractive haven for crime money as checks and balances on those setting up businesses or investing are flexible. Possibly this is why London remains an island of prosperity whilst the rest of the UK economy is in a state of austerity stagnation.

Further down the laundering food chain, there are betting shops and high volume fixed odds betting terminals widely used by drug dealers and gangs to wash their profits. In fact, these digital betting terminals now account for half the profits of bookmakers’ profits. However, the Chancellor of the Exchequer plans to plunder a good deal of this revenue by raising the duty on betting terminals. William Hill, the UK’s largest high street bookmaker, responded by announcing the closure of 109 betting shops at a projected cost of 420 jobs.

To consider the possible macro-economic benefits of illicit markets is not in any way to justify or celebrate crime. Far from it. The intention has been to consider the growing interdependence between crime and the legitimate economy. In fact, a growing body of research evidence suggests that criminal organisations and illicit markets increasingly form part of the mainstream economy. The boundary between the wider legitimate economy and the illicit economy is increasingly blurred.

A recent scandal when horsemeat was discovered in many “beef” burgers sold in UK supermarkets is case in point. A government commissioned review “clearly showed criminal activity in the global food chain”; a process aided and abetted by the aggressive pursuit by supermarkets of margins in a cutthroat commercial environment. The problem, it seems, is not so much organised crime but a crime-organised economy.

Help us bring facts and expertise to the public.