Crime as a Social Cost of Poverty and Inequality: A Review Focusing on Developing Countries

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Other costs arise through crime prevention and punishment. The
opportunity cost of the time of the incarcerated population in the US is
estimated by Freeman (1996) to be 0.6 per cent of GDP. Assuming this
cost is proportional to the number of incarcerated people per inhabitant
leads to a figure of only 0.1 per cent of GDP in Latin America. Indeed, the
incarceration rate, i.e., number of incarcerated persons per inhabitant, is
a little more than five times higher in the US than in Latin America. The
extent to which this difference in incarceration rates is related to observed
disparities in crime rates is not clear, however⁴*. Expenditures on criminal
justice and police may be compensating somewhat for this difference since
they amount to 1.6 per cent of GDP in LatinAmerica and only 1.3 per cent
in the US More is also spent on private crime prevention through security
guards, alarm systems, armored cars and the like in Latin America. As a
result, total expenditures on crime prevention and sanction amount to a
higher proportion of GDP there than in the US, although the ratio between
these two figures is far from the ratio of crime rates.

Summing all these components leads to a sizable total cost of crime equal
to 3.7 per cent of GDP in the US and an impressively high 7.5 per cent in
Latin America. Of course, both figures are very rough. But it is difficult
not to believe their orders of magnitude is about right. It must also be
reminded that, by world standards, the countries covered by the preceding
analysis have levels of criminality way above average. It is likely that the
same calculation would lead in most European and Asian countries to
figures below∙ 2 per cent of GDP.

Putting together the various estimates discussed in this section leads to a
strikingly high order of magnitude for that part of the social cost of poverty
and inequality which may go through crime and violence in LatinAmerican
countries. Consider for instance the elasticities of crime rates with respect
to inequality and poverty suggested by the coefficient reported in Table 1.
According to these elasticities a 5 percentage point increase in the CHni
coefficient in a given country might produce after some delay an increase
in the crime rate of the order of magnitude of 50 per cent. The same kind
of effect may be expected from a major recession leading to a 5 per cent

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⁴¹ Incarceration rates in European countries are comparable to those observed in Latin America. Yet
crime rates are much Iowerrhere than both in Larin Americaand in the I S.

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