forthcoming book on politics, finance and crime PDF Print E-mail

 

 

 

 

The Checkmate Pendulum

 

a book that turns  fiction into reality -- publication date:  June 1st, 2014

 

The Checkmate Pendulum had a long gestation.The writing started in the early ’90s when I was Director General for Economics and Finance at the EU Commission.  That was the time when three related events shocked the world:  the U.S.S.R. collapsed, Germany was reunited, and the EU single currency was planned.   The author took part in crucial, secret negotiations associated with these developments:  his personal notes provided the background material for this story.

In the late-’90s I  was Secretary General of the European Bank (EBRD).  This was an ideal position to gather evidence that financial crises (like the recent one) have remote but not always well understood causes:  politicians’ ineptitude and bankers’ greed.   

The book’s epic conclusion, with its rich revelations and implications, was written – and it could not be otherwise -- at the time I was the “world’s drug czar”, namely the UN Under-Secretary General in charge of fighting drugs and crime (2002-‘10).

 

The only part of The Checkmate Pendulum that is not the result of the my personal experience is the military confrontation that ends the nuclear intrigue.  The air battle is narrated on the basis of tactical plans designed by NATO military jet-fighter pilots.  

 

 

The Checkmate Pendulum educates and challenges public opinion.  The anxious reader will rush through the plot rich of suspense and reversals.  The analytical reader will learn about the financial-political warfare in Europe. Those concerned with geo-political issues will appreciate the strategic insights. 

 

 

 

 

 

 

 

 

 

The ECONOMICS OF CRIME

 

A discipline to be invented

 

A Nobel prize to be awarded

 

 

Antonio Maria Costa

 

 

Abstract:  In this statement I examine the many dimensions (socio- economic, political and strategic) of organized crime and insists on the fact that governments’ inability to deal with it, is the results of poor understanding of the ways crime operates, the power it has accumulated and the threat it poses to individuals and nations alike.

 

The current poor understanding of the problem of crime relates to inadequate research about it, lack of effective criteria to measure it and deplorable absence of reporting in a coherent manner – over time and across countries.  This statement will hopefully spur the world community overcome the knowledge gap and information deficit – so as to help governments take the necessary measures to counter organized crime. 

The statement provides detailed evidence of the many areas where crime research is at its infancy, though progressing and where improvements are badly needed.  Illicit drugs (cocaine and heroin) production and trafficking have been widely documented and studied.  But other – equally significant crime manifestations like modern slavery (trade in people and migrants), arm trafficking, piracy at sea, the illicit exploitation and commercialization of natural resources, counterfeiting (including pharmaceutical products), and cybercrime have been totally neglected by social scientists  Ample statistics and maps are provided to demonstrate that good, original work is possible – and badly needed.

 

The statement concludes by showing that law enforcement would also benefit from greater involvement by the economic profession in crime research.  This because current responses, based on police activity meant to identify, seize and hold suspects, are proving ineffective:  criminals locked up in prison or physically suppressed are rapidly replaced by new recruits.  The fight against transnational organized crime should rather be focussed on disrupting markets and illicit flows – and to do so, knowledge of their size, nature and evolution is paramount.  In short, given the fact that organized crime is an economic force motivated by economic stimuli, it must be fought on economic grounds, including of course anti-money laundering measures.  


 

 


 

 

THE ECONOMICS OF CRIME

 

 

I take part in the ASSA annual meeting as an economist, but also as a senior United Nations official who needs your help.  Actually, let me clarify that selfish help is what I need, as there important rewards (awards and fame) for those who will get engaged in providing the assistance being requested.

 

Of course, like in many other disciplines, socio-economic researchers like to get engaged in noble studies, work on socially-relevant and humanitarian topics, develop new methods of market analysis, build models related to economic behaviours:  these are the products of brainy efforts, but also of heart beats – call these, socially relevant and compassionate studies.

 

What I am proposing below, is not all that socially attractive:  actually, I propose that you get involved and study sinister matters, topics that people do not want to discuss at dinner, the result of (intellectual) associations with unsavoury characters.  All this is clear.  Yet, the problem remains:  out there is a gigantic threat to humanity, poorly understood, inadequately studied and as a consequence, ineffectively dealt with:  it is called transnational organized crime (TOC).  And the discipline I invite you to develop and be associated with is called the economics of (organized) crime.

 

Organized crime: a threat of macro-economic size and strategic impact

 

My thesis is easily spelled out:  we face a growing threat from crime, that in the past quarter century has become organized and transnational.  It has reached macro-economic dimensions. It has become one of the biggest winners of globalization – taking advantage of open borders, competitive markets, the ease of travel and communication, and growing economic integration.  It has penetrated economic entities and governments alike.

 

Criminals are the first-movers wherever there are opportunities to exploit. Crime has diversified from trafficking of drugs, people, arms, or piracy into money-laundering, identity-theft, cyber-crime, and terrorism. In the process, it has become a major threat to international peace and security.

 

Criminals are faster to adaptthan the international community’s ability to respond. There is a UN Convention against Transnational Organized Crime, agreed upon in Vienna in 2000 – a global legal instrument that has entered into force in 2003. There is Interpol, regional intelligence-sharing centres, as well as national crime-fighting agencies.  But frankly, 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. While it is possible to measure inflation, GDP, or climate change, we seem incapable of measuring organized crime – and related uncivil behaviours, like corruption. Because policy should be evidence-based, this creates a major handicap.

 

In 2009 work started at the United Nations Office on Drugs and Crime (UNODC), to fill the knowledge gap, following concerns expressed by the UN Security Council, the G8, and other international organizations about the threat posed by transnational organized crime, and the need to counter-act it. Producing a first report on the matter – titled The Globalization of Crime -- was a challenge due to the fact that evidence on the subject has thus far been limited and uneven. Yet, UNODC was able 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 – even the military.

The main finding of UNODC report on The Globalization of Crime are overwhelming.  For example:

·       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 $3 billion for their exploiters. World-wide there are millions of modern slaves traded at a price not higher in real terms than centuries ago. 

·       The two most prominent flows for smuggling migrants are from Africa to Europe and from Latin America to the US. Around 2.5-3 million migrants are smuggled from Latin America to the United States every year, generating $6.6 billion for smugglers. 

·       Europe is the highest value regional heroin market (US$20 billion), while Russia is now 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 during the invasion of Afghanistan in the decade of the ‘80s.

·       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’s illicit drugs, like Afghanistan (opium) and Colombia (coca), receive the most attention and criticism. Yet, most drug profits are made in the destination (rich) countries. For example, out of a global market of perhaps $55 billion for Afghan heroin, only about 5 per cent ($2.3 billion) accrues to Afghan farmers, traders and insurgents. Of the $72 billion cocaine market in North America and Europe, some 70 per cent 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$170-320 million per year, which is 10-20 per cent of the licit market. Although the smuggling of arms tends to be episodic (i.e. related to specific conflicts), the amounts have been so large, to kill as many people as some pandemics. 

·       The illegal exploitation of natural resources and the trafficking in wildlife from Africa and South-east Asia are disrupting fragile eco-systems and driving species to extinction. UNODC estimates that illicit wood products imported from Asia to the EU and China were worth some US$2.5 billion in 2009.

·       The number of counterfeit goods detected at the European border has gone up by a factor of ten over the past decade, for a yearly value of more than US$10 billion. As much as half of medications tested in Africa and South East Asia are counterfeited and substandard, increasing, rather than reducing the chance of illness.

·       The number of piracy attacks off the Horn of Africa has doubled in the past year (from 111 in 2008 to 217 in 2009), and is still rising. Pirates from one of the world’s poorest countries (Somalia) are holding to ransom ships from some of the richest, despite the patrolling by the world’s most powerful navies. Of the more than $100 million annual income generated by ransom, only a quarter goes to the pirates, the rest to organized crime.

·       More than 1.5 million people a year suffer the theft of their identity for an economic loss estimated at US$1billion, while cybercrime is endangering the security of nations:  power grids, air trafficking and nuclear installations have been penetrated.

These are just a few examples of the wealth of new evidence included in the UNODC Report that also makes a number of suggestions on how to deal with the threats posed by the globalization of crime.

 

Drugs: a variation on the law of markets

 

There are a few areas of crime that are somewhat better understood:  for example, the illicit markets of controlled substances like opium and its derivatives (herein and morphine), cocaine, amphetamine-type stimulants (ATS like ecstasy, meta-amphetamines), and marijuana.  About these markets there is a lot of information – data pixels that provide a clear picture of all aspects of the drugs economy, as illustrated by UNODC annual World Drug Report.

 

There is supply – around 850 tons of cocaine from the Andean countries, 550 tons of heroin from Afghanistan, around 600 tons of synthetic drugs, and 40,000 tons of cannabis.

 

These numbers – at least for coca and opium – 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 GDP.

 

Demandis measured by household surveys, and based on per capita consumption. Around 200 million people use drugs once a year, and around 25 million are “problem” drug users – people who are dependent on drugs.

 

In between are the traffickers, making around $300 billion 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’s Law is the recent boom in opium cultivation in Afghanistan. In the past 5 years, there has been so much production in that country, that there is now an over-supply of some 12,000 tons (enough to satisfy 2.5 years of global demand). Prices have fallen (by about 20% a year), but they have not crashed. Thanks God, also growing supply has not created higher demand:  actually, opium and heroin (i. e. narcotics) are becoming less attractive on world markets, replaced by psycho-active substances (like ATS and cocaine.) 

 

The impact of illicit substances in our society is two-fold:  on drug addiction and therefore, the impact on health, and on drug trafficking, and therefore, the 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’s 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 legalize drugs, and you get rid of the criminal market. These are two superficially seductive arguments, 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’s entire supply of drugs, and intercepted all drugs being trafficked, you would still have at least 25 million peoples suffering from addiction.

 

That is why drug control depends – first and foremost – on reducing demand for drugs. This is an economic argument for sure, but predominantly is a health issue.  Addicts should be sent to treatment not to jail, and there should be more investment in prevention and treatment, not just law enforcement.

 

But I am not here to discuss drug control. The basic point that I want to make is that we have a good idea of the economics of drugs. In contrast, we still lack an in-depth understanding of the economics of crime – in particular the horrific manifestations like modern slavery (trade in people and migrants), arm trafficking, piracy at sea, the illicit exploitation and commercialization of natural resources, counterfeiting (including pharmaceutical products), and cybercrime.  By and large we can safely state the example of uncivil behaviour have been totally neglected by social scientists.      

 

Economics: the key to unlocking crime

 

This is not just regrettable in terms of economic theory. It is dangerous – a gaping whole in our knowledge that handicaps our ability to deal with this clear and present danger to security and the wealth of nations. It is all the more strange since crime is economically deterministic. Unlike terrorists or insurgents, criminals don’t have a political agenda. They are out to make money – by hook or by crook. They seek to buy low and sell high – maximizing returns and minimizing risk (using violence and corruption if necessary). Wherever there is an opportunity, they will exploit it – 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 – in other words where the rule of law is weak. That’s why illicit activity often originates or transits areas of instability, like conflict zones or some of the poorer parts of the planet. As other panel participants (Dominick Salvatore and Fred Campano) would no doubt agree, income inequality also leads to high rates of crime.

 

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. This deepens vulnerability, causing the flight of foreign and human capital. Isaac Ehrlich’s work has demonstrated the damaging effects that this has on societies. 

 

Criminals make in-roads where there is a big pool of desperate and unemployed youth. Think of the kids in the favelas of Rio, gang members in Central American maras, or the baby-gangsters in Africa’s mega-slums. As Steven Levitt observed in Freakanomics, being a foot solider for a criminal group is over-rated. And yet, the supply is totally elastic.

 

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.

 

Beware the invisible hand

 

Let’s be frank. This is also happening in developed countries. If we estimate that organized crime generates more than $300 billion a year – making it the 21st biggest economy in the world just after Sweden – that’s a lot of money that needs to be laundered. Some of it is going through rogue jurisdictions and uncontrolled economic sectors, although – in the wake of the financial crisis – the G20 is taking steps to crack down. But a lot is also going into the global economy. We need to better understand these flows (into real estate, tourism, entertainment and gambling facilities) as well as informal money flows (like the hawala system) in order to cut them.

 

A laissez-faire system can not work if the invisible hand of the market is manipulated by the invisible, certainly bloody hand of organized crime. Markets – and governments – will fail if this dangerous externality is left unchecked. Greater regulation is essential. I am interested to hear the views of experts like William Baumol on how we can ensure openness while restricting abuse.  

 

          Finally, to understand the economics of crime, we must delve into the role of the private sector – putting particular emphasis on areas where the business world and the underworld come into contact. How do we reduce demand for licit goods that are illegally trafficked – like some types of wood, diamonds, minerals, and oil? How do we keep slave-made products out of supply chains? I know Richard Freeman has a lot of knowledge on labour regulation.  

 

          In short, we can see the contours of a massive beast and some foot prints, but we don’t really know what it looks like, it’s true weight and size, and where it will strike next.

 

Data is crucial, and for that we need governments to help. But we also need to better understand the crime numbers and trends as well as the underlying business models. Armed with that information, we can use the Lucas Critique to sketch out the “the deep parameters” of criminal behaviour in order to increase the risks and opportunity costs of the world’s most sinister entrepreneurs. In short, figuring out the economics of crime, we enable us to prevent and control it. Nothing less than global security is at stake.

 

And 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 (organized) crime, I commit myself to propose the best of such research for the next Nobel award in Economics.

 

To disrupt markets, we need to know them

 

Why such a commitment on my part, to promote academic work on organized crime?  First and foremost because the current law enforcement-based approach is producing limited results.  In the period ahead, we moust also disrupting the market forces behind these illicit trades.  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 – lawyers, accountants, realtors and bankers – 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.

Since crime has gone global, national responses, even those based on robust law enforcement,are inadequate: they displace the problem from one country to another.  The already mentioned United Nations Convention against Transnational Organized Crime (UNTOC) offers the premises for such globalized approach.  It proposes remedies to mend the fact that, in the past quarter century (namely since the collapse of the Berlin wall and the end of the cold war), crime has internationalized faster than law enforcement and world governance. The Palermo Convention was created precisely to generate an international response to these trans-national threats, but is often neglected. Governments that are serious about tackling the globalization of crime should spur the nations that are lagging behind in the implementation of the Convention.

I would also call the attention to the difference between countries being unwilling rather than being unable to fight organized crime, and appeal for more development and technical assistance to reduce vulnerability of poor nations. When states fail to deliver public services and security, criminals fill the vacuum. Hence, reaching the UN Millennium Development Goals (MDGs) would be an effective antidote to crime, that in itself is an obstacle to development. I insist as well on the need to pay greater attention to criminal justice in United Nations peace-building and peace-keeping operations:  since crime creates instability, peace is the best way of containing crime.

Criminals are motivated by profit:  so let us go after their money as well.  To do so we must increase the risks and lower the incentives that enable the bloody hand of organized crime to manipulate the invisible hand of competition.  And this can be done by more robust implementation of the United Nations Convention against Corruption, more effective anti-money laundering measures, and a crackdown on bank secrecy.

Law enforcement would benefit from greater involvement by the economic profession in crime research.  Given the fact that organized crime is an economic force motivated by economic stimuli, it must be fought on economic grounds.

Last Updated on Monday, 05 May 2014 14:38